Saving Performance in Individual Development Accounts: Does Marital Status Matter?

Research indicates that marriage has a large effect on reducing the risk of poverty and is associated with a higher probability of attaining affluence over the life course when compared with nonmarriage. Using data from the American Dream Demonstration (N = 2,364), this study compares savings performances of married and unmarried low income participants in a matched savings program – Individual Development Accounts (IDAs). The results indicate that both married and unmarried low income participants can save in IDA programs; however, unmarried participants are saving less than married participants. We further examine possible factors that are associated with savings performance for these two groups. Implications for policy makers and program administrators to better address the needs of unmarried participants are given. Marriage has a large effect on reducing the risk of poverty. A number of studies have indicated that unmarried individuals and single-parent families are more likely to live in poverty than their married counterparts (Blank, 1997; Furstenberg, 1990; Garfinkel & McLanahan, 1986; U.S. Bureau of the Census, 2001; White & Rogers, 2000). Compared to married couples, unmarried people also save much lower portions of their income and accumulate fewer assets. For example, several studies have indicated that married-couple households have significantly higher wealth than other types of households (Waite, 1995; Wilmoth & Koso, 2002) and that marriage is associated with a higher probability of attaining affluence over the life course when compared with nonmarriage (Hirschl, Altobelli, & Rank, 2003). The limited accumulation of assets in single-parent families has been increasingly recognized as an important contributing factor to the high poverty rate within this family type. Lack of assets contributes not only to the low economic status of single-parent families but, maybe more important, restricts their economic mobility (Cho, 1999; Rocha, 1997; Sherraden, 1991). In the last decade, the importance of assets and wealth accumulation as a development strategy is gaining ground in both academic and policy settings (Oliver & Shapiro, 1995; Shapiro & Wolff, 2001; Sherraden, 1991). Theory and evidence indicate that accumulation of assets can promote economic and social development of individuals and families, which include personal wellbeing, economic security, family stability, and civic behavior (Scanlon & Page-Adams, 2001; Sherraden, 1991). Recently, a wide variety of public policies have been developed to promote assets ownership among low-income families. One such policy is the Individual Development Accounts (IDAs). IDAs are saving programs targeted to low-income people and provide incentives and an institutional structure for saving. Account holders receive matching funds as they save for assets that promote long-term well-being and financial self-sufficiency such as a home, post-secondary education, or microenterprise (Sherraden, 1988,1991). In order to design programs that facilitate savings and asset accumulation for unmarried individuals and single-parent families, it is necessary to examine whether unmarried people can save and under what circumstances. The purpose of this study is to examine and compare savings performance and related factors of married and unmarried participants in IDA programs. We begin by reviewing theoretical frameworks of saving and empirical evidence on the relationship between marital status and saving. After the description of characteristics of IDA participants and bivariate analyses on savings of married and unmarried participants, regression analyses are conducted to examine how different factors are related to savings of married and unmarried people in IDAs. Finally, policy and practice implications are discussed. Theoretical Frameworks of Savings Economic theories of saving The two mainstream economic theories of saving are the life-cycle hypothesis (Modigliani & Ando, 1957; Modigliani & Brumberg, 1954) and permanent-income hypothesis (Friedman, 1957). The life-cycle hypothesis assumes that consumption is primarily a function of long-term income, and consumption and saving will represent an individual's age or stage in the life cycle. The permanent-income hypothesis emphasizes that people constantly face random and temporary changes in their income. Household consumption and savings reflect, in part, the differences of the relative share of long-term average income (permanent income) and transitory income. Center for Social Development Washington University in St. Louis 1 Further, the individuals’ consumption habits may change only when people are experiencing changes in their permanent income. Both of these theories imply that income is a major determinant of savings (Deaton, 1992). This theoretical summary borrows from Beverly and Sherraden (1999). From an economic perspective, marriage has several characteristics that may enhance wealth accumulation (Becker, 1981; Lupton & Smith, 2003; Schoeni, 1995; Waite, 1995; Waite & Gallagher, 2000; Wilmoth & Koso, 2002). First, the total product of a married couple is larger than the sum of the outputs of each produced separately. Second, the institution of marriage involves long-term commitment in which a division of labor enables each spouse to specialize in specific skills and duties. This specialization increases the productivity and the efficiency of the household. Third, economies of scale in consumption suggest that a married couple may achieve the same utility with less combined expenditure than the sum of their individual consumption if living apart. Fourth, the requirements and expectations of married (versus single) life may encourage people to buy a house, save for children’s education, and acquire cars and other assets. Fifth, there is persistent evidence that married men earn more than unmarried men. Sixth, the institution of marriage expands one’s social network and social support, which may result in additional opportunities and benefits that lead to saving. Finally, married individuals may have access to many benefits such as health and life insurance provided by the spouse’s employment. Institutional theory of saving One of the drawbacks of the economic theories of saving is that they are biased toward higher income groups (Beverly, 1997). The institutional model of saving posits that institutional factors other than income and preferences may play an important role in promoting savings (Beverly & Sherraden, 1999; Sherraden, 1991; Sherraden, Schreiner, & Beverly, 2003). A fundamental difference between this perspective and the traditional neoclassical economic theory is in the way savings are being generated. While the traditional economic theory views saving as a result of individual choices, this theory suggests that savings occur in households largely through institutional arrangements. Asset accumulation is structured and often subsidized through institutional arrangements. In the majority of households, unstructured savings, which are left over from income minus consumption, are likely to be smaller than asset accumulation generated by institutional arrangements. Specifically, Beverly and Sherraden (1999) propose four institutional determinants of savings: institutionalized saving mechanisms (access), targeted financial education, attractive saving incentives (e.g., matched savings), and facilitation (e.g., payroll deduction). These four were originally specified by Sherraden, (1999) in the Center for Social Development web pages under “Key Questions in Asset Building Research.” Sherraden, Schreiner and Beverly (2003) further suggest that specific savings expectations and the relaxation of savings limits and restrictions can help people save. From this viewpoint, a major reason that low-income households save less is that they lack the access to incentives or institutions that promote and subsidize asset accumulation (Howard, 1997; Seidman, 2001; Sherraden, 1991, 2001). For example, the nonpoor can save for retirement through institutionalized mechanisms with tax benefits; the poor, on the other hand, are much less likely to have jobs with pension benefits, thus their savings opportunities for retirement are more limited. Center for Social Development Washington University in St. Louis 2 Although further empirical evidence is needed, results of a number of studies support the propositions of the institutional view of savings. For example, the role that access plays in promoting saving can be shown in statistical evidence of the inequality in pension coverage and accumulation rates (Orszag & Greenstein, 2000). In terms of financial education, studies find that employee-based financial education increases both participation rates and amount of contribution in retirement plans (Bayer, Bernheim, & Scholz, 1996; Bernheim & Garrett, 1996). Financial education programs also significantly improve financial behaviors of low-income populations (Caskey, 2001). In addition, Anderson, (1998) suggests that lack of knowledge is one of the reasons for the underutilization of public financial services and benefits by the poor. In support of the institutional perspective of savings, studies also find that individuals save less due to assets restrictions or limits. For example, researchers have documented that the assets limits associated with means-tested welfare programs negatively influence savings of participants and potential participants (Carney & Gale, 2001; Hubbard, Skinner, & Zeldes, 1994, 1995; Hurst & Ziliak, 2001; Powers, 1998; Ziliak, 1999). Governments in many nations provide tax incentives for private pensions to encourage saving, which reflects the belief that in the absence of these incentives, individuals would not initiate and sustain sufficient savings for retirement (Orszag & Greenstein, 2000). Evidence on Marriage and Wealth Accumulation A number of studies have indicated that marriage may have a var