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Abstract
This report provides a policy-oriented conceptual framework that has the potential to explain saving and asset accumulation across the entire population and to account for the low levels of saving and asset accumulation in the low-income population. The report also reviews empirical evidence that supports or challenges this framework.
Introduction
Although research on the determinants of saving and asset accumulation is extensive, it remains inadequate for public policy purposes. Most existing theories of saving point to individual characteristics to explain low levels of wealth. Relatively few studies offer research that could inform policy for increasing wealth. This report examines the following question: What factors determine financial asset building? In particular, the report presents a conceptual framework for the determinants of saving and asset accumulation.
The goal is to develop a framework that explains saving and asset accumulation in ways that can inform policy decisions. Thus, the emphasis is both narrow and broad. It is narrow because of the focus on decisions and outcomes related to assets, not decisions and outcomes related to consumption, income, participation in means-tested programs, and liabilities. A broader conceptualization of the economic life of low-income households might also be useful, but is beyond the scope of this report. At the same time, the emphasis is broad because the report seeks to develop a framework that explains saving and asset accumulation across the entire population, while accounting for low levels of saving and wealth in the low-income population. The goal is not to develop theory that applies only to the poor because this theory would not support broad knowledge development and would not connect with larger bodies of work on saving and asset accumulation. That said, the report does give specific attention to three disadvantaged populations—low-income households, minority households, and single-mother households.
The emphasis on assets does not imply that income- and consumption-oriented strategies are undesirable. Economic constraints are very real and probably go a long way toward explaining low saving rates and limited asset accumulation in low-income households. The optimal decision for some very low-income households may be not to save, because saving would require harmful reductions in consumption. Thus, programs and policies that increase incomes and provide important supports, especially health insurance, are critical for the economic well-being of families. Both income generation and asset building are essential in the economic lives of everyone, rich and poor alike. The series to which this report belongs focuses on assets because policymakers (and others) have generally undervalued the role of assets in the economic well-being of low-income families (see Sherraden 1991) and because much more could be done to support the asset-building efforts of low-income families through public policy.
This report is organized as follows: Section II summarizes existing theories of saving and asset accumulation and discusses strengths and limitations, with an emphasis on ability to explain asset building in low-income households. Section III presents the conceptual framework. When applicable, this section considers how the hypothesized relationships might differ substantially for low-income, minority, and/or single-mother households. Because the aim is to develop a conceptual framework that will be of use to policymakers, this section also presents additional conceptual points related to public policy. Section IV reviews empirical evidence that supports or challenges the proposed framework, noting where findings seem to differ for low-income, minority, and single-mother households. The report concludes in Section V with a summary of strengths and weakness of existing empirical evidence and possible directions for future research.
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