Three years ago EconLog hosted an excellent discussion of means tests. The blogs were excellent, and comments by readers were sometimes even better. “White Detroiter”, for example, wrote:
There still are some programs that include wealth as a means test. Supplemental Security Income (SSI) doesn’t allow you to have more than $2,000 in savings and still receive benefits.
A few years ago I knew someone who was on SSI but had a part time low wage job. She lived in a very low rent trailer park and used the public bus system to get around (she was legally blind so she had no use for a car). Between the SSI and her part time income she was capable of building significant savings but if she did she would lose her SSI. So she spent everything she had on things like marijuana and never really got ahead in life.
“White Detroiter” wrote in response to a comment of Bill Conerly:
Some welfare programs in the past had wealth as a means test. A family on welfare that lived frugally and accumulated an emergency reserve savings account risked disqualification, whereas the family that spent every penny that came in were sure to continue.
Both were responding to EconLog blogger David Henderson who, in an otherwise excellent post, wrote:
Without exception, every time I’ve seen someone advocate means testing, he uses income as his measure of means. This completely ignores wealth. Although income and wealth are highly positively correlated, the correlation is not close to 1.0. Therefore means testing would discriminate in favor of wealthy people with low income.
David Henderson, “Problems with Means Testing“, EconLog, 5 February 2010.
Wealth tests are frequently used in developing countries, and occasionally in high-income countries, such as Hong Kong, Australia and the United States. Sometimes, as in the example of SSI (a noncontributory basic pension in the US), the test is draconian.
As I have said many times, “means tests are taxes”. It follows that a wealth test is a tax on savings, just as an employment test is a tax on wage income, and an income test is a tax on all income.
“White Detroiter” provides a human face for the consequences of a wealth test on very modest SSI benefits. Incidentally, SSI also requires an income test, such that beneficiaries lose 50 cents of benefits for each dollar of “earned income” (such as wages) and one dollar for each dollar of “unearned income”, such as income from a pension, or interest on savings.
People respond to incentives – even when they are poor.