The Welfare Trap: Social Protection or Economic Dependency?

Introduction

Economic shocks and changes in the structure of the economy leave many people vulnerable to unemployment and poverty (Erumban and de Vries 2024) ^[1]. The welfare system was constructed to assist those suffering with poverty and financial instability by raising their quality of life (Federal Safety Net, 2024) ^[2]. Social benefits were implemented (initially in Germany) with the aim of ensuring the well-being of all citizens by providing them with a social safety net to fall back on if they face unemployment or poverty. 

Although the welfare system plays a pivotal role in alleviating poverty and ensuring a minimum standard of living is maintained (Silva 2025) ^[3], the current structure of the benefits system creates a “welfare trap”. This trap is essentially the point where undertaking a low-wage job results in being above the threshold for receiving welfare benefits. Accepting the low-wage job leads to the loss of benefits which were worth more than the income from the new job, disincentivising the need to work. 

Vital Role of the Social Safeguarding Mechanism

The provision of welfare benefits is essential to ensuring all citizens surpass the minimum standard of living. The welfare system allocates federal tax revenue to provide financial assistance to citizens who do not make a sufficient income. 41.9 million US residents were dependent on welfare (Desilver 2023) ^[4] payments to survive; government assistance leads to people having greater incomes, which allows them to afford the basic necessities, such as food and housing. Therefore, extreme deprivation and social collapse is prevented.

Governmental use of progressive taxation to provide welfare benefits to low income households leads to increased equality among disposable household incomes (Obst, 2013) ^[5]. Direct taxes and transfers have been found in 11 OECD countries to contribute to an average 30 per cent reduction in income inequality (UNICEF 2024) ^[6]. Achieving low income inequality is one of the common aims of economies as it ensures long-term economic prosperity and ensures economic growth is not jeopardised (Kopp 2025) ^[7]. A lesser gap between high income earners and low income earners puts an end to the cycle of low opportunity because there is fairer access to education and healthcare. Education is a key tool in improving labour productivity in the long term as it strengthens workers’ skills and makes them more efficient (Radcliffe 2025) ^[8]. So, greater welfare benefits and reduced income inequality leads to economic growth.

State benefits (such as those in Denmark and Iceland) provide citizens with an escape from relative and absolute poverty. They are designed to protect vulnerable populations by providing a safety net which acts as a buffer against economic shocks like job losses. Government assistance is necessary to ensure a fair society.

The Economic Disincentive

However, welfare benefits can also be counterproductive. Many countries, such as Australia, have implemented marginal tax rates (Australian Taxation Organisation 2025) ^[9] (where additional tax is paid for every extra dollar earned). Consequently, when a state benefit receiver finds employment, they face a double penalty, where they pay tax and lose access to welfare payments. So, the new job provides little financial gain. 

The economic disincentive can also be seen with the idea of the benefit cliff, which is the point when an increased income from a new job leads to the sudden loss of government aid (NCSL 2024) ^[10]. Abrupt drops in benefits disincentivise citizens from seeking employment or accepting pay raises (Rachidi and Randolph 2025) ^[11]. So, the benefits recipient faces greater financial pressure with their job in comparison to being unemployed. 

Consumers are assumed to behave rationally and maximise their benefits. Therefore, if being employed leads to people facing a larger cost due to the loss of benefits and the burden of tax, they will choose the easier path of remaining unemployed and receiving unemployment benefits, resulting in working being discouraged.

Solutions to Tackling the Welfare Trap

One policy that can be implemented to overcome the benefit cliff is gradual benefit reduction. Instead of suddenly losing all government assistance, benefits could be lessened slowly and incrementally to ensure people have a greater net financial benefit while working. For every additional dollar made by the benefit recipient could result in them losing a small portion of welfare benefits. As a result, the recipient’s income (salary + welfare benefits) remains higher than welfare benefits alone. Gradual benefit reduction would make sure people are encouraged to become more self-sufficient and work, enhancing the country’s long-term productive capacity and eliminating the benefit cliff issue.

Moreover, improved universal access to key services like education, affordable childcare and healthcare removes most of the financial burdens low income earners face. So, welfare benefits can be reduced alongside better universal services to guarantee that the government assistance only acts as a temporary source of aid rather than a long-term income. 

Conclusion

In conclusion, although welfare benefits are necessary to provide a safety net for low income earners to maintain the minimum standard of living and prevent them from facing poverty, the traditional welfare scheme must have a better structure to ensure citizens are less economically dependent in the long run. It is important to reform the welfare system to encourage economic mobility without taking away citizens’ social protection.

References

Erumban, Abdul, and Gaaitzen de Vries. 2024. “Structural change and poverty reduction in developing economies.” World Development 181 (September). 10.1016.

Federal Safety Net. 2024. “Purpose Of Welfare.” Federal Safety Net. https://federalsafetynet.com/the-purpose-of-welfare/.

Silva, Gisele. 2025. “The Welfare State in the 21st Century: Balancing Social Protection, Economic Growth, and Responsibility.” Journal of Political Sciences & Public Affairs 13, no. 1 (March). 10.35248/2332-0761.25.13.077.

Desilver, Drew. 2023. “What the data says about food stamps in the U.S.” pewresearch. https://www.pewresearch.org/short-reads/2023/07/19/what-the-data-says-about-food-stamps-in-the-u-s/.

Obst, Thomas. 2013. “Income inequality and the welfare state – How redistributive is the public sector?” Institute for International Political Economy Berlin, no. 29. https://www.ipe-berlin.org/fileadmin/institut-ipe/Dokumente/Working_Papers/ipe_working_paper_29.pdf.

UNICEF. 2024. “Who benefits from benefits?” unicef.org. https://www.unicef.org/eca/stories/who-benefits-benefits.

Kopp, Carol M. 2025. “Understanding Income Inequality: Key Causes and Measurements.” Investopedia. https://www.investopedia.com/terms/i/income-inequality.asp.

Radcliffe, Brent. 2025. “How Education and Training Affect the Economy.” Investopedia. https://www.investopedia.com/articles/economics/09/education-training-advantages.asp#:~:text=Differences%20in%20training%20levels%20are,can%20perform%20tasks%20more%20efficiently.

Australian Taxation Organisation. 2025. “Tax rates – Australian resident.” ato.gov.au. https://www.ato.gov.au/tax-rates-and-codes/tax-rates-australian-residents.

NCSL. 2024. “Introduction to Benefits Cliffs and Public Assistance Programs.” ncsl.org. https://www.ncsl.org/human-services/introduction-to-benefits-cliffs-and-public-assistance-programs.

Rachidi, Angela, and Erik Randolph. 2025. “Eliminating the Benefit Cliff and Achieving Savings for Taxpayers: A Reform Proposal for the Supplemental Nutrition Assistance Program.” JSTOR. 1-10 https://www.jstor.org/stable/resrep66930.