Imagine a government policy that punished people for doing the right thing, or one that forced workers in financial straits to so deplete their assets that they end up permanently dependent on federal assistance. Actually, there's no need to imagine: the Food Stamp program does both.

The problem is in the program's asset test rules. Because of these rules, the Food Stamp program, which provides monthly food assistance to nearly 25 million low-income workers, punishes many workers who have already saved for retirement -- and it may end up discouraging future workers from saving at all.

This is exactly the reverse of what's needed. Welfare reform has helped move thousands of families into employment and onto a path to full participation in the economy. But these reforms are incomplete as long as we discourage working families from engaging in the very behaviors that lift them out of poverty. Policies that penalize saving need to be changed, and the current Food Stamp asset test should top the list.

The Food Stamp program wisely includes asset tests to make sure that the people who receive assistance really need it. Since 2002, though, those asset tests have specifically excluded money held in 401(k)-type retirement plans. This makes sense: Workers who drain their retirement savings due to a temporary income problem will just need more federal assistance once they retire. Plus, workers who spend money in a 401(k)-type retirement account must both pay income taxes on that money and a 10 percent penalty for using it before they reach retirement.

Unfortunately, the exemption for 401(k) plan retirement savings doesn't go far enough. Individuals who are laid off or in the process of changing jobs regularly have their 401(k) savings automatically rolled into an IRA. Retirement savings in an IRA are not automatically exempt from the Food Stamp asset test despite the fact that early withdrawal of those savings results in the same tax penalties as an early withdrawal from a 401(k). So if a worker is forced to turn to food stamps because he or she lost a job when a factory closed, and the company rolls his or her retirement savings from a 401(k) to an IRA, they become subject to the Food Stamp asset test.

This is a widespread problem. Significant numbers of moderate- to low-income workers who don't have access to employer-sponsored retirement plans, including many small-business employees, the self-employed and independent contractors, are also more likely to have their retirement savings in an IRA than in a 401(k).

Take the story of Linda Jean George, a former substitute teacher from Arcade, N.Y. Six years ago, Linda left her job to raise her two children and help her husband run the family's dairy farm. Following the recommendation of a financial advisor, she rolled her 401(k) money into an IRA. With falling milk prices, their family income dropped to about $10,000 in 2006, where it remains. When Linda applied for food stamps, her family was turned down because of her IRA savings. She was told that her family wouldn't be eligible for food stamps unless she liquidated her IRA (paying both taxes and a penalty for early withdrawal) and spent that money. The long-term effect will be that today's temporary financial problem becomes tomorrow's retirement crisis.

Luckily, policymakers have taken notice. A bipartisan effort lead by Sen. Saxby Chambliss (R-Ga.) and Sen. Tom Harkin (D-Iowa) would exempt all qualified retirement savings plans from being counted toward the Food Stamp asset. President Bush has also included this reform in his administration's annual budget. The House included the necessary language in its version of the Food Stamp portion of the agriculture bill. Unfortunately, it's only a tiny portion of a major bill and could get lost amid debates over agriculture subsidies and other issues. That would be a huge mistake.

Federal programs targeting low- and moderate-income families should be designed to encourage families to work, save and invest. Discouraging working families from engaging in the very behaviors that lift them out of poverty is both short-sighted and potentially expensive, as workers without retirement savings are much more likely to need federal assistance as they get older. Changing the Food Stamp asset test to exempt all retirement savings plans is a small step that could pay large benefits in the future.

David C. John is Senior Research Fellow with the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation (heritage.org).