The Economics of the Disability Poverty Trap

Abstract

This paper examines how the structure of existing public assistance, such as Supplemental Security Income (SSI) in the United States, created the current disability poverty trap. SSI creates barriers to saving with the implementation of low asset tests while at the same time establishing disincentives for work. As a result, the program fails to improve the quality of life for disabled people who need the benefits and prevents them from ever transitioning off the program. The inability to achieve a critical mass of income with limited benefits and low asset tests results in a poverty trap. Analyzing this dilemma utilizing behavioral economics, leisure demand and labor supply curves, income and substitution effects, and savings vs. consumption models reveals how public assistance programs systemically reinforce the disability poverty trap. Such reinforcement is done through limits on financial agency and failures to account for the socioeconomic role of disability in someone’s life. This analysis concludes that low monthly benefits and limitations on savings in public assistance programs fail to account for the extra costs of living with a disability and barriers to employment. Future policy solutions should increase the monthly benefits recipients receive on SSI, increase asset test limits, create more robust transitional periods off the program, and expand work opportunities.