Why Saving For Retirement May Hurt The Poor Both in UK and US

What do low-income households in United Kingdom and United States have in common? This specific demographics for both countries will get penalized for saving for retirement. And here’s how:

 

It’s amazing how the The US government has done a great job in educating a lot of people not to rely on Social Security benefits alone when they retire. The government also has provided tax incentives to motivate various individuals to start their own retirement plans either through their employers (401K, pensions, 457, SEP) or via an IRA (traditional or Roth). However, if you are poor, this may not be a good idea because various welfare assistance, such as food stamps. section 8 rents, cash aid, or medical insurance, will be reduced or eliminated completely!! Sometimes our government can be really confusing for the low-income households.

Here’s an excerpt from a recent article in Los Angeles Times entitled Saving May Not Pay-off for Poor:

Low-income households face an ”astronomical” penalties for saving, according to the report by the National Center for Policy Analysis. For example, each $1 saved by a single mother earning $15,000 a year could cost her $2.60 in higher taxes and lost government benefits. In addition, putting a few dollars aside in a retirement plan can disqualify families for food stamps, healthcare benefits and assistance given to poor families with children. The loss of benefits is felt year after year, compounding into a huge loss over time, the report says.

And here is a comparative excerpt from a recent article in BBC News UK entitled Pension Scheme ’Risk’ The Poor: 

Low-income groups could lose out when the Personal Accounts pension system starts in 2012, the Equal Opportunities Commission (EOC) has said.  Also, some people could find they are worse off under the new Personal Accounts system, losing more in benefits than they gain through personal accounts. In particular, women, who earn less than men on average, are among those most likely to fall into this trap.  

Whether you’re living in United Kingdom or in the United States, saving for retirement can penalize you if you are in the low-income household. If you’re one of the poor, you care more for what you need in the present than in the future. To them, retirement would just mean Social Security, if it’s still around. That’s why, in my opinion, the government should reform the new system to not include the retirement savings as part of the factors in determining welfare eligibility for the unfortunate ones.

Photo: By Victoriano from Flickr