Fight Poverty, Not Savings

You knows the rules: No savings!

Source: Hulton Archive via Getty Images

Some welfare programs exclude people who have financial assets, and for good reason. If the goal is to help people who are living in poverty, the program shouldn't waste resources on people who aren't actually poor. If you lose your job but have enough money in the bank to tide you over comfortably, you don't need food stamps, disability payments or other forms of public support as much as people with no savings do.

Yet some asset limits are set too low. By preventing beneficiaries from saving enough money to become self-sufficient, the government can make it unnecessarily hard for them to escape poverty. New data suggests some limits could well be raised.

In 24 states, people who receive benefits from the Temporary Assistance for Needy Families (a federal program administered by the states) can be cut off for having more than $2,000 in the bank. In Georgia, Pennsylvania and Texas, accumulating just $1,001 in savings can get you thrown off the program. (Social Security disability payments have similar limits, and so do food stamps in many states.)

This discourages saving. And it can also prevent people from improving their lives, moving into an apartment or building a cushion against emergencies. It discourages the very financial habits that people need to escape and remain out of poverty.

When programs raise their limits, it turns out, beneficiaries do adjust their behavior accordingly. After 1996, for example, when Congress started letting states set their own asset limits for TANF, those states that raised or abolished them found that poor families increased their savings. Easing restrictive limits on the value of cars that beneficiaries can own leads to increased car ownership, a 2012 study found.

All this raises a practical concern for policy makers: If easing asset limits helps welfare recipients pull themselves out of poverty, won't it also increase the cost to taxpayers by drawing new beneficiaries to the program?

New evidence says that concern is misplaced. The five states that abolished or significantly raised income limits for TANF from 2007 to 2011 saw no increase in the number of beneficiaries, according to an Appalachian State University study. Why not? There just aren't that many people with high savings but low income, the researchers found. If that's right, then rock-bottom asset limits guard welfare programs against potential beneficiaries who mostly don't exist.

Federal and state policy makers have been rethinking asset limits across various programs. Alabama, Louisiana, Ohio and five other states have abolished asset caps for TANF. Obamacare ended the asset test for Medicaid last year. And Congress in December began allowing Social Security disability beneficiaries to save up to $100,000 in specially designated accounts.

If $2,000 is too low, then what's the right limit? A ceiling of $10,000 or $20,000 would be high enough to help recipients out of poverty, but not so high as to direct benefits to people who don't really need them. President Barack Obama's 2011 budget request called for caps of no less than $10,000, and of course states are free to set that level on their own.  

The goal of welfare should be to get people off the program, and into financially secure lives. Asset limits that prevent even minimal saving frustrate both goals.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.