Does Means-Testing Welfare Discourage Saving? Evidence from the National Longitudinal Survey of Women

This paper empirically tests whether the asset limit associated with the Aid to Families with Dependent Children (AFDC) program discourages wealth accumulation by actual and prospective participants. Prior to 1981, the AFDC asset test varied substantially across states, and this variation can be used to identify the effect of the limit on wealth. Wealth holdings for female-headed households (the primary recipient group for AFDC) for 1978 are estimated using data from the National Longitudinal Survey of Women. A $1 difference in state limits results in an estimated $.50 difference in total net wealth holdings of female-headed households in different states. This qualitative finding of a significantly positive effect is reasonably robust with respect to a variety of specifications of the wealth equation and instrumenting of the limit to correct for the potential endogeneity of policy. After instrumenting, a $1 difference in limits implies a difference in potential AFDC recipients’ wealth holdings of $.30.