Low-Income People Face Barriers to Savings, Including Mandated Asset Limits

The Corporation for Enterprise Development defines asset poverty as insufficient net worth to subsist at a poverty level for three months without income. In 2010, 26% of households nationwide were asset poor by this definition.

Far more — nearly 44% — were liquid asset poor. In other words, they didn’t have enough money in a bank account and/or investments that could readily be converted to cash to cover basic expenses for three months if no additional money was coming in.

These, needless to say, are households at high risk of what CFED refers to as “economic catastrophe.”

We don’t know how many of them are low-income households, though we can be quite sure a large number are. What’s sure as can-be is that their financial practices have garnered a lot of attention.

This, in and of itself, is altogether reasonable. Much smaller events than a three-month spell without income can spell economic catastrophe if paychecks or cash benefits barely cover routine living costs.

What do you do, for example, if the car you need to work breaks down? You’re staring at an economic catastrophe if you haven’t got some money stashed away.

If not a job loss, then one of those short-term, high-interest loans that often turn into a debt trap, as the Center for American Progress warns.

Looked at from another perspective, extra money in the bank or the equivalent can, as CFED says, pave the way to long-term financial security and opportunities we associate with the evanescent American Dream.

Low-income people surely know this as well as the top 1%, who reportedly own more than 35% of all privately-held wealth in the country.

Yet the former face a variety of barriers to savings. The always-quotable Heritage Foundation says they’re especially afflicted by “weaknesses” in “character traits” like grit, perseverance and the capacity to delay gratification.

Yet even it acknowledges other issues — a lack of familiarity with “the mainstream financial system,” inconvenient bank locations and hours, high bank fees, etc.

Add to these relatively low levels of financial literacy, e.g., the skills needed to assess the costs of relying on a check cashing service because you don’t have a bank account — or do, but use the service anyway.

And then there’s the matter of what deferring a little gratification would net. It’s one thing if you’re setting aside, say, $500 a month, quite another if $5.00 is the most you think you can afford.

Well, we’ve got a host of programs designed to show low-income people how they could save — even give them an incentive to do so in the form of a match.

And by and large, they seem to work, though not for everyone or for all purposes.

Even the federal government seeks to promote asset building among low and moderate-income people. At this level, however, we see policies operating at cross-purposes — one ineffective, the other regrettably not.

Since 2001, low and moderate-income taxpayers have been able to claim a credit for up to $2,000 they invest in an employer-sponsored retirement plan or IRA.

This is a far less generous incentive than the tax breaks that benefit mainly filers who’ve already got considerable wealth — the mortgage interest and property tax deductions, plus the preferential rates for long-term capital gains and dividends.

More importantly, the Saver’s Credit does nothing at all for low-income workers who’d owe nothing to the IRS, even without it because it’s not a refundable credit like the EITC.

At the same time, a number of major federal safety net programs limit the assets beneficiaries may have.

There may be some exclusions, e.g., a home, a defined pension benefit, but liquid assets a beneficiary can tap are characteristically set somewhere in the $2,000-$3,000 range.

For most, but not all programs, states can lift or waive the asset limits. Or they can altogether exclude certain types of assets. They’ve responded variously, as you might expect.

They’ve no role in any eligibility criteria for Supplemental Security Income, however. For a single person, the limit for resources counted, including money in bank accounts, retirement savings and other investments, is $2,000 — and has been since 1989.

Thus, reports one of my blog followers, s/he can’t get the air conditioning in her mobile home repaired because that would cost more than the total s/he can have in savings. “So I use a swamp cooler in the desert and try to stay cool with a water pump that’s not quite good enough.”

SNAP (the food stamp program) uses the same asset limit, except for elderly and certain disabled people, who are allowed $1,250 more.

However, states can bypass the asset limit for families who’ve already qualified for benefits funded through their Temporary Assistance for Needy Families programs. This is one of the major features of what’s known as broad-based categorical eligibility.

Forty states and the District of Columbia have adopted it. All but five set no asset limit, thus enabling very low-income families to put some money aside — perhaps with a match if they’ve earned income by working.

The House Republican majority wants to put a stop to all this. Seems they’re all for personal responsibility (and flexibility for states), but not when it comes to poor people trying to create a little nest egg — or even just have enough to get their air conditioning fixed.

But, as you probably know, the nearly $21 billion they’d save, in part by eliminating broad-based categorical eligibility didn’t satisfy.

We can be quite sure that any alternative SNAP bill they manage to agree on will seek to reinstate the standard asset limit nationwide, as well as the standard gross income limit.

Meanwhile, the preferential capital gains and dividend rates will cost the federal government an estimated $161 billion this year alone.

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