"My credit is horrible. They won't even take my cash!" - May Gillian in "Head of State" (Chris Rock)

Why The Poor Are Crazy To Save Money

By , June 7th, 2007 | 29 Comments »

Here’s a question. You don’t have a whole lot of money and I want you to save more. So I create a plan where for every dollar you save, I will take away $2.60 worth of benefits from you. How likely are you to want to save money?

That is exactly what a new study reveals — that the government has made extensive incentives for the poor not to save money. Yes, that’s correct. If you are poor, the way the system is currently set up you are better off not trying to save money for your retirement and other needs.

While one would think the government would want to encourage the poor to save, under the current system, low-income households must pay astronomical penalties if they decide to save money, according to the report by the National Center for Policy Analysis. For example, each dollar a single mother earning $15,000 a year saves ends up costing her $2.60 in higher taxes and lost government benefits for an effective marginal tax on savings of 260%. Save a dollar, lose $2.60 in higher taxes and benefits.

How is this possible?

  • If a taxpayer qualifies for the earned income tax credit, they are not longer eligible for the tax credit for saving for retirement.
  • Saving money can disqualify families from food stamps
  • Saving money can disqualify families from health care benefits
  • Saving money can disqualify families from assistance given to poor families with children

These are just the main programs where savings can cause benefit loss. There are others that are set up for specific poor individuals that can also be lost when the taxpayer saves money.

For example, in Massachusetts a single mother with two children who earns $500 a month and had a savings account balance of $2,499 (bank accounts, retirement savings and the cash surrender of life insurance would all be counted toward this $2,499), she would receive $133 a month more in benefits than if she had saved $2500. That extra dollar in savings has an effective marginal tax rate of 1330%.

The results of all this are that even the poor that want to save money to help better their financial situation are so heavily penalized that they can no afford to do so.

You can find the complete report here (19 pages, pdf format)

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  • Minimum Wage says:

    This is hardly new. Back in 1981/82, Reagan had the brilliant idea that welfare recipients should lose a dollar of benefits for every dollar of reported earnings. Spineless congressional Democrats, shocked senseless by the results of the 1980 election, gave Reagan what he wanted. (This 100% marginal tax was changed as part of the massive 1986 tax reform.)

    Reagan’s response, when the disincentive to work was brought up, was something along the lines of, “we don’t have enough money to subsidize the working poor”.

  • WraythX says:

    Frankly, if a family needs food stamps they should not be saving money – they should be spending their money on food!

  • WraythX says:

    WraythX, you really sound like the rich douche you are. If you can’t see why you need to save, _especially_ when you make little money, then really there is nothing that can be done to help you.

  • WraythX says:

    Umm – I didn’t write post #3.

    I think people should save, but I think poor people who need foodstamps should be using their money to survive – not relying on the government to feed them.

  • Jon says:

    What if poor people use their cash instead of food stamps to buy food and then their car breaks down? Then they can’t make it back and forth to and from work unless they get some auto repair stamps.

  • wrex says:

    I think it’s time for another tea party…only this time in protest of our own government and their crimes against the poor. EAT THE [email protected]#

  • John Wesley says:

    The amazing efficiency of the US government continues to astonish. Well, as long as the economy keeps chugging along, who’s going to complain?

  • corey says:

    I was able to qualify for the EIC and the credit for retirement savings for the past three years.

  • CyberMage says:

    I just looked at my first full year joint tax return with my wife. We had a child already, and our total income was $12k for the year. It didn’t get much better for years. We were on food stamps for awhile, and welfare checks sometimes as well. I made minimum wage at the time.

    I agree with the rules. If I had savings of $2500 I should be using it for living. Savings up to $2500 would cover car expenses as someone else mentioned, without penalizing you.

    Also, if I owned 4 cars I should be denied benefits, because there’s no need to own 4 cars to support my family, and that’s a resource I could use to support myself.

    We should change from supporting the poor to teaching the poor to support themselves. My experiences living on welfare helped me advance to the point that I now make $90k / year and own three businesses.

    Now I look around at people I know and there’s a woman I know on welfare who drives a 2006 Mitsubishi Eclipse. She bought a motorized scooter and a $400 game system setup for her kid for Christmas, and gets welfare, food stamps and churches to donate to her.

    It makes me mad to see how many people abuse the system.

    • Nick says:

      I am not rich. I am suddenly jobless. I did the right thing or what I thought was the right thing by saving every extra thing I could and now I am being penalized and do not qualify for anything. Does that make sense to you?

  • AJ says:

    I don’t think it’s an issue. Who could save any money on $15000 a year ?

  • Bob/Paul says:

    Chugging along? Gas prices are up, wages are down, the value of the dollar is dropping in comparison to international currency… It’d be nice if the economy would /start/ chugging along again…

  • food says:

    The National Center for Policy Analysis is a Conservative Think Tank bought and paid for by large corporations and/or foundations acting in the interested of large corporations. I’m sure they’re unbiased.

  • foo says:

    Please explain how the value of the dollar relative to international currencies affects you in the slightest unless you’re planning a fancy vacation in Europe.

    Of course, it would definitely affect you if you are selling American products to Europeans, or working in America for a European employer. Obviously you would either get more business or more dollars for the same business.

    Get a clue.

  • LoLz()r says:

    LOLz @ food:

    can u sh0w me 1 report or study that isn’t unb1assed? gr34t point cpt. 0BV10US


  • Neo The One says:

    You’re an idiot. There’s a difference between tax-exempt interest (tax-exempt municipal bonds and mutual funds that operate outside of a retirement account) and interest earned on a 401K or IRA. The poor can still save money, and are, to some degree, encourage to save money through these instruments because they don’t have to spend their cash (they get foodstamps) on food. Further, the use of the IRA or 401K doesn’t disqualify them from EITC. In fact, if someone poor is lucky enough to get 401K, they may be able to lower their income to the EITC qualifying levels since the income reported on your taxes is after 401K withholdings. And you know what saving 2000/year does for someone from the age of 26 to the age of 35 for retirement? A crap load more than it does to save 2000/year from 35 to 65. The poor need to save money, but the problem is that they don’t know the right vehicles that can do it for them.

    As always, the devil is in the details. Do your research before you try to exert an unqualified an opinion.

  • Neo The One says:

    Oh, btw, saving 2000/year from 26-35 at standard market rates using IRA/401K vehicles results in approximately 500,000 in total savings by the time they are 65. Do the math. It’s compounding interest at 10%.

    Saving 2000/year from age 36-65 nets in 328,988. I don’t think 195 per month is unreasonable if the government is paying your food don’t you think? Not especially when they can afford 2006 Eclipses…

  • MoneyNing says:

    The reality is that people who are rich are often closer to the politics than people whom are poor, hence they get more attention which equals more benefits.

    Just like the law, the poor is often neglected with taxes since people who are doing the legislations are not poor and thus could never really get the real picture.

  • Annie says:

    A good friend of mine recently underwent a bone marrow transplant which basically rendered him disabled for ~3 years. During this time, he was forced to eliminate his 401K savings so he could receieve disability to pay day-to-day bills. A horrible situation. I agree that the govt provides incentives NOT TO save.

  • Blair says:

    Poor people who are able to save should look to participate in an individual development account (IDA), which receive special consideration and are generally not included when it comes to benefit asset tests. IDAs are available in many communities around the country, with lists available from the Center for Enterprise Development (www.cfed.org).

  • Bob says:

    Written by: Neo The One

    “Oh, btw, saving 2000/year from 26-35 at standard market rates using IRA/401K vehicles results in approximately 500,000 in total savings by the time they are 65. Do the math. It’s compounding interest at 10%.”


    First, it would be rather naive to expect a 10% return going forward.

    Second, the $500,000 you so breathlessly tout would be worth roughly $80,000 in 40 years given the inflation that occurred between 1967-2007. Going forward, inflation could very well be much higher, making your $500K worth even less.

  • A Marino says:

    The reason that the rules change are because of people who cheat the system which undermines what it was for in the first place. Welfare was never meant to be a permanent paycheck for someone. It was meant to help out or assist until the person could get on his feet.

    I don’t think that a person’s retirement account should be included in their income. What should be done is to freeze it while receiving benefits. The reason that they include it is because the person has access to withdraw money; even though they would be penalized. So, if the government put a freeze on their accounts while receiving benefits, there wouldn’t be a problem. If the person wanted the freeze off to withdraw money, his or her benefits would stop.

    Also, people can also prepay some of their expenses such as cemetery plots if you’re elderly.

    You can also save money on the side. When you use coupons, receive rebates or gift money, that can be saved to the side until needed for emergencies.

  • Neo The One says:

    Bob said “…it would be rather naive to expect a 10% return going forward.”

    S&P 500 returned 20% this last year. There’s no reason to believe that the market won’t return an average of 8-12% over the next 20 to 30 years. Over the last 5 years, the S%P has doubled over 5 years. By doing that math, that’s approx. 15% per year. Yes, it did go down. But then again, if you put your money aside monthly, you would have made money. It’s called cost-averaging.

    “$500,000 you so breathlessly tout would be worth roughly $80,000 in 40 years given the inflation that occurred between 1967-2007. Going forward, inflation could very well be much higher, making your $500K worth even less.”

    Secondly, DO YOUR MATH. 3% inflation 30-40 years from now only reduces value by a factor of 3. What empirical data do you even have to even suggest that inflation would be any higher than 3-4%? Even taking into account the recession and inflation crises of the 70s and 80s, our inflation is under 4%. Further, if you even begin to suggest that it’s unreasonable to expect a 10% rate of return, that means average incomes go down. That means that inflation would likely decrease unless we have short supply of a particular resource, the only one which comes to mind right now is oil. Either way, the last time I checked, 500K divided by 3 doesn’t equal 80K.

    Oh Bob, btw, do you have a background in either economics or finance? I didn’t think so…

    Lastly, what excuse do the poor have not to save money except for the fact that they may not know about it? If the poor save that money, it is only then that they have money there for a safety net or a retirement account.

  • Neo The One says:

    When I said it went down, I’m referring to our “recession” in 2001. You would have recovered all of your money, plus some had you continued putting in your 2000 per year.

  • blueholler says:

    I have a medical condition that requires me to take daily injections that cost $80.00 a piece. Because of my low income, I qualify for Medicaid. Without that benefit, I would have to make 80.00 every day of my life just to make sure I don’t drop dead. If I get a “regular” job, and I go over one penny of the allowable amount, I lose the medical benefits. Furthermore, many companies wont ensure me because of the preexisting (genetic) medical condition. So, what would I do? I guess save up enough money to go to
    Disneyworld, quit my job and await my impending death in the Florida sun. Not everyone who is poor is running around driving nice cars. Mine is a 1991 beat up mini van held together with paperclips and chewing gum. I get food stamps so I can eat. I work under the table so I can survive, literally.
    everyone has a different situation

  • Dev says:


    A single woman gets out of the military, has a divorce with an abusive husband, and is trying to find a decent home.

    She has $1000 saved up to find a place, but doesn’t yet have a job.

    She lives with a friend or relative, at a rental price of $150 a week, with her child until finding an apartment.

    After an exhaustive search, she finally finds a job with a non-profit; Grosses $1400 a month.

    The least expensive rental she can find is $600 for a 1 bedroom.

    Figuring in the cost of daycare for her 1 child; electricity; rent; gas; car maintenence; water and sewer; and groceries;

    she’s lucky if she HAS any money to save. More than likely, she will find herself in a deficit from time to time.

    This mother is NOT eligible for health insurance, and to get it through her employer, would cost her an additional $100.

    She has to make some decisions now, ie, choosing to get her painful tooth looked at by a dentist, or paying rent/electricity/ Etc.

    She has been told to apply for foodstamps, but knows that she has a $2000 retirement plan, and $1000 in a savings account that she is saving to put toward her home through Habitat for Humanity. (They require at least $500 deposit, and she will need her money for utility deposits.

    If she spends her money now on food, she won’t be able to afford to move out. Section 8 has a 2 year waiting list, and Habitat will take at least a year.

    If she spends her money now on food, though she will STILL NOT BE ELIGIBLE FOR ASSISTANCE. Government assistance is based on HOUSEHOLD income.

    Here’s the problem with the system. We’re keeping people on it, and we don’t want to do that. We’re keeping people poor.

    If this single mother can get herself out of this situation, and can EVEN get herself food stamps, she won’t be able to afford to get off of them.

    Sure, having money in the bank means you can afford food, but not having the assistance can mean not becoming self-sufficient.

    I think it’s a travesty that low-income people have to “dump” their savings into basic needs before they can get help with those needs.

    Having a savings account shows that the people have goals, and that they are working toward getting out of the system, which should be the goal of assistance.

    Rather than simple placing a limit on savings, the government could impose some sort of limitation on savings. Here are some MUCH better options:

    1. Clients with $2500 or more cannot withdraw their money until they find a better paying job and get disqualify, income-wise, for assistance.

    2. Clients must specify allocations for their savings, and there should be certain savings accounts excluded from the assets eligibilty requirements, ie. housing, retirement, or education. Clients should sign a contract stating that the money in their accounts is being saved for one of those reasons, and if used for any other reason, they may be penalized a certain percentage for the benefits they have already received, and may be terminated from receiving assistance.

    3. Clients in temporary situations should not be penalized for savings if their accounts are less than the standard $2500 limit AND
    a. first, last and security deposit rates (based on lowest available rental rates for local area), and
    b. Deposits for utility bills
    c. a certain small amount to account for basic living ammenities (bed, Etc).

  • Marc says:

    I think living hand-to-mouth is a lousy way to live. If poor people can generate enough income to put money away, the system should be structured so they can raise their income until it reaches 1.5 times the benefits they receive. That way they can put money away, create a buffer and then replace their benefits with the ability to be self-reliant. The way the system is currently, it’s impossible to reach a level of income without the fear of losing the only avenue of survival.

    I’m sure there are some people who would get a twist in their panties over this idea but it seems to be a way in which earnings and self-sufficiency can be encouraged and even rewarded.

  • Acajudi says:

    I must give God the credit for keeping me in good health and giving me control over my morals.
    I was left on the street by a married Mom, who could not take anymore abuse from my evil father. I was raised by an elderly couple, who I was later able to help them.
    I married twice at 27 and 31, and I stayed a virgin until 25. I had one child at 37. I always worked and did all the overtime I could. My job gave me a very nice pension, when I retired at 58, after 33 years of service. I still went back to work at 60 and I I have always been generous with what God has given me. I never had to get on welfare, and at 67, I am living very comfortable. I do feel sorry for people, who have children too early, or too many children, so I am sharing my life with you, and I hope you can learn. The economy is so much different, and jobs do not last as long as my job did. I started two businesses also, but never had the time to earn money in them due to working so much. I paid for my vacations all over theworld from savings. I do not travel now, but I save and help others. I am not rich, but I am comfortable, so please think before you go into debt, or have so many children. I must thank Dave Ramsey for his true and excellent advice about finances and life.

  • Alice says:

    I was born poor and now I find myself with a family and poor still. I want to save for the future but being on foodstamps and medical I cant. I want to save for retirement, for a home, so one day I can win my freedom back and be self reliant, but I cant. What I value the most is my medical. I lost my mother-in-law because she couldnt afford health insurance. She was 50 and worked all these minimum wage jobs that didnt offer any health insurance. She wouldnt qualify or be able to afford health insurance because she had diabetes. She never was able to treat herself and died of a simple leg infection that just got worse.She left 4 grandkids behind. I rather stay poor then lose my medical because without your health nothing else matters. Its going to be hard to jump from poverty to middle class where you can afford everything you need, I wish I had the resources to figure out a way out of poverty. Im tired…living paycheck to paycheck and praying theres enough.


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