End disincentives for poor to save

The Baltimore Sun

In 1990, newspapers around the country profiled the story of Grace Capetillo, a welfare mom from Milwaukee who, after managing to save $3,000 in the bank, was hauled into court by the county Department of Social Services and charged with fraud. Having breached the limit on allowable assets, Ms. Capetillo was found guilty and ordered to pay a fine of $1,000, spend down another $1,000 of the money she had worked hard to save, and promise not to save again if she wanted to stay on assistance.

The country was rightfully outraged; the system was clearly broken. Yet today, 17 years later and more than a decade since welfare reform, asset limits continue to send mixed messages to the poor.

In order to qualify for government assistance, from cash welfare and food stamps to disability income, low-income families must demonstrate they are not only income-poor but also asset-poor. These rules were understandably designed to preserve assistance for those truly in need. Yet, while policymakers created an asset test to keep hypothetical, unemployed trust-fund brats from collecting government checks, these rules are sending a dangerous message to low-income families: Do not save.

Last month on Capitol Hill, Democratic Rep. John Conyers Jr. of Michigan introduced a bill that aims to reverse decades of this self-defeating policy toward the poor. His proposal calls for a major reform in eligibility policy across public assistance programs, recommending aggressive liberalization or outright elimination of asset tests, depending on the program. While such a bill may prove too costly, Mr. Conyers is to be praised for shedding light on this tragic contradiction in American social policy.

The climb out of poverty is fraught with unpredictable and expensive complications, such as illness, temporary unemployment or divorce, that can act as a riptide, dragging a working family back to government assistance. One of the proven ways to weather these income shocks is to develop a safety net of savings. But under today's rules, in order to remain eligible for vital government assistance - assistance understood to be crucial on the path to economic independence - families aren't permitted to save much at all.

While most would agree with the need for policies to protect income-support programs from fraud, existing asset limits are either far too restrictive or, in some cases, entirely unnecessary.

Take welfare. The program that gives temporary assistance to needy families requires all recipients to engage in 30 to 40 hours of "work activities" every week, meet stringent income requirements, and be subject to strict time limits. Coupled with the stigma associated with welfare, it's no wonder that asset limits have become entirely unnecessary in preventing fraud (only 0.5 percent of applicants a year were denied assistance because of the asset limit in Virginia). In 1996, welfare was redesigned to be truly an option of last resort - and in that respect it has overwhelmingly succeeded.

Any money that families might have saved in low-wage jobs must be spent before they apply for government assistance. One young woman I met while interviewing recipients at a welfare office in Maryland laid bare her understanding of the relationship between saving and public benefits: "I definitely don't think you can have any money in a bank account and still get assistance."

Although Maryland permits families to hold up to $2,000 in liquid assets and still qualify for assistance, she believes the existence of an asset limit - and the caseworker's duty to investigate financial holdings - sends a clear message that saving will be penalized.

The campaign for reform is gaining momentum.

President Bush has recognized the disincentive to save that exists in the food-stamp program and has proposed excluding retirement accounts from the asset test. Republican Sen. Saxby Chambliss of Georgia has gone a step further in proposing to exclude education savings accounts and index the limit to inflation.

States across the country, from Virginia to California, are using what flexibility they have in administering government programs to raise or eliminate the asset test for low-income families. It is time for Maryland to follow their lead. Unfortunately, state policymakers are limited in what they can do, and few legislators at any level are even aware such a problem exists.

This new legislation signals that awareness is growing. If we truly want low-income families to achieve self-sufficiency, we need to give them the tools, education and incentives to save for the future - not penalize those who try.

Rourke O'Brien is a policy analyst with the Asset Building Program at the New America Foundation, a nonpartisan, public policy institute. This article originally appeared in The Christian Science Monitor.

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