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How an outdated welfare rule is forcing low-income families to spend their savings
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Families thrive when they can save up. So why do welfare laws discourage them from accumulating wealth? - photo by Lane Anderson
When President Reagan revamped welfare reform in the '80s, he introduced a crucial change: to be eligible for social programs, a person couldnt have more than $1,000 in assets. This meant that people in need would have to spend their savings before they could apply for assistance programs and they did.

Ten years after Reagan left office, research found that 40 percent of low-income, single mothers (including non-recipients) reduced personal savings by an average of $1,250.

The rule remains in many states and keeps people in a poverty trap of low assets that makes it hard to save up, accumulate wealth and join the middle class.

But without limits, would people just milk the system?

To find out, Leah Hamilton and other researchers from Appalachian State University conducted a new study that looked at five states Alabama, Colorado, Delaware, Louisiana, and Maryland that have eliminated or increased the asset limit to $10,000 or greater.

They did the study during the height of the Great Recession, when there was record unemployment and the chance of seeing increased applications was highest. Researchers looked at caseloads two years before and after the rule change in each state.

We discovered no associated increase or decrease in welfare enrollment, the authors wrote, meaning that the number of people applying for help wasnt affected by asset limits. It also means that fears of widespread abuse are most likely unfounded.

Two states that eliminated asset tests, Ohio and Virginia, actually saw declines in program enrollment.

The findings are important, Hamilton wrote in the Atlantic, because "while the structure of welfare has changed over time, the trap presented by asset limits has remained relatively unchanged to the detriment of many American families who face short-term financial challenges like loss of a job or incapacitation of a loved one."

Advocates have encouraged states to raise or eliminate asset limits, but many have yet to do that, leaving families in a quandary between remaining eligible for needed aid and saving up for the future.

States that did raise levels, such as Nebraska and North Dakota, saw an increased savings among all low-income families, according to Hamilton's research.

The primary reason that limits haven't been raised appears to be that doing so would "open the floodgates to abuse," wrote Hamilton, adding that middle class families with savings would flock to the government for assistance.

She said that the research suggests the opposite: that limits aren't necessary to prevent abuse, and they actually encourage self-sufficiency. And if they don't work? They can be reversed at no cost.

"Assets matter because they have the power to insulate families from financial emergencies, purchase homes, and send children to college," Hamilton wrote.

"The fact is that families with financial assets are more not less likely to become self-reliant."