Does It Pay to Save?
Table of Contents
The Effects of Saving on Asset-Tested Benefits
Since households must meet an asset test to qualify for many assistance programs, putting an additional dollar of income into a regular savings account can render an individual completely ineligible for certain benefits. This "all or nothing" qualification penalizes even the most negligible savers. It is also important to note that the interest earned on savings is part of a household's adjusted gross income. Thus, a household that is ineligible for a program with an asset test may also eventually be ineligible for an income-tested program that does not have an asset test, if the household's interest income puts them over a maximum income limit.
Because eligibility requirements for benefit programs vary by state, calculations in this paper are based on rules for the Commonwealth of Massachusetts in 2005. The benefit programs included are Transitional Aid to Families with Dependent Children, food stamps, Supplemental Security Income, Medicaid and the Saver's Credit. [See Table I for a summary.]
“An individual with $250 in savings isn't eligible for state emergency aid.”
Transitional Aid to Families with Dependent Children (TAFDC). TAFDC, Massachusetts' Temporary Assistance to Needy Families (TANF) program, is a federal block grant to the states that provides cash assistance to low-income pregnant women living alone or to families with a dependent child. States are allowed some flexibility in determining eligibility and the length of benefit payments. In Massachusetts, benefits are limited to 24 months over a five-year period. TAFDC applicants must pass two income tests: 1) Gross income (including unearned income such as unemployment compensation or interest from a savings account) must not exceed 185 percent of the federal poverty level for a household, and 2) gross income minus certain deductions (such as dependent care deductions) must not exceed 100 percent of the poverty level. The federal poverty level is the income required to purchase basic necessities such as food and shelter. It varies by family size and is adjusted for inflation.
“Each benefit program has its own asset limits.”
Applicants must also pass an asset test; countable assets cannot be greater than $2,500. The catch is that a savings account, retirement account and even the cash surrender value of a life insurance policy is a countable asset; thus, if a household saves an additional dollar of income beyond $2,499, it becomes ineligible for TAFDC benefits. For example:
- If a family of three (adult with two children) has countable monthly income of $500 and a savings account balance of $2,499, they will receive the difference between the maximum monthly benefit and their income - $133 a month.
- However, if the family puts an additional dollar into their savings account, they fail the asset test and become ineligible for the $133 a month; hence, their immediate effective marginal tax rate on an additional dollar of saving is 1,330 percent!
Food Stamps. The federal Food Stamp Program requires applicants to meet an income test (not to exceed 200 percent of the federal poverty level), and also requires some applicants to meet an asset test. There is no asset test for households with children under 19, for pregnant women, or for households that receive TAFDC, Supplemental Security Income or Emergency Aid to Elders, Disabled and Children (EAEDC). Households that do not fall into any of those categories must have countable assets of less than $2,000 to qualify for food stamps.
Food stamp payments are determined by subtracting 30 percent of the household's net monthly income (gross income after deductions) from the maximum monthly benefit for a particular family size. For example, a single woman who is not pregnant and has no children in the house under age 19 is eligible for a maximum monthly benefit of $149:
- If her monthly net income is $400 she is eligible to receive $29 in food stamps.
- However, if her assets total $1,999 and she saves an additional dollar, she loses the food stamp benefit; hence, her current marginal tax on saving from losing the food stamp benefit alone is 290 percent.
Supplemental Security Income (SSI). SSI is a federal assistance program for low-income individuals age 65 or older, or the blind or disabled of any age. SSI eligibility is subject to income and asset limits. After deductions, the monthly income limit (including unearned income such as unemployment benefits) is $708 for a single person and $1,071 for a couple. The income limit is equal to the maximum benefit payment for a household and benefits are determined by subtracting countable income from this maximum benefit level. Therefore, an additional dollar of income causes the household to lose a dollar in benefits. In addition, a single person must have less than $2,000 in assets, while a married couple cannot have more than $3,000.
Emergency Aid to Elders, Disabled and Children (EAEDC). EAEDC is a Massachusetts program that provides cash assistance in addition to medical benefits. EAEDC benefits are available to the elderly, the disabled, and families with needy children who do not receive, or who are waiting to receive, other benefits such as SSI. EAEDC is also available to those who do not qualify for TAFDC due to family restrictions. The asset limit is low, however - to qualify for this program, asset values must be less than $250 for an individual or $500 for a couple or family. Thus, for a couple, an additional dollar of savings can render them ineligible for up to $395 (the maximum for a family of two) in monthly benefits.
Medicaid. Medicaid is a joint federal-state program that provides medical care to the poor. Each state establishes its own eligibility standards and general rules, but they are required to cover those with negligible incomes. Under the MassHealth Standard Program, coverage differs according to the characteristics of household members and monthly income before taxes and deductions. Households consisting of a pregnant woman and infant are covered if income does not exceed 200 percent of the federal poverty level; households with noninfant children less than 19 years old are eligible at 150 percent of poverty; and households that include parents and their children under age 19 qualify at 133 percent of poverty.
Medicaid does not have an asset test for individuals under age 65; however, there is an asset limit for individuals 65 and over, and for institutionalized individuals of any age. The assets counted include savings accounts, retirement accounts, pensions and annuities. Depending on the type of Medicaid plan available, countable asset limits range from $2,000 to $4,000 for an individual and from $4,000 to $6,000 for a couple.
“Most low-income families can't get a tax credit that rewards saving.”
Saver's Credit. The Saver's Credit is a federal program that is supposed to help low-income people save. But because of the complexity of the tax code and interactions with other benefit programs, few people actually qualify for the Saver's Credit. The program allows single households with adjusted gross incomes of less than $25,000 and married households with adjusted gross incomes of less than $50,000 to receive a match of up to 50 cents from the federal government for every dollar they contribute to a retirement plan, such as an IRA, 401(k), 403(b), SIMPLE, SEP or 457 plan.
“The tax for young, low- income couples starts at a high level.”
The problem with the Saver's Credit is that it is only available to households with a positive tax liability. Consider a 30-year old couple with two children, earning a total household income of $25,000 a year. When filing their 2005 tax return:
- They qualify for the standard personal exemption (married filing jointly), plus child tax credits.
- As a result, they will owe no federal taxes, but will also be ineligible for the Saver's Credit.
- Even those with a minimal tax liability will benefit little from the Saver's Credit, compared to high-income couples who benefit substantially through tax-deferred savings plans.
Due to their income, this couple could qualify for a tax credit of 50 cents for every dollar they contribute to savings, up to a maximum federal match of $2,000 annually (depending on their tax liability). However, since their tax liability has been wiped out, they no longer qualify for the Saver's Credit.