Helping Poor and Working Families Build Financial Assets

By one estimate, the federal government spent over $367 billion in 2005 alone on subsidizing Americans' retirement savings and tax breaks to build up other assets like buying a home.  Unfortunately, those subsidies go overwhelmingly to those Americans who already have high-incomes; almost none of it goes to the poorest Americans who need the most help building the financial assets that can lead to long-term economic opportunities and security.

One key problem with traditional anti-poverty programs is their concentration on merely transfering a small amount of day-to-day income to poor families, while failing to encourage, or in some cases actively discouraging, the accumulation of wealth.  

Yet, as this Dispatch will outline, some states are taking action to encourage the working poor to accumulate the financial assets that can help them escape poverty, and help their children afford college in later years.  These key steps have been removing asset limits from existing benefit programs, creating savings vehicles with real economic incentives that help the working poor, and initiating college savings programs that similarly benefit the poor as well as high-income families.

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Eliminate Assets Tests on Government Benefit Programs

The first step states need to take, which many are increasingly doing, is to stop actively discouraging the poor from saving and investing.  States have traditionally limited the assets that TANF, Food Stamps and Medicaid recipients can have, severely limiting those families' ability to permanently escape poverty and dependency on those programs.  

The existence of an asset limit, no matter how high, sends a signal to program applicants and participants that asset-building should be avoided.  Most rules are also confusing for the working poor, who may face one asset limit for medical coverage, a different one for nutrition assistance and a third for cash assistance.   There are well documented examples of caseworkers advising recipients to get rid of savings or retirement accounts to avoid problems.

State Freedom to Eliminate Asset Ownership Limits: States are free to set their own asset limits under TANF, Medicaid and SCHIP programs, and, while states cannot completely eliminate the asset limit on Food Stamps, under the 2002 Farm Bill, they can create "categorical eligibility" for Food Stamps in some areas for anyone qualifying for a program like TANF for which the state has eliminated asset limits. 

At minimum, states should raise asset limits and index them to inflation.  They can also exempt certain classes of assets from benefit limits, such as retirement savings, vehicles, homes or Earned Income Tax Credit refunds.  For example:

  • Colorado in 2006 (see SB 134) expanded its asset limit for TANF from $2,000 to $15,000 and exempted retirement, education and health savings accounts from the limits altogether.
  • At least forty states have exercised the option to exclude at least one vehicle, and twenty states exclude all vehicles.
  • Most states have no asset limits for receiving childrens' health care benefits.  Only three states -- Idaho, Texas and Oregon -- had asset limits for their programs as of 2007.

For most states, eliminating asset rules has been a bipartisan effort.  Ohio was the first state to abolish asset limits in TANF: it did so in 1997, when senior Republican Representative Bob Netzly proposed the abolition.  Eliminating such asset rules not only help the recipients but save states money by eliminating wasteful paperwork.  Eliminating Medicaid asset limits in Oklahoma resulted in savings of close to $1 million.

The two states that have eliminated asset limits for their TANF programs -- Ohio and Virginia -- have seen declines in caseloads with no reports of high-asset, low-income individuals abusing the system.  The reality is that work requirements and other welfare rules mean few people with wealth would game the system to gain access to benefits, while eliminating the asset tests is actually a tool to reduce caseloads by helping families gain financial independence and permanently escape poverty.

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Individual Development Accounts

Beyond removing disincentives for the poor to save, states have increasingly created active incentives through Individual Development Accounts (IDAs). 

Thirty-nine states have had a state-supported IDA program at some point and eighteen states funded their IDA programs in 2007.  540 community-based organizations help to run these programs across the country.  They are funded either through general funds, TANF, Community Development Block Grants, tax credits or housing trust funds.

How IDAs work: IDAs are savings accounts matched with state govenrment contributions that are targeted to low-income persons.  Withdrawals are typically restricted to the purchase of assets, such as buying a home, pursuing postsecondary education and training, and starting a small business.  In some cases, other uses such as the purchase of a car, a computer or other work-related investments are also permitted.  Most IDA programs match contributions by low-income families through a blend of public and private funding.

Generally, state IDA programs involve a partnership between a state agency, nonprofit service providers, and financial institutions. Once a state authorizes an IDA program through a legislative or regulatory process, it designates a state agency or non-governmental entity to serve as the program administrator and steward.  Most state programs are administered jointly by a state agency and a nonprofit.

CFED (Corporation for Enterprise Development), for example, argues for a few key policies to make IDAs effective:

  • Sufficient funding, defined as at least $200 per low-income resident.
  • Stable funding built into the budget, ideally with a dedicated funding source.
  • A state agency steward which oversees the program, ideally one tied to economic development or banking rather than just part of a human services department.

One of the best examples of an existing IDA program is in Indiana.  Created in 1997, it is one of the oldest IDA programs in the country.  With HEA 1075 enacted in 2007, the program now matches participant savings of up to $400 per year with funding of $1.6 million in FY 2008.

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Support College Savings Plans

One crucial area where state action can make a difference in improving economic mobility is in strengthening college savings plans.  While the federal government created the federal tax incentives for 529 plans, states administer the plans.  This administrative control gives states the ability to make the plans more effective in helping lower-income workers increase their savings.

Unfortunately, most states do not tailor plans to effectively help lower-income workers, instead it is still upper-income savers who benefit most from the 529 incentives.  However, due to significant criticism that 529s are structured to largely benefit high-income savers, a few states have taken action to make these college saving accounts more useful for lower-income families.

State 529 Programs that Help the Working Poor:  Instead of just offering tax deductions, which help individuals in higher tax brackets the most, six states -- Colorado, Louisiana, Maine, Michigan, Minnesota, and Rhode Island -- directly match savings in 529 plans.  Arkansas and Texas enacted legislation in 2007 to add state matching funds to their programs.

  • Maine's NextGen program is one of the best.  It creates a 529 account with an initial $50 for each newborn, with low- and moderate income families receiving an initial $200 deposit and an annual 50 percent match, up to $200, on all deposits for those making less than $75,000 per year. 
  • Rhode Island's CollegeBoundfund matches contributions of $500 per year at a rate of 2 to 1 (with $1000 maximum per account) for families below 200% of the poverty line and a 1:1 match for those between 201% and 300% of the poverty line.

Along with larger initial state contributions and matching funds, CFED and other advocates such as the Center for Social Development suggest additional features to help low-income families save for college, including automatic enrollment of all children and strong outreach to educate families about the availability of the funds.

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The sad reality is that most government subsidies for savings and retirement go to the wealthy. States, however, are beginning to recognize the misallocation of resources that results from those priorities.  While most efforts to help the poor accumulate financial assets are still dwarfed by subsidies for the wealthy, a number of states, by eliminating asset tests for benefits, funding IDAs and providing matching contributions for 529 college savings funds, are beginning to move towards a system that gives the working poor real help in achieving financial security over the long term.

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