Barriers to Saving

recent years, policymakers of both parties have expressed grow- In ing interest in raising retirement saving by low-income house- holds. Such households are much less likely than higher-income households to participate in employer-based retirement savings

plans, and few of them contribute to by Zoë Neuberger, Robert Greenstein, e l t and Peter Orszag t y L

IRAs. Moreover, when low-income k r i K y

b households do participate in retirement saving plans, they tend to s n o i t contribute a smaller share of their income than higher-income a r t s u l l

I households. Communities & Banking 25 A growing body of evidence sug- are insufficient to make ends meet. In were developed in the early 1970s, gests that low-income families will save addition, many low-income people employers have shifted away from more if saving is made easier for them who are unable to work for a while defined-benefit plans, putting more and if they are given a clear financial because of a serious disability rely tem- workers—those without a defined-ben- incentive to do so. For example, 401(k) porarily on Supplemental Security efit plan—at a distinct disadvantage. participation rates among new employ- Income (SSI). A different inconsistency exists in ees rise substantially when such In many of these programs, the the Food Stamp Program, which gener- employees are enrolled in the plans asset limit is set at or about $2,000. ally does not count employer-based automatically unless they opt out. Moreover, the asset limits in these pro- retirement plans toward the asset test Congress is likely soon to adopt legisla- grams generally are not indexed to but does count IRAs. This, too, is tion making it more attractive for inflation and are raised infrequently. As inequitable, since many low- and mod- employers to establish automatic a result, the asset limits have shrunk erate-income people work for compa- nies that do not offer an employer- based retirement plan. Furthermore, Counting retirement savings toward the many workers are encouraged to roll asset test of programs like Medicaid or their funds over from a 401(k) into an IRA when switching jobs, which could SSI could force a family or individual disqualify them from receiving food stamps. to deplete those savings before Counting retirement savings qualifying for benefits. toward a program’s asset test could force a family or individual to deplete those savings before qualifying for ben- enrollment for 401(k)s. Congress also substantially in inflation-adjusted efits, even when doing so would may at some point extend the benefits terms and are expected to continue to involve a financial penalty. As a result, of the Saver’s Credit—a tax credit for do so in the future. asset tests often penalize low-income low- and moderate-income individuals In addition to imposing what families that save for retirement and who save for retirement—to workers amounts to a steep implicit tax on sav- discourage others from saving in the who do not earn enough to owe ing, asset tests in means-tested benefit first place. income taxes. programs treat retirement saving in a Consider, for example, individuals Such changes are important, but confusing and seemingly arbitrary whose earnings were consistently low they will not be fully effective unless manner. One family may be able to throughout their career. (As defined by policymakers also address the barriers retain its retirement savings when it the Social Security Administration, or to saving posed by the asset tests of needs to turn to means-tested benefits, SSA, a low earner is someone whose many means-tested benefit programs, while a similar family that uses a differ- average earnings are about 45 percent such as food stamps and Medicaid. To ent retirement saving vehicle or lives in of the average worker’s wages, or about qualify for these programs, applicants a different state may have to deplete its $16,000 in 2004.) To avoid living in often must have total countable assets retirement savings or forgo means-test- poverty during retirement, such work- that do not exceed a dollar limit set by ed benefits during a time of need. Also, ers would need about $2,000 in the program. These asset tests can a household may qualify for some pro- income from savings for each year of penalize those who save for retirement. grams but not others solely because of retirement to supplement their Social Fortunately, there are steps the federal the different rules across programs for Security benefits, or around $30,000 in government and state governments can counting retirement accounts. savings at retirement (if they have aver- take to reduce the savings barriers such Adding to the confusion, some age life expectancy). Clearly, subjecting asset tests can create.1 employer-based retirement plans are households to a $2,000 asset limit can exempt from the asset limits in these prevent them from saving enough to Existing Asset Rules Punish programs, while others are not. Means- support themselves for even a brief Savers tested programs generally do not count period, much less their entire retire- Many low-income families rely on employer-based retirement plans if they ment. means-tested programs such as food are structured as “defined-benefit stamps, Medicaid, or cash assistance at plans” such as traditional pensions, but Eliminating Barriers times during their working years—for often do count them if they are struc- The most straightforward and example, during temporary spells of tured as “defined-contribution plans” comprehensive way to eliminate the unemployment or when their earnings such as 401(k)s. Since these asset rules retirement savings barrier posed by

26 Summer 2006 these asset rules would be for Congress older). Most employer-based Conclusion to amend the tax code so retirement retirement plans, including Modifying asset rules that discour- accounts that receive preferential tax defined-benefit plans and 401(k)s, age low-income families from building treatment—such as 401(k) plans and are excluded from the asset limit, retirement savings would help reduce IRAs—do not count toward eligibility but IRAs are counted. The 2002 elderly poverty and increase the nation- and benefit determinations in federal Farm Bill gave states a new option al saving rate. There would be some means-tested programs. to exclude certain types of assets budgetary cost because these changes Short of that, the federal govern- from their food stamp asset test if would make some low-income house- ment and states can take steps to sub- they exclude these assets from holds newly eligible for benefits. Yet the stantially reduce savings barriers. At the their asset test for Temporary return should more than justify the federal level, the Social Security Assistance for Needy Families investment. The changes would simpli- Administration could take two steps to (TANF) cash assistance or family fy program administration and reduce facilitate retirement saving by low- Medicaid coverage. This provision administrative costs. Most important, if income people with disabilities who appears to apply to IRAs, accord- low-income households could save need SSI benefits: ing to the U.S. Department of more for retirement, the economy as a • SSA or Congress could exclude Agriculture’s proposed regulations. whole would most likely benefit, and from the SSI asset test retirement If the final regulations confirm fewer people would have to rely on accounts held by non-elderly indi- that the provision applies to IRAs, public benefits in old age. viduals. That would eliminate the states could exclude IRAs from the need for working-age individuals food stamp asset test if they also with serious disabilities to liqui- exclude IRAs in their TANF cash date their retirement accounts dur- assistance or family Medicaid pro- Zoë Neuberger is a senior policy ana- ing periods when they are unable gram. lyst at the Center on Budget and Policy to work and need SSI benefits to • Temporary Assistance for Needy Priorities, where Robert Greenstein is make ends meet. Families. States have complete dis- executive director. Peter Orszag is the • SSA or Congress could eliminate cretion over their TANF asset lim- Joseph A. Pechman Senior Fellow in the requirement that elderly indi- its and the types of assets that Economic Studies at the Brookings viduals convert their retirement count toward them. Therefore, Institution and Director of the accounts into a lifetime annuity in states have the flexibility to Retirement Security Project. order to have these funds excluded exclude retirement accounts from from the SSI asset test. A lifetime the asset test for TANF-funded annuity is not always a wise choice programs. 1See Zoë Neuberger, Robert Greenstein, and for low-income people. Instead, in • Medicaid and the State Children’s Eileen Sweeney, Protecting Low-Income Families’ Savings: How Retirement Accounts Are Treated in determining individuals’ SSI eligi- Health Insurance Program Means-Tested Programs and Steps to Remove bility and benefit levels, SSA could (SCHIP). Nearly all states, includ- Barriers to Retirement Saving (The Retirement exclude their retirement accounts ing all New England states, have Security Project, report no. 2005-6, June 2005), as assets, while counting as income eliminated the Medicaid asset test http://www.cbpp.org/6-21-05socsec.pdf. Sources for the information cited here are included in the the monthly amount that could be for children, but the majority of report. taken from their account for the states continue to apply an asset remainder of their life, based on test when evaluating Medicaid eli- the account’s value and the indi- gibility for parents, and most of vidual’s projected life expectancy. these states count 401(k)s and IRAs toward the asset limit. States could In addition, states have the flexi- dispense with their Medicaid asset bility to craft a more coherent set of tests for both children and parents, asset rules in means-tested programs, or if they wish to retain an asset test thereby exempting more retirement for either group, they could exclude savings from asset tests and making retirement accounts from the asset these programs easier to administer. test. Also, by excluding retirement accounts from the Medicaid asset • Food stamps. The food stamp test applied to working-age people asset limit is $2,000 ($3,000 if at with disabilities, states could least one household member has a encourage them to save for their serious disability or is age 60 or old age.

Communities & Banking 27

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