Restructuring the Eligibility Policies of the Child Care and Development Fund to Address Benefits Cliffs and Affordability

Brittany Birken
Federal Reserve Bank of Atlanta
Community and Economic Development Department

Elias Ilin
Federal Reserve Bank of Atlanta
Research Department
Boston University

Alexander Ruder
Federal Reserve Bank of Atlanta
Community and Economic Department

Ellyn Terry
Federal Reserve Bank of Atlanta
Research Department
University of Washington

Discussion Paper 2021-01
June 2021

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This paper explores how the current eligibility policies of the federal Child Care and Development Fund (CCDF) create affordability challenges and benefits cliffs that act as barriers to economic self-sufficiency. By examining Florida data and policies, the authors demonstrate how the program’s existing co-payment schedule affects the same hypothetical family living in two contrasting Florida counties: one with state median living costs and one with high living costs. The authors find that the CCDF income eligibility exit threshold is too low, particularly in high-cost counties. That occurs because the exit threshold is based on the state median income, as opposed to more local measures that better approximate and reflect local cost of living. The authors propose and calculate the additional family and government costs of two alternative CCDF phase-out designs, which would remove the CCDF benefits cliffs. Both proposed alternatives feature smooth phase-out schedules that align the subsidies with the local cost of childcare, thereby reducing barriers to economic mobility unintentionally created by government policies.

JEL classification: I38, J08, J13, J24

Key words: childcare, benefits cliffs, human capital, skills, provision and effects of welfare programs, effective marginal tax rates

https://doi.org/10.29338/dp2021-01

Comments to the author are welcome at brittany.birken@atl.frb.org and ellyn.terry@atl.frb.org