Poverty, Not Policy Deters Saving Among Poor

Published June 20, 2007

The editorial “When a Penny Saved Is Taxed” is correct to point out that incentives matter. Surely there are ways the tax code can be altered to encourage saving among lower-income individuals–and everybody else.

But it’s poverty, not welfare policy, that keeps assets low. A study in the Winter 2006 Journal of Human Resources found, “Consistent with other recent studies, … [we found] little evidence that asset limits have an effect on the amount of liquid assets that single mothers hold.”

All incentives count, and the possibility of losing one’s welfare check is not only a disincentive to saving, it’s a disincentive to staying on welfare. That was the aim of welfare reform in the first place. Welfare is supposed to be temporary help that enables people to get into the workforce. Staying on welfare will keep one poor regardless of how much the program “allows” one to save.

Incentives matter to everybody, and the huge tax increases that would be caused by a return to the old welfare system and addition of further opportunities for wealthy elderly people to hide their assets so as to get more taxpayers’ money would do infinitely more harm than good.

S. T. Karnick ([email protected]) is research director for The Heartland Institute.