Welfare recipiency and savings outcomes in individual development accounts

Abstract

The authors examined how welfare recipiency is associated with savings outcomes in individual development accounts (IDAs), a structured savings program for low-income people. They investigated whether welfare recipients can save if they are provided with incentives. Data for this study ore from the American Dream Demonstration (ADD), the first nationwide demonstration of IDAs. A Heckman two-step regression analysis suggests that, after controlling for a variety of program and participant characteristics, welfare recipiency, either before or at the time of enrollment in IDAs, is not correlated with program exits or savings outcomes. The findings suggest that welfare recipiency does not seem to affect savings performance in IDAs. Key words: individual development accounts (IDAs); savings; welfare recipients; welfare reform ********** Welfare recipients accumulate little wealth. or example, in 1994 more than 90% of welfare recipients reported less than $500 accumulated financial liquid assets Hurst & Ziliak, 2001). Welfare recipients may have little wealth because of limited ability to accumulate assets and structural barriers to wealth accumulation. One structural barrier may be their response to disincentives created by means-tested transfer programs such as Aid to Families with Dependent Children (AFDC)/Temporary Assistance for Needy Families (TANF), Supplemental Security Income (SSI), Medicaid, and food stamps. To qualify for benefits, a household's income and assets must be sufficiently low. For example, benefits are cut off in some states if liquid assets in the form of cash and deposits in bank accounts exceed $1,000. Under these conditions, asset limits may limit savings. Also, many nonpoor households have incentives for asset accumulation in the form of home mortgage interest tax deductions, tax deferments on retirement savings, and other tax benefits (Howard, 1997; Seidman, 2001), but few low-income households benefit from these asset-building policies (Sherraden, 1991). We examined the relationship between welfare recipiency and savings outcomes in a matched savings program for low-income people--individual development accounts (IDAs). IDAs are saving programs that provide incentives and an institutional structure for savings for low-income people. Account holders receive matching funds when they purchase assets that promote long-term well-being and financial self-sufficiency such as a home, postsecondary education, or microenterprise. We investigated whether current and former welfare recipients have the ability and willingness to save and whether their savings patterns differ from people who have never received welfare. Our study draws on a general research report by Schreiner and colleagues (2001), with closer attention to welfare recipiency and savings in IDAs. This study may have policy implications for welfare reform. First, the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996 (P.L. 104-193) represents a fundamental change in the delivery of cash benefits to program participants (PRWORA, 1996). PRWORA replaced AFDC with TANF, a work-based program. Major changes under I'RWORA include time limits on receipt of cash assistance and greater control of program rules by states. The stated intent of the legislation was to end welfare dependency and promote self-sufficiency. Yet, very little programming has been developed to help welfare recipients become self-sufficient. Studies show that limited skills for self-sufficiency may prevent many welfare leavers from lifting themselves out of poverty, even if they work full-time (Edin & Lein, 1997; Loprest, 1999, 2001). Helping welfare recipients save and accumulate assets may increase their long-term well-being and self-sufficiency. In contrast to income, which refers to the flow of resources into a household, assets refer to the stock of resources in households. Assets include financial resources such as cash savings and stocks, capital such as homeownership, and business property. …