Low-Income Individuals Penalized for Saving

Did you hear this story? Yesterday, I was watching CNN, before going to work, when I heard this. So shocking, it was, I knew I had to look up the story online and report it here. I never found the CNN story, but I did find several print versions of it, including the LA Times, which I quoted in this post.

The federal government has been urging people to sock away money for their retirement, but many low-income families would be foolish to take that advice, according to a report released Wednesday by a Washington think tank.

Low-income households face "astronomical" penalties for saving, according to the report by the National Center for Policy Analysis. For example, each $1 saved by a single mother earning $15,000 a year could cost her $2.60 in higher taxes and lost government benefits.

That's right, the poor are actually penalized for trying to get themselves off government assistance.

"We're constantly told that we need to save early and often to prepare for retirement," said Laurence Kotlikoff, professor at Boston University and author of the study. "Yet government policies tell low-income families, 'If you save for the future, you won't get our help today.' "

Over the last decade, the government has sharply increased the amounts that Americans can set aside on a tax-favored basis for retirement, created a tax credit for low-income people who fund retirement accounts and launched public campaigns urging people to save.

But those efforts are hindered by incentives created by the government, Kotlikoff said. For example, the tax credit for saving for retirement is wiped away when the taxpayer also qualifies for the earned income tax credit.

Meanwhile, putting a few dollars aside in a retirement plan can disqualify families for food stamps, health care benefits and assistance given to poor families with children. The loss of benefits is felt year after year, compounding into a huge loss over time, the report says.

Someone who doesn't save for the future will become a drain on the public tax rolls after they reach retirement age. It is my humble opinion that these low income individuals who save to build a retirement savings are being fiscally responsible. However, the government concerned about about people cheating them (Lord, knows there has been a lot of people, using these funds, who have cheated), has instituted these guidelines.

In Massachusetts, for example, anyone with assets of $2,500 or more is disqualified from getting federal assistance to families with dependent children. That asset test includes retirement accounts and even the cash value of a life insurance policy, the report says. As a result, a single parent with two children who earns $500 a month would lose $133 a month in benefits if the family saved more than a nominal amount for retirement.

"People start saving, thinking that they are going to be treated fairly, and then they get clobbered. They don't know what happened," Kotlikoff said. "There are ways to achieve our objectives without kicking people in the head if they try to work and save."

Most of the benefit programs looked at in the study are federally funded. But because eligibility rules vary by state, the study focused on Massachusetts.

So what is the answer? To me, I think the answer is simple. Keep the restrictive guidelines about saving, with one little change. They still must use their savings for necessities, before getting government assistance, unless that savings is in a recognized retirement account (IE: 401-k, IRA, Roth IRA, SEP, etc).