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dcyphr | Public income transfers and wealth accumulation at the bottom: Within and between country differences in Canada and the United States

Abstract

Canada and the United States are both similar in that they are liberal welfare states, but have significant differences in poverty resulting from social policies. A more generous welfare system can uplift people from poverty, but more income from the state may also displace private savings and merely substitute people’s income rather than increase it (substitution effect). In this study, the researchers used nationally representative surveys of wealth in Canada and the U.S from the late 1990’s to 2016 to examine the relationship between welfare and private wealth. More specifically, they studied household asset poverty, defined as financial assets that fall below the income poverty threshold. The researchers found that asset poverty rates varied over time for both countries, and were higher in the United States which has a less generous welfare state. In addition, the researchers found that income transfer share was positively associated with asset poverty in Canada but not in the U.S. The substitution effect was observed in Canada, where higher levels of transfers may substitute private wealth. The results of the study provide a basis for further examination of asset poverty and its relationship to welfare states.

Aims

The researchers wanted to understand the relationship between welfare and private wealth accumulation in Canada and the United States, which have different kinds of economic social policies.

Introduction

Cross-national research about poverty has focused on how income is distributed and the causes and consequences of the growth of top earners. Greater income inequality has been associated with less generous welfare policies, while more generous welfare was associated with a decrease in income poverty. Most of these studies have solely focused on income.

 

There have been less studies about cross-national differences in household wealth. Previous studies have shown that wealth inequality is more pronounced than income inequality. They have also frequently focused on upper income levels. In this paper, the researchers investigate how public income transfers in Canada and the U.S are related to private asset poverty. They analyzed within- and cross-country differences to understand social policy in liberal North American countries.

 

The researchers considered changes in wealth of the poorest 50% of households in both countries. While both countries are welfare states, their social policies have important differences. While Canada has shown a declining universality in its social policy, the United states has always had a very targeted social policy, often offering social protection solely based on citizenship.

These differences are seen in social spending patterns. Canada spends on cash benefits, while the U.S mostly spends on in-kind benefits. Despite these differences, the U.S and Canada are both liberal welfare states, and scholars suggest that they can be appropriately compared.

Introduction

Cross-national research about poverty has focused on how income is distributed and the causes and consequences of the growth of top earners. Greater income inequality has been associated with less generous welfare policies, while more generous welfare was associated with a decrease in income poverty. Most of these studies have solely focused on income.

 

There have been less studies about cross-national differences in household wealth. Previous studies have shown that wealth inequality is more pronounced than income inequality. They have also frequently focused on upper income levels. In this paper, the researchers investigate how public income transfers in Canada and the U.S are related to private asset poverty. They analyzed within- and cross-country differences to understand social policy in liberal North American countries.

 

The researchers considered changes in wealth of the poorest 50% of households in both countries. While both countries are welfare states, their social policies have important differences. While Canada has shown a declining universality in its social policy, the United states has always had a very targeted social policy, often offering social protection solely based on citizenship.

These differences are seen in social spending patterns. Canada spends on cash benefits, while the U.S mostly spends on in-kind benefits. Despite these differences, the U.S and Canada are both liberal welfare states, and scholars suggest that they can be appropriately compared.

 

Welfare States and Household Savings

Previous studies have suggested two ways public income transfers may shape private assets. Both assume a substitution effect, in which the larger the welfare state, the more discouraged people are to save money. The substitution effect assumes that intergenerational transfer of wealth is decreased in more generous welfare states, and that in less generous welfare states, people are more likely to save to insure themselves against risk. 

However, the substitution effect may not always accurately predict how people save. Income transfer programs such as TANF and SNAP require participants to demonstrate financial hardship, whereas social insurance programs such as unemployment and workers compensation do not. Asset limits may reduce household saving or even promote not saving to remain below the poverty level required for eligibility.

 

Poverty and Household Assets

Income poverty is a key indicator of household wellbeing. Although Canada and the U.S experience similar levels of income poverty, the Canadian welfare state reduces income poverty by 50% more than the U.S. Targeted social policy in the U.S has been linked to lower levels of social mobility and greater income poverty compared to Canada.

However, income is not the sole indicator of wealth in a household. Assets are also an important indicator of financial security, and are categorized as financial and non-financial assets. Financial assets are cash deposits in financial institutions including banks, stocks, bonds, and mutual funds. Non-financial assets include real estate, vehicles, rental properties, and equipment. In this study, the researchers focus on financial assets.

 

Asset poverty

The researchers followed previous research which stated that a household has sufficient assets that if fully spent, it would allow them to maintain an income poverty level for an infinite period of time. In this study, the researchers examined the bottom 50% of the income distributions in the U.S and Canada to see how asset poverty has changed within and between the two countries over time, and how cross-national differences in wealth can be attributed to social policy.

Results

The researchers found that financial asset poverty had been high in both countries (Figure 1). In addition, levels of asset poverty in Canada and the U.S had diverged over time. In 1998, two-thirds of the bottom 50% of American households had insufficient financial assets, compared to three-fourths of Canadian households. By 2005, these differences disappeared, but appeared again by 2012/2013 and again at 2016. Generally, U.S asset poverty increased while Canadian asset poverty decreased.

 

To understand these differences, an understanding of differences in income and wealth variables are necessary. Across different indicators of wealth, Canadian households had greater levels of wealth compared to U.S households. In Canada, public income was higher and more distributed in the bottom 50%, suggesting that welfare reaches a larger number of households in Canada.

 

Table 3 shows further differences between the countries. In Canada, all income declines in the bottom 50% experienced decreases in asset poverty, while American households saw increases over time, even though characteristics of these households (increased age and education) should have protected them from increased poverty.

 

Table 4 shows what kind of people were most represented in the bottom 50%. In both countries, the proportion of the bottom 10% is unequally distributed compared with the overall population, with more people at the bottom in Canada and more people at the top 10% in the U.S. In addition, key differences were observed for families with children. Education and employment inequalities were more pervasive in Canada, while gender inequalities were more pervasive in the U.S.

 

Transfer income reached a greater number of households in Canada than in the U.S. In 2016, 96% of Canadian households received transfer income, while only 41% received it in the U.S. There were modest declines in Canada with a substantial increase in the U.S. The researchers also found that higher levels of transfer shares were associated with increased asset poverty (Figure 2a, b).

 

The researchers found that transfer share was positively correlated with asset poverty in Canada (Figure 3). There was no similar relationship for the U.S.

These correlations reveal that families with children were less likely to be asset poor in Canada, but more likely in the U.S. Increasing age was negatively associated with asset poverty in Canada, but no significant relationship in the U.S.

Discussion

Asset poverty is high both in Canada and the United States, and is concentrated in the bottom 50%. Within each country, there were diverging patterns. At the starting point of the study, asset poverty was higher in Canada than the U.S, but this reversed by 2016. In general, poverty declined for households with age and education in Canada but increased for the same groups in the U.S, even though they are supposed to reduce asset poverty.

The results of this study support that more generous welfare programs are correlated with lower private wealth accumulation. However, the researchers do not interpret this as as higher transfer shares cause decreased asset poverty rates. Higher asset poverty is observed in the U.S in context of welfare scarcity, but no significant relationship exists between transfer share and asset poverty. In contrast, Canada has more people receiving public income, and there is a positive relationship between transfer share and asset poverty.

The results of this study invite further examination of asset poverty and implications for public policy, specifically the areas of asset building policies and asset limits in eligibility for welfare.

Methods

Sample

The researchers used multiple nationally-representative surveys from Canada and the United States. Data from these surveys that included households below each country’s median income were extracted and compiled into a single dataset.

 

Measurement

Wealth and financial asset poverty

The researchers analyzed financial assets in this study, which included cash deposits in financial institutions and investments in stocks, bonds, and mutual funds.

Transfer share

The researchers defined transfer share as the share of household income available outside of labor or capital markets, or the proportion of disposable household income that is made up of public income (provincial social assistance programs in Canada and TANF and SNAP in the U.S).

Other variables

The researchers also included individual demographics such as gender, age, and family type, as well as five additional variables: deciles of household market income, family structure, age of the head of the household, indicators for household heads’ education, and employment status.

 

Analysis

The researchers analyzed poverty rates for each year across demographic variables, and used linear regression models to predict poverty as a function of these different variables. They also estimated how each country’s poverty rates would change under different scenarios to understand how transfer share influenced asset poverty.

Conclusion

The researchers conclude that household income paints an incomplete picture for measuring the standard of living. There has been little attention paid to wealth, especially redistribution of wealth through tax and transfer programs. Further studies of how policies impact household assets are promising for future research.