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The Safety Net

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The Safety Net

Have you ever jumped on a trampoline and been caught by a net surrounding the parameter when you bounced a little too hard or lost your balance and tumbled over? Well, as a society, we have safety nets too, and they work much the same. They are meant to catch us when we experience poverty, economic shocks, or natural disasters, and we need a bit of support to get back on our feet. The United States has several types of safety net programs that cater to all different types of needs. In this explanation, we will take a look at what the safety net is, how it works, and some examples of safety net programs. Sounds interesting? Climb aboard!

Safety Net Definition

The safety net is a collection of programs meant to protect individuals and families from financial and existential hardship. These programs are set up by the government to assist those who are unemployed or have no source of income. The safety net is not meant to support people long-term. It is there to catch you if you become jobless or experience hardship due to any number of unforeseen circumstances and help you get back on your feet as soon as possible.

The safety net consists of a collection of government programs that are meant to provide temporary protection and assistance to people who are unemployed or otherwise need economic assistance.

A well-designed safety net will assist those in need for the time it takes them to dust themselves off and get back on their feet by finding employment, housing, or whatever it takes to stabilize themselves. The safety net has a diverse variety of programs that provide assistance with food, housing, electricity, childcare, healthcare, and others for poor or near-poor citizens.

Unfortunately, the safety net does not always work as intended. One of the challenges of providing a good safety net is the poverty trap. It is a mechanism that makes it hard for the poor to escape poverty, such as when government assistance is reduced as income increases. This means that even though a person is increasing their income, there is a minimal improvement to their situation. Their increase in income is offset by their loss of government support.

The poverty trap is a mechanism that makes it hard for the poor to escape poverty.

Do you want to learn more about the poverty trap and why it is so difficult to escape? Check out our explanation - Poverty Trap

Safety Net Theory

The safety net theory has been implemented all over the world. The point of a safety net is to help those who are poor or have otherwise fallen on hard times maintain the minimum standard of living. The programs that make up the safety net are typically funded by the government and tax revenue.

The Safety Net trapeze artist falling into net StudySmarterTrapeze artist falling into a safety net. Source: Wikimedia Commons

The safety net is supposed to come into action in cases where someone loses a job, falls ill, and cannot work, there is a disaster that upends the community, or any situation where a person can no longer adequately provide for themselves or their family. The safety net then provides support in the areas that the person requires the most such as rent assistance or food, until the person can once again support themselves.

Ideally, the safety net is only a temporary support network for those living near or below the poverty line. It is meant to maintain the minimum standard of living in the case of economic shocks like the loss of income or natural disasters. This is achieved by creating a network of programs that help cover an individual's needs for nutrition, shelter, healthcare, or income. The support is kept in place until people's economic circumstances improve. When the person finds a job and can afford to pay for their own necessities, the safety net is gradually phased out in proportion to the increase in income.

Eventually, support will no longer be required, and those who relied on the programs in the safety net will give back in the form of taxes paid to the state and government. These taxes will then go back toward the programs in the safety net to help others in need.

Types of Safety Nets

There are several types of safety nets in place to cater to different needs and situations. Some people may be employed but do not earn enough to feed their families a nutritious meal, so school feeding programs provide free breakfast and lunch. Others may live with family or trade work for rent, but they still need help with paying for essentials like shoes and clothing. In those instances, in-kind or cash transfers would be helpful.

Means-tested programs provide benefits to only families and individuals whose incomes fall below a certain threshold.

Non-means-tested programs, or universal programs, provide benefits to everyone within the eligible category regardless of income levels. These programs still tend to help those with lower incomes as they provide a larger benefit as a proportion of their incomes. Medicare is an example of a non-means-tested program, as it provides health insurance to everyone at and above the age of 65.

The most common types of safety net programs in the United States are:

Non-contributory pensionsIn-kind transfersCash transfersIncome tax creditSchool feeding programs
These are pensions that are paid out by the government to those who qualify due to economic circumstances even though they did not contribute to the pension program during their working time. In-kind transfers provide people with actual goods or services rather than giving them money. Governments tend to use in-kind transfers because it gives them more control over the aid they provide. A cash transfer provides the recipient with cash rather than goods or services. These are typically preferred by recipients since they are more versatile. This is a tax break in the form of a tax credit for the working poor. The higher the income of the working poor, the higher the tax credit is, up to a limit. It essentially increases the payment received for work. These programs provide free or reduced-price lunches to school children attending public schools to ensure they receive adequate nutrition.

Table 1. Common types of safety net programs - StudySmarter

Safety Net Programs

Safety net programs first appeared in the United States in the early 20th century. Before then, the German chancellor Otto von Bismarck had been a pioneer of social insurance programs in the late 19th century.1

Safety Nets in U.S. History

The first real safety net, the Social Security Act signed in 1935,2 was modeled closely after the German system. The original act provided grants for states to fund unemployment benefits, dependent children, and public health. Today it provides retirement, disability, and survivor benefits to those who qualify.

Another historical safety net program was the Aid to Families with Dependent Children (AFDC), which provided cash transfers to mothers and their children if they were below the poverty line.3 This program was replaced in 1996 by President Bill Clinton with Temporary Assistance for Needy Families (TANF). TANF sees a fixed budget provided to states by the federal government, and the state can decide how to best allocate the funds, as long as it is towards anti-poverty measures.3

There is so much more to learn about anti-poverty programs and their history in the U.S. Check out our explanation - Anti Poverty Programs

The Current Safety Net

The safety net that is in place in the U.S. at the moment also includes programs like the Special Supplemental Food Program for Women, Infants, and Children (WIC), the Supplemental Nutrition Assistance Program (SNAP or "food stamps"), Earned Income Tax Credit (EITC), Section 8 housing, and assistance for electricity or heating bills. For medical assistance under the Affordable Care Act (ACA), there are programs like Medicare and Medicaid that provides health coverage for those 65 and older and low-income families, respectively.

In the case of economic shocks that destroy people's livelihoods, either through a recession or a natural disaster, the government will provide financial relief in the form of Economic Impact Payments (EIPs). The current safety net is an improvement from those of the past because some, like the ACA, have loosened minimum requirements for eligibility enabling more people to qualify. The safety nets have also changed coverage parameters to allow for more personal choice and diversity. In the past, only certain brands or products could be purchased with SNAP benefits, whereas now, nearly any food item can be purchased with SNAP, except for alcohol.

Safety Net Criticisms

All of these programs are meant to provide basic necessities that we have decided all people are entitled to regardless of employment status or income. They attempt to maintain a minimum standard of living that we, in the United States, have decided that all citizens should have. However, safety net programs face a lot of criticism for potentially enabling those who do not want to work or discouraging those who do work from working more because the loss of government benefits would cancel out any increase in income. Critics claim that the government just gives away taxpayer money through these programs. There is also the claim of welfare fraud, where people will hide their income to qualify for more benefits from the government. These claims have been proven to be false by the Congressional Research Service, which says that only $11 out of every $10,000 of SNAP was overpaid due to fraud.4

The Safety Net cartoon woman throwing money StudySmarterWoman throwing money away. - StudySmarter Source: Wikimedia Commons

Examples of the Safety Net

The main examples of the safety net are Supplemental Security Insurance (SSI), Earned Income Tax Credit (EITC), nutritional assistance, Medicaid, and Temporary Assistance for Needy Families (TANF). Let's take a look at these.

Supplemental Security Insurance (SSI)

SSI provides income for those over 65 who qualify financially and those who are disabled as well as children. The difference between SSI and the regular Social Security pension is that SSI is non-contributory, so one does not have to pay into it to qualify for these benefits. Social Security is a pay-as-you-go program that requires recipients to have paid into it to qualify for benefits since it is funded by those who are actively paying into it. SSI is funded by the treasury and income taxes.

Earned Income Tax Credit (EITC)

The EITC is assistance via the tax system. A tax credit is essentially money that is credited to you for your taxes. It is a tax break for those earning below a certain income. Since our taxes are calculated as a percentage of our earnings, the more we make per paycheck, the more we pay. So the more the recipient earns in income, the larger the tax break until the recipient exceeds the upper qualifying limit for EITC. This means that low-income workers are paying fewer taxes out of each paycheck which puts more money in their pockets.3

Nutritional assistance programs

The two most widespread nutritional assistance programs are WIC and SNAP. They are both collected by low-income families, with WIC being meant for women with children specifically, whereas SNAP can be collected by anyone. Both programs provide assistance in proportion to income. So if you earn more, you will qualify for a smaller monthly supplemental payment, but if you earn less or are unemployed, you will collect a higher payment.

Medicaid

Medicaid is a federally funded healthcare program where the qualifications and parameters are set by each individual state. It is meant for low-income families and focuses especially on children, the elderly, and the disabled. Medicaid is one of the programs that receive criticism for encouraging people not to work or work more. Often the income to qualify is set so low that workers quickly rise above the qualification limit, yet their job may not offer health insurance benefits, and then they lose coverage for themselves and their families.3

Temporary Assistance for Needy Families (TANF)

TANF is a federal program that provides states with funding for anti-poverty measures. It is up to the individual state's discretion how this money is spent as long as it is used for reducing poverty. These programs should be geared toward helping low-income families and children achieve economic and financial self-sufficiency. TANF also sets a limit on how long families can collect the benefit and requires that recipients are either working or going to school to qualify.3

The Safety Net - Key takeaways

  • The safety net consists of a collection of government programs that are meant to provide temporary protection and assistance to people who are unemployed or lack an income.
  • The point of a safety net is to help those who are poor or have otherwise fallen on hard times maintain the minimum standard of living.
  • There are several types of safety nets in place to cater to different needs. The most common types in the U.S. are non-contributory pensions, in-kind transfers, cash transfers, income tax credits, and school feeding programs.
  • The safety net that is in place in the U.S. at the moment also includes programs like the Special Supplemental Food Program for Women, Infants, and Children (WIC), the Supplemental Nutrition Assistance Program (SNAP or "food stamps"), Earned Income Tax Credit (EITC), and the Supplemental Security Insurance (SSI).
  • Safety net programs face a lot of criticism for potentially enabling those who do not want to work or discouraging those who do work from working more because the loss of government benefits would cancel out any increase in income.

References

  1. Social Security Administration, Social Security History Otto von Bismarck, https://www.ssa.gov/history/ottob.html
  2. Center for Poverty & Inequality Research, What are the major federal safety net programs in the U.S.? 3/15/2018, https://poverty.ucdavis.edu/article/war-poverty-and-todays-safety-net-0
  3. Steven A. Greenlaw, David Shapiro, Principles of Economics 2e, 10/11/2017, https://openstax.org/books/principles-economics-2e/pages/1-introduction
  4. Randy Alison Aussenberg, Errors and Fraud in the Supplemental Nutrition Assistance Program (SNAP), 9/28/2018, https://sgp.fas.org/crs/misc/R45147.pdf

Frequently Asked Questions about The Safety Net

The safety net consists of a collection of government programs that are meant to provide temporary protection and assistance to people who are unemployed or otherwise need economic assistance.

Examples of a safety net are programs like TANF, Medicaid, SNAP, WIC, EITC, and SSI.

Safety nets in US history are the Social Security Act and Aid to Families with Dependent Children (AFDC) which provided cash transfers to mothers and their children if they were below the poverty line.

Types of safety nets are non-contributory pensions, in-kind transfers, cash transfers, income tax credit, and school feeding programs.

Safety nets in economics are programs meant to protect individuals and families from financial and existential hardship. These programs are set up by the government to assist those who are unemployed or have no source of income. 

Final The Safety Net Quiz

Question

What is the safety net?

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The safety net consists of a collection of government programs that are meant to provide temporary protection and assistance to people who are unemployed or lack an income. 

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What is the poverty trap?

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The poverty trap is a mechanism that makes it hard for the poor to escape poverty. 

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Why is it hard to escape the poverty trap?

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It is hard because government assistance is reduced as income increases. This means that even though a person is increasing their income, it is offset by their loss of government support.  

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Why do we have safety nets?

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We have safety nets to help those who are poor or have otherwise fallen on hard times maintain the minimum standard of living. 

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Are safety net programs meant for long-term or short-term assistance?

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Short-term.

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Who funds the safety net?

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The safety net is funded by the government and tax revenue.

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What are five types of safety nets?

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Five types of safety nets are non-contributory pensions, in-kind transfers, cash transfers, income tax credits, and school feeding programs.

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What is a non-contributory pension?

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These are pensions that are paid out by the government to those who qualify due to economic circumstances even though they did not contribute to them during their working time. 

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What is an in-kind transfer?

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In-kind transfers provide people with actual goods or services rather than giving them money. Governments tend to use in-kind transfers because it gives them more control over the aid they provide. 

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What is a cash transfer?

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A cash transfer provides the recipient with cash rather than goods or services. These are typically preferred by recipients since they are more versatile.  

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What are income tax credits?

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This is a tax break in the form of a tax credit for the working poor. The higher the income of the working poor the higher the tax credit is, up to a limit. It essentially increases the payment received for work.   

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What do school feeding programs do?

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These programs provide free or reduced lunches to school children attending public schools to ensure they receive adequate nutrition. 

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What was the first real safety net in the U.S. and what did it do?

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The first real safety net, the Social Security Act signed in 1935 and provided grants for states to fund unemployment benefits, dependent children, and public health. 

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What is SSI?

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Supplemental Security Insurance (SSI) provides income for those over 65 who qualify financially and those who are disabled as well as children. 

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What are WIC and SNAP?

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Both are nutritional assistance programs. The Special Supplemental Food Program for Women, Infants, and Children (WIC) is meant for women with children specifically, whereas the Supplemental Nutrition Assistance Program (SNAP) can be collected by anyone to purchase food.

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What is TANF?

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Temporary Assistance for Needy Families (TANF) is a federal program that provides states with funding for anti-poverty measures. 

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What is Medicaid?

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Medicaid is a federally funded healthcare program where the qualifications and parameters are set by each individual state. It is meant for low-income families and focuses especially on children, the elderly, and the disabled. 

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The _______ is a collection of programs meant to protect individuals and families from financial and existential hardship. 

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safety net

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The safety net is not meant to support people long-term, instead:

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it is there to support you in times of need

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Which of the following does the safety net NOT support?

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none of the above

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A con to the safety net is the potential for:

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a poverty trap

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The ______ is a mechanism that makes it hard for the poor to escape poverty.

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poverty trap

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 The programs that make up the safety net are typically funded by:


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government

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Ideally, the safety net is only:


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temporary

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_______ programs provide benefits to only families and individuals whose incomes fall below a certain threshold.


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means-tested

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The first real safety net in the U.S. was:

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social security

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SNAPS is also known as:

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food stamps

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True or False: Safety net programs face a lot of criticism for potentially enabling those who do not want to work

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True

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True or False: Medicaid is an example of a safety net.

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True

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A federally funded healthcare program where the qualifications and parameters are set by each individual state. 


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Medicaid

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A federal program that provides states with funding for anti-poverty measures. 


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TANF

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The two most widespread nutritional assistance programs are:


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WIC and SNAP

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This safety net is an assistance program via the tax system

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EITC

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The _____ provided cash transfers to mothers and their children if they were below the poverty line.

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AFDC

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True or False: The goal of safety nets is to one day not require them for people on them.

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True

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True or False: Safety nets typically are not effective.

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False

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True or False: A well-designed safety net will assist those in need for the time it takes them to dust themselves off and get back on their feet by finding employment, housing, or whatever it takes to stabilize themselves. 

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Answer

True

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