Clifford F. Thies writes,

When you take into account the loss of means-tested benefits (e.g., cash assistance, food stamps, housing subsidies, and health insurance), and the taxes that people pay on earned income, the return to working is essentially zero for those in the lower two quintiles of the income distribution.

Read the whole thing. And note that Greg Mankiw shows that health care reform will make this worse. For that matter, so might health care vouchers.

There are two potential solutions. One solution is to base eligibility for means-tested benefits on total income, including other government benefits programs. Another approach would be to abolish a lot of specific programs and replace them with generic cash assistance.