Do Welfare and IDA Program Policies Affect Asset Holdings?

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Abstract

Restrictive asset limits in means-tested programs may unintentionally discourage families from saving. This brief presents an empirical analysis of how asset tests affect families' asset holdings. The findings suggest that more lenient asset tests and more generous IDA program rules can lead families to increase their asset holdings. Relaxed vehicle asset limits, for example, are associated with increased vehicle ownership. Since people often need a reliable car to get to work, this finding suggests that exempting at least one vehicle in all states may increase employment and job stability among low-income families. The findings also suggest that restrictions on withdrawals and incentives built into restricted asset accounts and IDA programs may provide families with motivation to build assets.

Introduction

Savings and assets can cushion families against sudden income losses and can bolster long-term economic gains. Assets, however, can make a low-income family ineligible for benefits from means-tested programs when they encounter economic difficulties. Most means-tested programs restrict eligibility to families with assets that fall below a set threshold in an effort to target benefits only to those most in need. However, if asset restrictions unintentionally discourage low-income families from saving, asset tests may run counter to the often-cited government goal of promoting self-sufficiency.

In recent years, federal and state governments have implemented programs and amended program rules to encourage savings and thus promote self-sufficiency among low-income families. For example, the Temporary Assistance for Needy Families (TANF) program and the Food Stamp Program (FSP) now allow states to ease asset rules. These changes were aimed at lifting restrictions on vehicle ownership and the value of liquid assets (e.g., dollars held in savings or checking accounts). Some states further liberalized asset tests by creating separate limits for restricted accounts; restricted accounts are savings accounts earmarked for specific purposes such as individual development accounts, retirement savings accounts (e.g., 401(k)), and education savings plans (e.g., 529 plans), among others. Withdrawals from restricted accounts are limited to certain activities, such as retirement, education, homeownership, or business start-up.

In addition to these liberalizations, federal and state governments have been supporting Individual Development Account (IDA) programs. IDAs are restricted savings accounts that provide matching funds at the time of withdrawal (i.e., matched withdrawals), if savings will be used for one of a few preset goals (e.g., higher education, homeownership, or business start-up). Other government programs and policies aimed more broadly at low-income families can also affect asset accumulation. Both the earned income tax credit (EITC) and the minimum wage, for example, are aimed at raising the incomes of low-income families, which in turn can affect their asset building.

Despite the potential importance of these government programs and policy changes, few studies have examined rules that can affect saving and asset accumulation among low-income families. So far, the research shows mixed results. Of four empirical studies that examine the effect of the asset rules in the Aid to Families with Dependent Children (AFDC) program and its successor, the TANF cash assistance program, two studies find that relaxing AFDC/TANF program rules did not increase households’ liquid asset holdings or net worth (Hurst and Ziliak 2006; Sullivan 2006), while two others find that they did increase households’ liquid asset holdings (Nam 2008) or net worth (Powers 1998). The research on the effect of AFDC/TANF rules on vehicle ownership is also mixed. Sullivan (2006) and Hurst and Ziliak (2006) find evidence that relaxing asset limits leads to higher vehicle ownership, while Nam (2008) finds no evidence that vehicle ownership increases when asset limits are relaxed. Findings on the relationship between IDA programs and asset holdings are more consistent and provide evidence of a positive relationship between IDA programs and asset accumulation (Schreiner et al. 2005; U.S. Department of Health and Human Services 2004; Stegman and Faris 2005; Mills et al. 2006).

(End of excerpt. The entire brief is available in PDF format.)

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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