Document date: December 01, 2010
Released online: January 24, 2011
Savings can help low-income households cope with income instability and unexpected expenses, according to new evidence presented here. For households with nonelderly heads in the lowest income quintile, modest holdings of liquid assets (amounts up to $1,999) can significantly reduce the probability of hardships with health care, housing payments, food security, utility and phone bills, and basic consumption. Programs to promote saving can help low-income households protect themselves from economic shocks, as income variability, in addition to low income, increases risk of such hardships.
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This brief explores the role that savings can play in alleviating material hardship for low-income households. We use longitudinal household data from the Survey of Income and Program Participation (SIPP) to examine whether modest liquid assets—sometimes referred to as precautionary or emergency savings, a rainy-day fund, or ready money—can protect against impending hardship for low-income households with nonelderly heads. Such households are at risk of adversity because their monthly incomes are low and highly variable. Compounding this inherent income instability is the likelihood of unanticipated spending needs.
The SIPP is well-designed for such research, as low-income households are oversampled and the members of each survey panel are followed for multiple years. Interviews are conducted at four-month intervals (or waves), and monthly household income is measured at each wave. Detailed information on liquid assets and other components of net worth is gathered approximately every year. Measures of economic well-being are also collected for each panel, indicating hardships related to health, housing, food, and other basic needs.
The analysis here focuses on the following research questions:
Answers to these questions have important implications for policies to encourage unrestricted savings as a way to self-insure against economic shocks. Such shocks are a major form of economic risk—arguably, the major economic risk—to households already operating just above subsistence-level income. Programs and policies to help households manage these risks need to reflect a well-informed understanding of the underlying short-term dynamics of income, assets, and material well-being.
This brief focuses on savings in the form of unrestricted liquid assets. When low- and moderate-income households have wealth, it is often in home equity, retirement savings, or other assets that cannot readily be liquidated to meet shortterm needs. Avoiding hardship, however, requires the capacity to replace a sudden income drop or cover an emergency expense without delay.
End of excerpt. The entire brief is available in PDF format.