Income Transfers and Assets of the Poor

Abstract

Compared with nonpoor households, many poor households accumulate little wealth over their lifetimes. This rich-poor wealth gap may be due to different abilities to accumulate assets, possibly because the poor face a lifetime of lower incomes and higher income uncertainty. Alternatively, the wealth gap might be due to different responses to economic incentives to accumulate, such as transfer-program policies. In this paper, I use data from the Panel Study of Income Dynamics and a correlated random-effects estimator to estimate the wealth-disincentive effects of both transfer-program income and policies in a buffer-stock model of asset accumulation. With the estimated parameters, I decompose the rich-poor wealth gap into the fraction attributable to ability-to-accumulate differences and the fraction attributable to differences in responses to asset-accumulation incentives. The results suggest that welfare income and policies discourage accumulation of liquid assets, but do not reduce net wealth. However, the wealth decomposition indicates that at least 75 percent of the rich-poor wealth gap emanates from ability differences. This suggests that the disincentives created by transfer programs have a small impact on the overall asset position of the poor.