Retirement Savings and the Poor

There’s little disagreement that saving for retirement is a good thing. But could helping poor people build savings through a retirement plan reduce or eliminate their eligibility for social assistance?

This important question has come up recently because state- or city-sponsored retirement plans are, or soon will be, automatically enrolling workers, some of whom have low incomes. California, Connecticut, Illinois, Maryland, and Oregon, as well as Seattle, offer retirement savings programs for private sector workers who do not have a plan at their workplace. Eligible workers are automatically enrolled in the plans, although they can change their savings rate or simply opt out.

The potential fly in the ointment is that as the retirement savings of low-income workers increase, their social safety net support could decrease—or be eliminated altogether. State and federal programs such as Medicaid, Temporary Assistance for Needy Families (TANF), the Low Income Home Energy Assistance Program, and the Supplemental Nutrition Assistance Program, often referred to as SNAP or Food Stamps, help low-income Americans. However, some of these programs limit participation to people with assets or incomes below a certain level, to guarantee that the program targets the truly poor. For example, many states set an asset ceiling, usually $2,000, for TANF eligibility.

States and cities that operate retirement savings plans need to consider how working-age participants might be affected by an asset or income limitation to a social assistance program—and also consider options for action, which include removing asset limits or excluding certain kinds of assets or income for purposes of public assistance eligibility. For instance, governments could follow the lead of Kentucky, where money in individual retirement accounts is not counted toward TANF asset limits. Research by The Pew Charitable Trusts has found that increasing or removing asset thresholds for state TANF programs has little effect on the number of applications for assistance, application acceptance rates, or the size of caseloads.

In fact, because the point of any retirement savings program is to guard against poverty in old age, inadequate savings by individuals during their working years could boost state public assistance spending on the elderly. Modeling work by Econsult Solutions Inc., an economic consulting firm, found that inadequate retirement savings could cost Pennsylvania $14 billion in increased social assistance and reduced tax revenue over 15 years.

Conversely, a relatively small amount of retirement savings can have a multiplier effect: Putting more money in retirees’ pockets could allow them to delay claiming Social Security benefits, which would increase their proceeds by as much as 7 or 8 percent. And retirement savings programs can buffer large and unexpected expenses, such as uncovered medical care, long-term care, or other financial shocks such as a roof repair, for which a monthly Social Security check is not sufficient.

Policymakers, business owners, and others working on retirement issues should be aware of any effects that these programs could have on public assistance eligibility. At the same time, we need to keep in mind how sufficient savings can help reduce poverty in retirement, which could help improve the fiscal health of states and cities.

This article was originally published on Forbes on Sept. 20, 2018.