Vermont Takes on “The Poverty Trap”

Blog Post
May 15, 2014

In the past few months, there’s been a lot of talk about “poverty traps” built into the social safety net. The term is most commonly used to refer to the issue of “benefit cliffs” in TANF and other programs – as families’ incomes go up, their benefits decrease, which arguably creates a disincentive to work, depending on how quickly benefits phase out. One approach? Just cut the programs. But a bill that just passed in Vermont shows what a better—and proven—approach looks like.

Benefit cliffs are nothing new, and neither is the policy debate about how to fix them. Vermont is addressing the problem by: 1) increasing the “earned income disregard,” or the amount of money that families can earn through work without triggering a decrease in benefits, and 2) extending the amount of time families can receive subsidized childcare, even after their income makes them ineligible for TANF.
These are proven strategies. Since welfare reform, many states have increased their earned income disregards to encourage more households to work;  a similar state policy option in SNAP, broad-based categorical eligibility, allows states to modestly increase their gross income limits so that low-income families who have significant expenses (generally a combination of childcare and rent) aren’t penalized for working. Coupled with the EITC, these policies help “make work pay” by providing incentives. Additionally, research shows that the lack of affordable childcare is one of the most significant barriers to work for single mothers. Though funding challenges remain, together, Vermont’s two reforms will facilitate a smoother transition from TANF to financial stability, and make it less likely families will cycle on and off of assistance for years to come.  
Yet as the Rutland Herald notes, the bill leaves another manifestation of the “poverty trap” untouched—the asset limit:

“One thing unchanged in the bill is the amount of assets the state will disregard when calculating Reach Up benefits. That figure remains at $2,000, although advocates for low-income residents had pushed for an increase to $5,000.
[Heather] Newcomb, 43, said she lost her job last year, applied to begin receiving Reach Up benefits and was told she would have to cash out an individual retirement account in which she had saved about $5,000.
She did so, paid taxes and a penalty for early withdrawal, and was required to prove she had spent the money, which she did by paying off a credit card account.”

As we’ve written at length, asset limits, particularly in TANF, often require families to remain well below the asset poverty level as a condition of getting help—thereby increasing their immediate vulnerability and, as in Ms. Newcomb’s case, jeopardizing their long-term prospects. Keeping the limit unchanged reduces the ability of families to save every year. Inflation has eroded the value of the $2000 limit to just $1300 in constant dollars.

Eliminating asset limits across states and programs would be the most straightforward way to address this issue – while increasing state agencies’ efficiency in the process. But at the very least, states should increase them to a moderate level and exempt certain assets—like retirement accounts—that will reduce families’ need for public assistance in the future. In our SOlving the about the myRA, we urge policymakers to eliminate asset limits so that low-income workers aren’t deterred from opening an account and developing a small emergency fund. Saving money increases the odds that families will climb out of poverty and that their children will thrive. Telling poor families not to save is a different kind of poverty trap, but it deserves to be addressed just the same.