Welfare Reform, Saving, and Vehicle Ownership

Abstract

Eligibility rules for the AFDC/TANF program prohibit recipients from accumulating wealth in excess of certain thresholds. These asset restrictions place high implicit tax rates on asset holdings, and may also affect asset allocation decisions, because some assets such as vehicles are partially exempt. This paper examines whether asset restrictions for eligibility under the AFDC/TANF program affect the asset holdings of low-educated single mothers . Using nationally representative family-level data, I examine the impact of these restrictions on both liquid and vehicle assets , exploiting variation in asset limits and exemptions across states and over time. There are important reasons to examine vehicle assets in this context. First, vehicles make up a very significant share of total wealth for poor families. Families with limited resources are more likely to have vehicle equity than any other type of asset. Second, the variation in vehicle exemptions over time and across states far exceeds the variation in asset limits, suggesting that policy changes are particularly important for vehicle equity. Nevertheless, there is little research that examines the effects of asset restrictions on vehicle assets . Consistent with other recent research, I find little evidence that asset limits have an effect on the amount of liquid assets that single mothers hold. However, I find evidence that vehicle exemptions do have an important effect on vehicle assets. The findings suggest that moving from a $1500 vehicle exemption to a full vehicle exemption increases the probability of owning a car by 20 percentage points for low-educated single mothers relative to a comparison group. There is also evidence that more generous vehicle exemptions result in greater vehicle equity. The results indicate that single mothers are not substituting vehicle equity for liquid assets in response to more relaxed restrictions on vehicles . In addition, the findings suggest that total wealth increases in response to more generous vehicle exemptions.