The Effects of Welfare and IDA Program Rules on Asset Holdings

1. The Effects of Welfare and IDA Program Rules on Asset Holdings Signe-Mary McKernan and Caroline Ratcliffe The Urban Institute Yunju Nam Washington University in Saint Louis UKCPR Welfare Reform Conference April 12, 2007 Please do not quote any information from this presentation. All findings are preliminary and not for attribution.

2. Introduction • Savings and assets can: • Cushion low-income families against sudden income losses and bolster long-term economic gains. • Make a family ineligible for benefits from means-tested programs. • Asset restrictions may have the unintended consequence of discouraging low-income families from saving. • Federal and state governments have implemented programs and program rules to better promote savings. • TANF and FSP asset restrictions relaxed. • IDA programs supported. • Few studies have examined the effect of program rules on saving and asset accumulation and existing research shows mixed results.

3. Research Questions • This paper measures the effect of state program rules on asset holdings. • AFDC/TANF, Food Stamps, Individual Development Accounts (IDA), EITC, and minimum wage • What are the effects of specific TANF, Food Stamp, IDA, EITC, and minimum wage program rules on:  • Liquid asset holdings? • Vehicle asset holdings? • Net worth?

4. Background on State Program Rules • AFDC/TANF • Federal waivers to states and 1996 welfare reform (PRWORA). • Increased limits on vehicle assets. • Increased limits on liquid assets in unrestricted accounts. • Created restricted account programs. • Food Stamps • Some steps to liberalize asset limits in 1990s, but key steps in 2000 through 2002. • Increased vehicle asset limits & expanded categorical eligibility. • Individual Development Accounts (IDAs) • Federal and state governments began adopting IDA programs during the 1990s. Matched saving accounts created to encourage asset accumulation. • IDA programs differ with regard to match rates, maximum $s available for match, & eligible population (e.g., welfare recipients).

5. Literature • Four studies examine the effect of AFDC/TANF asset limits on asset holdings and find mixed results. • Studies focus on AFDC/TANF unrestricted (countable) asset limits and vehicle asset limits. • Finding • Liquid asset holdings and net worth • Two studies find that relaxing AFDC/TANF program rules did notincrease liquid assets or net worth (Hurst & Ziliak 2006, Sullivan 2006). • Two studies find that relaxing these program rules did increase liquid assets (Nam & Kam 2006) or net worth (Powers 1998). • Vehicle ownership and equity • Two studies find that relaxing asset limits increased vehicle ownership (Hurst & Ziliak 2006, Sullivan 2006), while a third study finds no effect of relaxed asset limits on vehicle ownership (Nam & Kam 2006).

6. Literature • Analyses of IDA account monitoring data suggest people in IDA programs save. • Analyses of the American Dream Demonstration (ADD) program (designed to promote saving through IDAs) suggest that the program increased participants’ savings (Stegman & Faris 2005). • Mills et al. (2006) controls for selection into IDA program with a controlled field experiment. • IDA program was found to: • Raise homeownership rates among blacks. • Reduce financial assets and business ownership among blacks (possibly indicating the need to liquidate assets to afford down payments and housing transition costs). • Raise business equity among whites. • Have no statistically significant effect on net worth.

7. Contributions • Examine comprehensive set of 16 program rules hypothesized to affect asset holding. • AFDC/TANF, Food Stamps, Individual Development Accounts, earned income tax credit, and minimum wage • Examine both unrestricted and restricted (IDA and new TANF) accounts. • We find differences between these accounts.

8. Sample and Data • Sample • Low-education single mothers and low-education families • Low-education: High school degree only or less • Age: Working age, 18-54 • SIPP Data: 1990, 1992, 1993, 1996, and 2001 panels • Data from 1991 through 2003 • Captures period of significant changes to program rules and both weak and strong economy. • Asset data collected in SIPP topical modules (2-4 times per panel) • Annual data • 10,487 low-education single mother person-years • 53,215 low-education family person-years • Supplemented with policy data and controls for the economy • Variety of sources including Welfare Rules Database, FNS waiver database, Center for Social Development IDA data, etc.

9. Asset Measures • Liquid asset holdings • Have liquid asset holdings • Value of liquid asset holdings • Vehicle asset holdings • Own a vehicle • Vehicle equity • Net worth • Net worth including home value • Net worth excluding home value

10. Asset Holdings

11. Sample Characteristics

12. State Program Rules

13. Number of States with Rule or Mean Value by Year

14. Asset Measures and Controls • Asset Measures • Liquid asset holdings • Have liquid asset holdings • Ln(value of liquid asset holdings) • Vehicle asset holdings • Own a vehicle • Ln(vehicle equity) • Net worth • Net worth including home value • Net worth excluding home value • Demographic and Economic Controls • Age, age squared, black, Hispanic, education less than high school, number of children in family, number of adults in family, metro area • State unemployment rate, state per-capita income, state employment-population ratio

15. Empirical Model:Have Liquid Asset Holdings • Linear Probability Model • Yist 0/1 have liquid asset holdings • WPst State AFDC/TANF policies • FSPst State FSP policies • IDAst State IDA policies • EITCst State EITC policies • MWst State minimum wage policies • Xist Family characteristics • Sst State economic conditions • s State fixed effects • t Year fixed effects • ist Error term

16. Empirical Model: • Other outcomes: • Vehicle ownership – linear probability model • Ln(vehicle equity) and Ln(value of liquid assets) – tobit model • Net worth – ordinary least squares • All models use same set of explanatory variables, state and year fixed effects, and are weighted.

17. Outline of Results • Liquid asset holdings • Vehicle ownership • Net worth

18. Liquid Asset Holding Results, 1991-2003:AFDC/TANF and FSP Rules Percentage holding liquid assets: Mothers 31%, Families 56%

19. Liquid Asset Holding Results, 1991-2003:IDA, EITC, and Minimum Wage

20. Liquid Asset Holding Results, 1991-2003:Demographic and Economic Controls

21. Vehicle Asset Holding Results, 1991-2003: AFDC/TANF and FSP Rules

22. Vehicle Asset Holding Results, 1991-2003: IDA, EITC, and Minimum Wage

23. Net Worth Results, 1991-2003: AFDC/TANF and FSP Rules

24. Net Worth Results, 1991-2003: IDA, EITC, and Minimum Wage

25. Summary of Results • Overall, not many program rules are statistically significant. However, key findings hold in alternate specifications. • State AFDC/TANF Program Rules • More generous restricted asset account limits are associated with increased liquid asset holdings • No evidence that more generous unrestricted asset account limits or AFDC/TANF vehicle exemptions are associated with increased asset holdings • State FSP Rules • More generous food stamp eligibility rules—exempting at least one vehicle and expanded categorical eligibility—are associated with increased vehicle ownership • Expanded categorical eligibility is associated with increased net worth

26. Summary of Results (cont’d) • IDA Program Rules • More generous IDA rules affect asset holdings. • Increases in the maximum match rate are associated with increases in vehicle ownership. • Increases in the maximum amount qualified for match are associated with increases in liquid asset holdings. • EITC/Minimum Wage • State EITC program rules have a mixed relationship to asset holdings (EITC amount decreases, EITC refundable increases). • State minimum wage is associated with increases in vehicle assets.

27. Conclusions • Results suggest that some state program rules – especially those aimed at asset building – could affect low-education single mothers’ and families’ asset holdings. • Not all state asset-related program rules have the same effect: restrictions on withdrawals and incentives built into restricted asset account limits and IDA programs may provide better motivation to build assets. • Non-asset related program rules (e.g., FSP categorical eligibility and minimum wage) may affect asset holding, suggesting that potential program interactions and indirect effects of program rules on non-target populations are potentially important.