Obstacles to Savings in the United States: How Government Policies to Encourage Savings Leave the Poor Out in the Cold

Saving money is hard. It involves tradeoffs, and it means limiting what you consume in a society that’s all about consumption. The lower your income, the more difficult the tradeoffs. Yet we all need to do it if we want to retire with dignity, send our kids to college, and pass something on to future generations. Governmental and employment policies address this problem by providing people with incentives to save and build assets. You can deduct contributions to your IRA or 401(k) from your taxable income, which dramatically improves your returns. And your employer might match your 401(k) savings as a way to help keep you happy on the job. When you pay your mortgage, and much of the money goes to pay interest on the loan, you can take comfort that you’re also lowering your income tax liability. Same with paying your property tax. All of these inducements to save or build assets are the result of public policy decisions, and they remove about $370 billion from federal tax receipts each year. It’s a tradeoff: less to spend on schools, roads and healthcare, but the government is rewarding people’s hard work and thrift.

But here’s the catch — these benefits go to people who do not need them. According to CFED (a national think-tank on economic policy), more than 45% of the three largest tax subsidies (the home mortgage interest deduction, the property tax deduction, and preferential rates on capital gains) go to the top 1% of households — whose average income exceeds $1.25 million. The lowest-paid 60% of Americans gets less than 3% of the benefits. Put another way, the poorest fifth gets an average of $3 in benefits per family, while the wealthiest 1% enjoys an average of $57,673.

Why this appalling inequity? It’s because low-wage workers don’t earn enough to qualify to pay very much income tax. They pay their fair share of taxes, with a big chunk of each paycheck going to payroll tax to fund Social Security and Medicare. Yet all of these tax subsidies apply to income tax only.

So if you earn $24,000 per year, at a job that offers no 401(k) plan, and no employer match, and you put some of your hard-earned wages into an IRA, you get none of the added boost to your savings that middle- and upper-income people get at tax time. And even if you could afford to buy a home and try to build equity that way, all of the mortage interest you would pay would do nothing to bring down your tax bill.

By providing the working poor with a savings match and financial education, we are rewriting this dismal story for hundreds of families every year.

Eric Weaver