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Government Penalizes Saving For Those Who Need It The Most

June 06, 2007 — News

NCPA Study Shows Government Policies Discourage Low-Income People from Preparing for Retirement

DALLAS (June 6, 2007) - Does it pay to save?  For many households, particularly young and lower-income families, the answer is often no, according to a new study from the National Center for Policy Analysis (NCPA).  The report found that due to government policies, saving can cost many low-income families thousands of dollars in lost benefits, such as food stamps.  Read the report online here.

"We're constantly told that we need to save early and often to prepare for retirement," said NCPA Senior Fellow 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."

The study notes that most government aid programs are subject to income and asset requirements.  Often saving means a loss of benefits:

• A 30-year-old single parent earning $15,000 a year stands to lose $2.60 in higher taxes and lost benefits for every $1 she saves - an effective marginal tax on saving of 260 percent. 
• By contrast, if the same parent earned $250,000 a year, she only stands to lose 31 cents for every dollar saved - an effective marginal tax on saving of 31 percent. 
• At age 45, a single parent earning $10,000 a year faces an effective marginal tax on saving of 109 percent, compared to 39 percent if she had earned $250,000 instead.

The study also notes that government policies that encourage saving often conflict with programs aimed at providing present day benefits for the same population.  For example, the Saver's Credit provides a federal match of up to 50 cents for each dollar saved by low- to moderate-income families.  Yet households that qualify for the Saver's Credit usually also qualify for the Earned Income Tax Credit (EITC).  However, since the EITC gives them a zero or negative tax liability, they get no benefit from the Saver's Credit.

"This is just one of the many ways that unrelated provisions of our tax and benefit systems can interact to penalize those who most need to accumulate assets," said Kotlikoff.