Key
Questions in Asset Building Research
Michael Sherraden, Director
1999
In
asset building research there are two main categories of academic
questions: (1) How do people, especially those with little or no
wealth, save and accumulate assets? and (2) What are the effects
of asset accumulation? These questions, and related hypotheses,
are briefly outlined below:
How Do People Save?
A primary
assumption in asset building policy and community development is
that savings is an institutional phenomenon, i.e., when access and
incentives are right, people -- including poor people -- are more
likely to save. This assumption runs contrary to mainstream economic
thinking about savings behavior, which focuses more on an individual's
"propensity to save." If IDAs, for example, can be shown to facilitate
asset accumulation by the poor, there would be important theoretical
implications as well as policy implications. The commonly-accepted
theories of savings rely on preferences for consumption across time.
Consistent with their neoclassical origins, these perspectives view
individuals as actors in an unstructured world. No attention is
given to social or cultural factors that may influence saving behavior.
More importantly, no attention is given to institutional arrangements
that may facilitate or hinder saving.
Post-Keynesian
theories of savings are best represented by Franco Modigliani's
life-cycle hypothesis and Milton Friedman's permanent income hypothesis.
In brief, these theories suggest that people consume in a long-term
pattern that is more or less equal to their long-term expected incomes.
They may save at one point in their lives, but the purpose of this
saving is to consume more later on. According to these theories,
the purpose of saving -- the only purpose -- is to create a storehouse
for future consumption. Empirical evidence that might support various
theories of savings is mixed. Overall, it is fair to say that the
mainstream consumption-based, income-smoothing theories of savings
are not strongly supported by empirical data. This is especially
true regarding savings behavior of the poor.
The
empirical discrepancies are twofold. As I pointed out in Assets
and the Poor, the poor very often cannot borrow against their
future earnings potential, i.e., they have "liquidity constraints"
that do not enable them to consume in a permanent income manner.
Second, the poor typically do not have access to mainstream financial
institutions for savings, which would enable them to put money aside
for future consumption needs. Empirical discrepancies also occur
regarding the broad middle class of America. The bulk of asset accumulation
in most middle class households occurs not by individuals making
savings deposits in an unstructured world, but through institutionalized
and heavily subsidized public policies that support asset accumulation,
principally in the form of subsidized home ownership and subsidized
retirement pension accounts. Both access and financial incentives
play key roles in this pattern of asset accumulation. From this
perspective, savings is not entirely a function of consumption preferences.
For example, the mortgage interest tax deduction is a direct transfer
of assets from public resources to individuals. This money is not
"saved" out of incomes for future consumption. Also, accumulations
in retirement accounts are structured, automatic, and subsidized.
Individuals who have opportunities to participate in these asset
accumulation programs are not simply "saving" money due to their
"propensities to save." Rather, they are accepting a good offer.
Because of the tax subsidy, the individual would be making an unwise
decision to turn it down. It is of central importance that, under
the current structure of tax and labor policies, poor people do
not have the same access and financial subsidies for asset accumulation
in the form of home ownership and retirement pension accounts. Therefore,
the key theoretical issue in savings behavior is whether institutions
(IDA programs for example) can have a substantial impact on savings
of the poor. If so, there are important implications for theories
of saving and how saving is structured and promoted by public policy
and private institutions.
Based
on the above thinking, we can offer several propositions that should
be tested regarding savings behavior in asset building programs.
These fall roughly under the categories of access, incentives, information,
and facilitation:
Access.
The overall proposition is that ease of access will facilitate
increased savings. The hypotheses are:
- The closer the asset building program, the greater the participation
and savings.
- The fewer the organizational barriers to the IDA system, the greater
the participation and savings.
Incentives.
The overall proposition is that greater incentives will yield
greater savings. The hypotheses are:
- The higher the matching deposits, the greater the participation
and savings.
- The more local partners in matching deposits, the greater the
participation and savings.
- The higher the earnings on savings, the greater the participation
and savings.
- The more feasible the asset building goal (home purchase, microenterprise,
job training, etc.), the greater the participation and savings.
Information.
The overall proposition is that information and education about
IDAs will increase their use. The assumption is that awareness
and knowledge of access and incentives must be present before
people can act on these conditions. The hypotheses are:
- The greater the program outreach, the higher the rate of participation.
- The more educational programming and "economic literacy," the
greater the participation and savings.
- The more peer modeling and information sharing, the better the
participation and savings.
Facilitation.
The overall proposition is that structured and/or active assistance
in asset building programs will increase savings.
- The more involved the program staff in helping with savings, the
greater the savings.
- A program of automatic deposits will increase savings most of
all.
What
Are the Effects of Asset Accumulation?
Asset
accumulation is not an end in itself. The next evaluation question
-- what are the effects of asset accumulation? -- is an "outcomes"
question that has the potential to expand the operational definition
of well-being in social policy to include asset accumulation. There
are two pathways to answering this question. The first is basic
research using existing data sets, and CSD has embarked on a program
of basic research that is proving to be fruitful. We are finding
significant, sometimes surprisingly strong, asset effects in a wide
range of data sets. The second pathway to answering the outcomes
question is to evaluate outcome effects of IDAs. Outcome evaluations
of IDAs are of the greatest importance in confirming, not confirming,
or revising theoretical propositions.
The
key theoretical issue is whether assets yield positive effects other
than deferred consumption. If this can be answered in the affirmative,
it may have important implications for theories of "welfare" (well-being)
as well as for public policy related to savings. Key questions regarding
effects of asset accumulation include a range of economic, psychological,
social, civic/political, and intergenerational outcomes, which are
stated here in the form of hypotheses. Confirmation of a substantial
number of these hypotheses would be sufficient to establish the
value of asset-based policy.
In
addition to program "impacts" (amounts saved and use of savings
to meet life goals), IDAs and other asset-based strategies have
multiple hypothesized effects or outcomes. Some of these may be
supported by empirical research, while others may not. At this stage,
we want to attend to a broad range of likely effects. We can identify
potential asset effects in several different categories: economic,
personal (or psychological), family and household, relationship
to the community and society, civic and political, and intergenerational:
Economic
- Greater effort and success in increasing asset values.
- Maintenance and improvement of real property.
- Learning and applying knowledge of financial investments.
- Decrease in financial crises in the household.
- More investments in human capital (in addition to formal education)
- Improved consumption efficiency (shopping at supermarket, buying
on sale, buying in bulk).
- Decrease in use of second-tier financial services (check cashing
places, rent-to-own stores).
Personal
Physical:
- Improved health.
- Greater longevity.
Affective:
- Improved self regard.
- Improved outlook on life.
- Greater sense of personal control over life.
Cognitive:
- Greater knowledge of financial matters.
- Lengthened time horizons.
Behavioral:
- Better record in attending school, job training, or other personal
advancement activities.
- More time spent on financial matters.
- Better planning for the future.
Family
and household
- More stable household composition.
- Decreased moving due to negative causes (unable to afford rent,
eviction).
- Increased moving due to positive causes (move to a better neighborhood,
move for a job).
- Decrease in domestic violence.
Relationship
to community and society
- Improvement in perceived social status.
- Increase in social connectedness and/or decrease in social isolation.
- Increase in caring for and helping others.
Civic
and political
- Involvement in neighborhood/community affairs:
- More discussions with neighbors.
- More behaviors to improve public space.
- Increased involvement in community organizations.
- Involvement in formal political processes:
- Increased voting.
- Greater effort in working on or contributing to an issue.
- Greater effort in supporting or contributing to a political candidate.
Intergenerational
Social
behaviors of offspring:
- Improved school behaviors (attendance, grades, completion).
- Avoidance of pregnancy.
- Fewer arrests.
Eventual
financial well-being of offspring:
- Increased savings behavior of offspring.
- Increased investments in education of offspring.
- Increased asset transfers to offspring.
Additional
Reading on Key Questions
For
a discussion of theories and evidence on savings behavior see:
Sondra
Beverly (1997). How Can the Poor Save? Theory and Evidence on
Saving and Asset Accumulation in Low-Income Households, working
paper in progress. St. Louis: Center for Social Development, Washington
University.
For
discussions of theory and evidence on effects of asset accumulation
see:
Michael
Sherraden (1991). Assets and the Poor: A New American Welfare
Policy. Armonk, New York: M.E. Sharpe, chapter 8.
Deborah
Page-Adams and Michael Sherraden (1996). What We Know about Effects
of Asset Holding, working paper 96-1. St. Louis: Center for
Social Development, Washington University.
Edward
Scanlon (1996). Homeownership and Its Impacts: Implications for
Housing Policy for Low-Income Families, working paper 96-2.
St. Louis: Center for Social Development, Washington University.
