Guest Post: How Asset Tests Punish the Poor

Editor’s Note: This guest post is by Benjamin Landy, a Policy Associate at The Century Foundation. The article originally appeared on tcf.org.

Last week, national media reported on the story of a formerly homeless New Jersey man whose honesty, after finding and turning in $850 he found on the street, turned him into a local celebrity but cost him his welfare and Medicaid benefits.

James Brady was unemployed and living in a shelter in Hackensack at the time he found the unmarked envelope, but he didn’t think twice before giving it to the police, reasoning that the money might belong to someone even worse off. Six months passed and no one came to claim it, so the police returned the cash to Brady. The local headline that day read “Ex-homeless man’s selfless act pays off.”

Unfortunately, all of the attention caught the eye of Hackensack Human Services director Agatha Toomey, who proceeded to cut Brady’s general Assistance and Medicaid benefits for failing to report the reward as new income. Media around the country immediately seized on the story as an object lesson in the casual cruelty of bureaucratic indifference.

Still, the saddest part of the story isn’t Toomey’s cold-heartedness, or even the two months Brady will have no health insurance coverage (he sees a therapist and takes medication regularly for the depression he has had since September 11th, when he was supposed to be at the World Trade Center for a business event). It’s the fact that Brady’s dilemma is so commonplace.

Public policy and the poverty trap

Every day, millions of low-income Americans live in fear of losing public assistance entirely if they earn any extra income, save too much money, or buy a car to get to a new job.

The way that asset tests are designed, even one additional dollar in income could be enough to disqualify a family from receiving benefits worth thousands. That isn’t a problem when benefits are phased out slowly, as with the Earned Income Tax Credit. But with many other programs—TANF (welfare), SNAP (food stamps) and Medicaid, to name a few—beneficiaries face a stark choice: continually spend down their savings or become suddenly ineligible.

Means-testing makes sense in theory. Public assistance programs are designed to provide benefits only to people with too few resources to avoid destitution. To determine whether an applicant is eligible, government agencies consider both income and assets, including anything that can be converted into cash, like stocks, bonds and bank accounts. In some cases, the list even includes cars, retirement accounts and college savings plans.

There is no doubt that denying benefits based on these criteria helps the government to save money. The problem from a public policy standpoint is that asset-testing also creates a powerful incentive for families not to save money.

In general, taxes increase progressively with income. But benefits also disappear as income rises, acting as a secondary tax on each additional dollar. The result, according to the nonpartisan Congressional Budget Office, is an effective marginal tax rate on income as high as 95 percent for some low-income people. This is the very definition of a poverty trap.

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