Rock Center   |  May 24, 2013

Working Americans turn down pay raise to avoid ‘cliff effect’

NBC News’ Lester Holt investigates a double bind for a growing number of Americans. Some hard-working people are grappling with an economic "cliff effect" where a pay raise can actually make them worse off while also costing taxpayers at the same time.

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This content comes from Closed Captioning that was broadcast along with this program.

>>> has been work hard to get ahead and if you slip, at least in the era since fdr's new deal, you can count on getting help from your government. but our economic down turn of late has changed some of that equation for a lot of americans. tonight, melester holt investigates something that defies logic. some people have to refuse a pay raise which ends up costing taxpayers money. in a crew dynamic called the cliff effect .

>> reporter: it's 3:00 a.m . welcome to dan greeley's day.

>> i drink a lot of coffee in the morning.

>> reporter: dan , a decorated army veteran is a single father of three young children, ages 2, 4, and 6. they love in longmont, a city near boulder, colorado.

>> 4:00, i pack their bags, and 5:00 they are in the car. going to daycare.

>> reporter: at 6:30 a.m ., dan arrives at his job at sister carmen. a nonprofit community center and food pantry .

>> all this can go on that.

>> reporter: nine hours later, back home to cook, clean and play.

>> yeah, i don't get a break. but i love it. every minute of it. it's my life.

>> reporter: back in 2010 , life looked promising. dan , who was earning $44,000 a year, was about to be promoted to director of facilities and operations. the additional raise he figured would finally allow him to fulfill a dream, to buy his own home. but then --

>> i had to take a pay cut. my stomach was in knots. supposed to get a raise and instead took a pay cut.

>> reporter: did your boss think you were crazy?

>> pretty much so. i don't think anybody asked for a pay cut. i wasn't living high on the hog. i was just making ends meet and this was -- it really hurt.

>> reporter: what happened? the answer lies in state policies that prevent hundreds of thousands of families from climbing up the economic ladder. dan took a pay cut so he could keep his child care assistance. he only qualified for help from the state if he stayed below a certain income.

>> i felt like i was standing on the edge of a cliff and i was going to get pushed off and there was nowhere to go.

>> reporter: dan fell victim to what is known as the cliff effect . when just a small raise in a family's income leads to an abrupt termination of an essential public benefit like food stamps , health insurance , or child care assistance.

>> parents who are trying to work at low or moderate wage jobs and raise kids often run into roadblocks where the system doesn't make sense.

>> reporter: olivia golden is an expert on family assistance programs at the urban institute , a nonpartisan thinktank based in washington, d.c.

>> you could lose your help with child care assistance before you can cover it on your own and that could lead to you a point where you are making more money, but it isn't helping you -- you are not overall doing better.

>> reporter: dan is not alone. in almost half the state across the u.s., families on the cusp of a middle class life face the same cliff effect .

>> i worked my way from the bottom to operations of facilities director, and instead of paying cuts, i should be up there in pay pretty good, but, no.

>> reporter: in november 2011 , dan had to ask for another pay cut. that's because a court had ordered his ex-wife to pay child support , which pushed his income $49 above the monthly limit. $49?

>> yes. that $49 would have taken $20,000 a year away from me for child care .

>> dan , you said you have been on the system long enough, move on, what would you tell them?

>> they should be in my shoes. i hear the same thing all the time. that i person has been here forever, not trying to better themselves or they are just here to use the system, but it's hard to get out of it once you're in it.

>> reporter: almost like a trap?

>> it feels just like you are trapped.

>> reporter: colorado's governor john hickenlooper understands what is at stake for families like dan . he came face to face with the cliff effect , when he hired his assista assistant, earning $9 at her previous job.

>> i said we'll hire you at $16 and when she sat down and looked at that in her universe, she would lose health care , child car care . we almost doubled her income and she would come out worse.

>> reporter: now, john hickenlooper has to find money to help pay for changes.

>> something has to give.

>> reporter: to give past the cliff effect , do we have to rethink the notion of a helping hand , it's to pull you out of low income , not to take care of the while you're in it?

>> that's the age-old challenge. you know, you want to provide a happened hand up, not a hand out. part of the american dream is to lift yourself up. by working harder, you somehow come out worse, you get a raise and end up with less, that's not the way it's supposed to work.

>> this is a split level like we've seen before.

>> reporter: dan 's pay cuts threatened what he wanted most of all, a house he and his kids could call their own. while he preserved his child care benefits, his lower salary also meant he qualified for a smaller mortgage.

>> reporter: how much offers have you put down?

>> three offers.

>> reporter: how many offers were accepted?

>> none of them. i'm at a price category where it always seems to fall short.

>> reporter: dan 's realtor tried to find the right fit. but rejections kept coming. one hit dan to the core. his daughter jasmine's favorite house .

>> this one house especially she fell in love with, she wanted it, i tried and i had to crush her feelings when we didn't get accepted. i felt like a failure. it's not -- not easy. looking at a 6-year-old eyes and telling them, sorry, you know, we didn't get it. i got to get up one minute. come on, buddy, let's go look in the house .

>> reporter: by last june, dan had almost given up on the dream of owning a home. but his three little kids wouldn't let him.

>> walked in the front door, they took off, they automatically loved the bedrooms, all claimed their own bedrooms right off the get go. next thing i know, i'm making an offer on this house .

>> go ahead and initial at the bottom.

>> reporter: this time, his offer, the seventh one on the seventh house , was accepted.

>> i was happy. i was so excited to come and tell the kids, hey, you got your new house . the one you love.

>> i love this house !

>> reporter: as he was moving into his new home, dan received some more good news. helped by additional revenue from a property tax hike, boulder county had increased the child care income limit.

>> i was actually able after three years to take a raise this time instead of a pay cut. what a feeling.

>> reporter: what do you say about the american dream ? still alive?

>> it's still alive, just really hard to achieve in this day and age. i got the house . not very easily, but i got it.

>> reporter: you're a piece of the american dream ?

>> part of my piece of the american dream , yes.

>> reporter: still climbing ?

>> still climbing , hope to continue to climb.

>> at least it turns out the seventh house was the charm. lester holt from longmont,