Slump Endangers Welfare Reform US Family Support Act of 1988 Is Going into Effect as the Economy Falters, Making It Difficult for States to Come Up with Matching Funds to Help Turn Welfare Parents into Wage Earners Series: NEW APPROACHES TO WELFARE. Part 1 of a 2-Part Series. First of Two Articles Appearing Today

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SINCE Aid to Families with Dependent Children was established in 1935 as part of the United States Social Security Act, the federal government has been wrestling with whether such assistance helps people become self-sufficient or perpetuates dependence.

Observers say that with the passage of the Family Support Act of 1988, Congress's best shot at welfare reform in the last 20 years, states are having to sort that question out for themselves. The legislation provides $3.3 billion of both "carrots and sticks" to help get the 4 million recipients of Aid to Families with Dependent Children (AFDC) working.

But some experts wonder how states will pay for a program that Congress authorized when the US economy was more robust than it is now.

A recent Associated Press survey found that welfare rolls grew in 49 states in the last year. And as the number of aid recipients mounts, the economic slowdown means fewer job opportunities and fewer tax dollars to pay for programs.

Some states are having problems coming up with enough money to qualify for federal matching funds.

"Our total federal allocation could have been as much as $13 million, but we received only $6.3 million because we were appropriated only $1.9 million from the state general fund," says Lynn Clark, director of the office of public relations for the Mississippi Office of Human Services.

Robert Ivrey, senior vice president of the Manpower Demonstration Research Corporation, which has a US contract to study the effect of these welfare changes over the next eight years, says the situation is going to worsen.

Southern states are in the worst shape, says Mr. Ivrey. Many pay benefits only to single-parent households.

Now, to keep welfare rules from breaking up marriages, the states are required by law to pay benefits to two-parent families. After paying for the entitlements, state welfare systems have little left over to set up the Job Opportunities and Basic Skills Training (JOBS) program, says Ivrey.

The federal legislation, a compromise between liberals and conservatives, reflects the lessons of experience. To ease the transition from welfare to employment, recipients are allowed to collect day-care and health benefits for a year after they start working. On the other hand, the new legislation requires mothers of children three years old and up to participate in job training or educational programs. The requirement formerly applied to mothers of children at least six years old.

"This is a step in the right direction," says David Ellwood, a professor of public policy at Harvard University, who helped write the legislation. "It reflects a changing view of government and its role from writing checks to being more pro-active in helping people get off of welfare."

But conservatives say the generous benefits actually encourage people to go on welfare, and the sanctions don't go far enough.

"I think it provides expensive benefits to those best able to get off welfare on their own, and largely ignore the more hard-core population dependent on welfare," says Kate Walsh O'Beirne, deputy director for domestic policy studies at the Heritage Foundation, a conservative think tank. …