September 22, 2007
By David C. John
Imagine a government policy that punished people for doing the
right thing, or one that forced workers in financial straits to so
deplete their assets that they end up permanently dependent on
federal assistance. Actually, there's no need to imagine: the Food
Stamp program does both.
The problem is in the program's asset test rules. Because of
these rules, the Food Stamp program, which provides monthly food
assistance to nearly 25 million low-income workers, punishes many
workers who have already saved for retirement -- and it may end up
discouraging future workers from saving at all.
This is exactly the reverse of what's needed. Welfare reform has
helped move thousands of families into employment and onto a path
to full participation in the economy. But these reforms are
incomplete as long as we discourage working families from engaging
in the very behaviors that lift them out of poverty. Policies that
penalize saving need to be changed, and the current Food Stamp
asset test should top the list.
The Food Stamp program wisely includes asset tests to make sure
that the people who receive assistance really need it. Since 2002,
though, those asset tests have specifically excluded money held in
401(k)-type retirement plans. This makes sense: Workers who drain
their retirement savings due to a temporary income problem will
just need more federal assistance once they retire. Plus, workers
who spend money in a 401(k)-type retirement account must both pay
income taxes on that money and a 10 percent penalty for using it
before they reach retirement.
Unfortunately, the exemption for 401(k) plan retirement savings
doesn't go far enough. Individuals who are laid off or in the
process of changing jobs regularly have their 401(k) savings
automatically rolled into an IRA. Retirement savings in an IRA are
not automatically exempt from the Food Stamp asset test despite the
fact that early withdrawal of those savings results in the same tax
penalties as an early withdrawal from a 401(k). So if a worker is
forced to turn to food stamps because he or she lost a job when a
factory closed, and the company rolls his or her retirement savings
from a 401(k) to an IRA, they become subject to the Food Stamp
This is a widespread problem. Significant numbers of moderate-
to low-income workers who don't have access to employer-sponsored
retirement plans, including many small-business employees, the
self-employed and independent contractors, are also more likely to
have their retirement savings in an IRA than in a 401(k).
Take the story of Linda Jean George, a former substitute teacher
from Arcade, N.Y. Six years ago, Linda left her job to raise her
two children and help her husband run the family's dairy farm.
Following the recommendation of a financial advisor, she rolled her
401(k) money into an IRA. With falling milk prices, their family
income dropped to about $10,000 in 2006, where it remains. When
Linda applied for food stamps, her family was turned down because
of her IRA savings. She was told that her family wouldn't be
eligible for food stamps unless she liquidated her IRA (paying both
taxes and a penalty for early withdrawal) and spent that money. The
long-term effect will be that today's temporary financial problem
becomes tomorrow's retirement crisis.
Luckily, policymakers have taken notice. A bipartisan effort
lead by Sen. Saxby Chambliss (R-Ga.) and Sen. Tom Harkin (D-Iowa)
would exempt all qualified retirement savings plans from being
counted toward the Food Stamp asset. President Bush has also
included this reform in his administration's annual budget. The
House included the necessary language in its version of the Food
Stamp portion of the agriculture bill. Unfortunately, it's only a
tiny portion of a major bill and could get lost amid debates over
agriculture subsidies and other issues. That would be a huge
Federal programs targeting low- and moderate-income families
should be designed to encourage families to work, save and invest.
Discouraging working families from engaging in the very behaviors
that lift them out of poverty is both short-sighted and potentially
expensive, as workers without retirement savings are much more
likely to need federal assistance as they get older. Changing the
Food Stamp asset test to exempt all retirement savings plans is a
small step that could pay large benefits in the future.
David C. John is
Senior Research Fellow with the Thomas A. Roe Institute for
Economic Policy Studies at The Heritage Foundation (heritage.org).
First appeared in the Washington Post
Imagine a government policy that punished people for doing the right thing, or one that forced workers in financial straits to so deplete their assets that they end up permanently dependent on federal assistance. Actually, there's no need to imagine: the Food Stamp program does both.
David C. John
Senior Research Fellow in Retirement Security and Financial Institutions
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