Here’s a question. You don’t have a whole lot of money and I want you to save more. So I create a plan where for every dollar you save, I will take away $2.60 worth of benefits from you. How likely are you to want to save money?
That is exactly what a new study reveals — that the government has made extensive incentives for the poor not to save money. Yes, that’s correct. If you are poor, the way the system is currently set up you are better off not trying to save money for your retirement and other needs.
While one would think the government would want to encourage the poor to save, under the current system, low-income households must pay astronomical penalties if they decide to save money, according to the report by the National Center for Policy Analysis. For example, each dollar a single mother earning $15,000 a year saves ends up costing her $2.60 in higher taxes and lost government benefits for an effective marginal tax on savings of 260%. Save a dollar, lose $2.60 in higher taxes and benefits.
How is this possible?
- If a taxpayer qualifies for the earned income tax credit, they are not longer eligible for the tax credit for saving for retirement.
- Saving money can disqualify families from food stamps
- Saving money can disqualify families from health care benefits
- Saving money can disqualify families from assistance given to poor families with children
These are just the main programs where savings can cause benefit loss. There are others that are set up for specific poor individuals that can also be lost when the taxpayer saves money.
For example, in Massachusetts a single mother with two children who earns $500 a month and had a savings account balance of $2,499 (bank accounts, retirement savings and the cash surrender of life insurance would all be counted toward this $2,499), she would receive $133 a month more in benefits than if she had saved $2500. That extra dollar in savings has an effective marginal tax rate of 1330%.
The results of all this are that even the poor that want to save money to help better their financial situation are so heavily penalized that they can no afford to do so.
You can find the complete report here (19 pages, pdf format)