Welfare Reform and Household Saving

In order to receive many forms of government assistance, a household?s assets must be below the federal or state mandated limits. Recent theoretical work has shown that such means-tested welfare programs can explain the low levels of saving observed in the data for households with relatively low lifetime resources. In this paper, we use micro-level data from the Panel Study of Income Dynamics to examine the impact of new saving incentives that were implemented as part of the overhaul of U.S. welfare policy during the mid-1990s on the saving of households at risk of entering welfare. The Temporary Assistance to Needy Families program devolved responsibility of program rules to the states, and many states have responded by relaxing liquid asset and vehicle-equity limits that determine program eligibility, by introducing targeted Individual Development Accounts whose contributions do not count against program eligibility, and by introducing time limits on benefit receipt. According to the recent theoretical work and statements made by public officials, such policies are predicted to increase total savings for those households who have a large ex-ante probability of welfare receipt. Among those households with a high risk of entering welfare we find that increasing asset limits had a modest positive effect on liquid saving, and no effect on broader measures of saving; that liquid saving fell in states that removed their vehicle equity limits; and that IDAs had a positive, but small, impact on liquid saving. In general, though, there has been no near-term impact of welfare policy changes on the saving of those with only a moderate risk of facing welfare policies.