Asset Limits, Savings Behavior, and Welfare: Evidence from the SIPP and a Life-Cycle Model

Abstract

This paper examines how asset limits in means-tested welfare programs shape household saving behavior. I exploit cross-state variation in Temporary Assistance for Needy Families (TANF) asset limits by linking these limits to individual-level data from the Survey of Income and Program Participation (SIPP) and estimating ordinary least squares (OLS) regressions with state and year fixed effects. I find that a $1 increase in the liquid asset limit corresponds to a $0.75 decrease in non-housing wealth among single mothers without a high school diploma. This suggests that less stringent asset tests reduce incentives to save, consistent with models in which more generous public insurance lowers the need for precautionary saving.

To interpret these findings, I develop a dynamic life-cycle model of saving under income and medical expense risk, calibrated to key moments from the Hubbard, Skinner, and Zeldes framework. The model embeds Medicaid-style transfer rules and a guaranteed consumption floor. Simulations indicate that a $7,000 consumption floor can reduce median assets by up to 20% among low-education households, reflecting a decrease in self-insurance as public support increases. I then extend the model to include Achieving a Better Life Experience (ABLE) accounts, which are tax-advantaged savings vehicles for individuals with disabilities exempt from means testing. Simulations indicate that ABLE eligibility increases early-life consumption by approximately $10,000 and reduces retirement savings, with account holders shifting more spending into their working years. Together, these results yield a direct mapping from policy levers, including asset-limit generosity, earnings disregards, childcare subsidies, and ABLE exemption rules, to predicted shifts in median household assets. This offers policymakers a practical tool to balance public insurance and private precautionary savings.