# Means-Tested Transfers, Asset Limits, and Universal Basic Income

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DOI: 10.26509/frbc-ec-202210

Asset limits in means-tested transfers can allow for the distribution of scarce aid to families most in need but may offer a disincentive to beneficiaries to build savings necessary to weather economic shocks. In this Economic Commentary, we examine the net worth of transfer recipients along the income distribution and review the economic literature on the matter with a discussion of universal basic income (UBI) as a policy alternative. Using the 2018 Survey of Income and Program Participation, we document that recipients have a smaller average net worth than nonrecipients at every quintile of the income distribution. We also find that participants at the very bottom of the income distribution are in asset poverty, with an average level of assets surrounding testing thresholds. Recent research suggests that the elimination of testing limits, such as in policies similar to a UBI, could present a welfare-improving alternative to the current system, though not without large economic trade-offs.

Appendix Replication Files

## Introduction

Income security programs are an important component of the social safety net in the United States.1 They mostly consist of unemployment insurance and means-tested transfers, the latter being a complex system of benefits distributed to families and individuals based on their qualifying characteristics. The means-tested transfer system plays a critical role in addressing some of the foremost current economic and social challenges such as income inequality, childhood hunger, severe disability that inhibits the ability to work, lack of health insurance, and deep poverty (Moffitt, 2016a, 2016b).

There has been a longstanding debate regarding the capacity of means-tested transfers to effectively provide insurance for households in trying times (Chen and Lerman, 2005; Hamilton, 2021). On the one hand, means-testing may allow for the distribution of scarce taxpayer funds to aid those families most in need. On the other hand, there is some discussion about the extent to which the earnings limits and, more notably, asset limits required to maintain eligibility present a disincentive to beneficiaries to save and build the financial means necessary to weather economic shocks. The relevance of this debate becomes more pronounced when considering the increase in job insecurity and financial vulnerability brought about during the onset of the COVID-19 pandemic. Furthermore, a clear understanding of the trade-off between helping the neediest individuals and potentially compromising their financial security when capping income and assets is essential to inform the current policy debate on benefit program reform and to what extent a universal basic income (UBI), a financial transfer given without any means-testing, may be a feasible alternative.

In this Commentary, we shed light on some aspects of this debate with a two-part analysis. In the first part, we examine the structure of the income security system of the United States and its major programs. We use the Survey of Income and Program Participation (SIPP) to document a contemporary picture of the means of its recipients, with a focus on the role of asset testing. We find that benefit recipients have significantly less accumulated wealth than nonrecipients even when their annual incomes are in the same quintile of the income distribution. By analyzing households’ assets, we find that resources—asset categories that are broadly tested by programs—are unevenly distributed between recipients and nonrecipients, a situation indicating that participants at the very bottom of the income distribution are most likely in asset poverty and have wealth below means-testing thresholds. We take a deeper dive into households’ balance sheets as indicated in the SIPP and find that benefit recipients have a relatively larger share of assets in property and other noncash items when compared to nonrecipients. This fact is in line with surveyed literature that suggests that asset-testing may affect recipients’ decisionmaking regarding savings and asset allocation, that is, where and how they place their money.

These findings suggest the need for an examination of the effectiveness of asset-testing in transfer programs, and the second part of our analysis reviews the literature on the effects of asset-testing and discusses how a reduction or even elimination of means-testing, similar to a UBI approach, could present a policy alternative to provide financial support to low-income households. Recent research suggests reforms that depart from strict testing could improve households’ welfare, although not without trade-offs that have broad macroeconomic and fiscal effects.

## The Income Security System: Overview of the Major Means-Tested Programs

We start by providing an overview of the income security system of the US and its different types of transfers and means-testing requirements. For our analysis and later connection with the data, we focus on some of the foremost means-tested transfer programs: the Earned Income Tax Credit (EITC), Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF) block grant, and Supplemental Security Income (SSI) program.

The EITC is a federal tax credit for low- and moderate-income working people that is designed to offset federal payroll and income taxes.2 Eligibility at the federal level is determined by employment status, household income, marital status, and number of dependent children. Per Internal Revenue Service rules, to claim the EITC the applicant must have what qualifies as earned income and meet certain adjusted gross income (AGI) and investment income limits.3 In 2021, about 25 million working families and individuals received EITC benefits, with an average annual credit of $2,411. SNAP, formerly known as the food stamp program, is an antihunger program intended to ensure low-income working families, low-income seniors, and people with disabilities living on a fixed income can purchase nutritionally adequate food. SNAP eligibility guidelines and benefit levels are set at the federal level with some flexibility at the state level.4 Federal eligibility criteria consider three factors: gross monthly income (a household’s total income from all income sources before any adjustments), net monthly income (income after necessary expenditures such as housing and childcare), and assets. In 2021, roughly 41.5 million Americans received SNAP benefits, with an average monthly benefit per person of$218.14.5

The TANF block grant is a federal disbursement of funds to state programs that are designed to provide time-limited assistance to families with children. Benefit amounts, eligibility, and requirements vary significantly by state. Most programs provide some combination of cash assistance, childcare, or other supports.

## Conclusion

In this Commentary, we have documented that means-tested program recipients have a smaller average net worth than nonbeneficiaries at every quintile of the income distribution. We also observe that transfers are substantially more relevant at the bottom of the income distribution, and we identify which of the programs studied plays a more pronounced role of providing economic cushion for benefit recipients. We find that resources subject to testing are unevenly distributed between recipients and nonrecipients and that participants at the very bottom of the income distribution are in asset poverty, with assets surrounding testing thresholds. Finally, we observe that transfer beneficiaries have a relatively larger share of their portfolios allocated toward assets less prone to being tested when compared to nonrecipients. Recent research suggests that the elimination of testing limits, such as in policies similar to a UBI, could present a welfare-improving alternative to the current system, though not without economic trade-offs that broadly impact macroeconomic aggregates and transfer levels.

## Endnotes

1. The US social safety net spans three broad functions: health security, social security, and income security. Health security generally refers to programs such as Medicare and Medicaid. Social security originated with the Social Security Act of 1935, designed to pay workers age 65 or older an income after retirement. This has since been expanded to also pay benefits to families of deceased or disabled workers. See https://www.cbo.gov/publication/57171 for a breakdown by the Congressional Budget Office of the mandatory spending by the US federal government in 2020. Return
2. There are 29 states plus the District of Columbia and Puerto Rico that have established their own state EITCs to supplement the federal credit. Return
3. https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/earned-income-and-earned-income-tax-credit-eitc-tables Return
4. As of January 2022, 39 US jurisdictions can have no test required for SNAP eligibility via broad-based categorical eligibility (BBCE). For a February 2022 report by the Congressional Research Service on the BBCE, see https://sgp.fas.org/crs/misc/R42054.pdf. Return
5. https://fns-prod.azureedge.us/sites/default/files/resource-files/SNAPsummary-3.pdf Return
6. https://www.ssa.gov/policy/docs/quickfacts/prog_highlights/RatesLimits2020.pdf Return
7. https://www.ssa.gov/OACT/ssir/SSI21/ssi2021.pdf Return
8. See Appendix 1 for a detailed description of the SIPP 2018 data, our sample and variable selection, and summary statistics. For a detailed report on wealth data on the SIPP, see Eggleston et al. (2020). Return
9. See Appendix 2 for tables with summary statistics of our sample and Table A2 in which we document the distribution in quintiles of the main variables for benefit recipients. Return
10. This format of visualization is inspired by the documentation provided by the Congressional Budget Office at https://www.cbo.gov/system/files/2020-10/56575-Household-Income.pdf. To avoid bundling the SSI recipients that receive the benefit solely as a result of disability, we consider here only the recipients who are 65 or older. See Giefer (2021) for a detailed Census report on the SSI. Return.
11. The SIPP has a specific variable that informs us whether the household applied for the credit in the past fiscal year, allowing us to impute the effective transfer value by using the EITC formula. See Appendix 3 for details on how we obtain our imputation for the EITC transfer values per household in our sample. Return.
12. The relatively smaller relevance of TANF in comparison with the EITC, SNAP, and SSI is consistent with the stagnation of federal spending on the program as documented by the Congressional Budget Office: https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/43934-means-testedprogramsone-column0.pdf Return.
13. For a detailed description of how we construct the “resources” variable and how it relates to tested assets of the programs, see Appendix 1. Return.
14. Specifically, asset poverty is defined as the level of liquid assets required for a family to live at the federal poverty line for three months. See Appendix 1 for a detailed explanation of the calculation. Return.
15. BBCE policies are those designed to account for the fact that benefit recipient households frequently receive benefits from more than one program. In the case of this study, the BBCE policies discussed expanded SNAP eligibility to households that receive noncash benefits that were at least 50 percent funded by TANF assistance or maintenance-of-effort funds. Return.
16. See the article for an in-depth review of other recent papers on UBI and transfer system reform. Return.

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