Do Assets Help Families Cope with Adverse Events?

Abstract

THE URBAN INSTITUTE Family events, such as a job loss, the onset of health limitations, and a change in family structure, can adversely affect economic well-being. The impact of these events may be mitigated if the family holds assets that it can draw on to maintain consumption and material well-being. This study examines the extent to which families that hold assets are better able to maintain their level of material well-being in the face of adverse events, compared with families that do not hold assets. In essence, this work looks at the role of assets in families' economic and material stability, a potential benefit of asset-building programs for low-income families. We use the 1996 and 2001 panels of the Survey of Income and Program Participation (SIPP) to address two key research questions: (1) What is the relationship between events and material hardship? and (2) Given that an event occurs, do families with assets have lower levels of material hardship? We answer the questions by examining the relationship between events and material hardship and by looking at the relationship between asset holdings and material hardship, given that an event occurs. We also assess the relationships between adverse events, material hardship, and asset holdings for families in different parts of the income distribution. This study builds on the substantial literature that examines income volatility (e.g.

Financial Shocks, Liquid Assets, and Material Hardship in Low- and Moderate-Income Households: Differences by Race

“…Having access to at least $500 influenced material hardship equivalent to a threefold increase in household income (Mayer and Jencks 1989). Among households experiencing a financial shock, asset-poor households are 23 percentage points more likely to face material hardship than non-asset-poor families (McKernan et al 2009). Keating (2012) found that the probability of experiencing material hardship is greatest for asset-poor households in the bottom third of the income distribution.…”

“…Income shocks are a consistent predictor of material hardship for households (Heflin 2016), yet among lowincome households, the presence of up to $2000 in liquid assets reduces the risk of hardship by 5 percentage points compared to households with no assets (McKernan et al 2009). Additional studies have found reduced odds for material hardship associated with Child Development Account (CDA) participation (Wikoff et al 2015) and reduced financial strain associated with homeownership (Manturuk et al 2012) and greater financial assets among low-income households (Rothwell and Han 2010).…”

“…More specifically, liquid financial assets lessen risk for material hardship among LMI households (Gjertson 2016) including in the wake of financial shocks (McKernan et al 2009). …”

“…The consequences of such shocks may include LMI households forgoing necessary consumption McKernan et al 2009; Pew Charitable Trusts 2015a) or taking on high-interest rate debt to smooth consumption through the period of the emergency (Pew Charitable Trusts 2012).…”

“…Liquid financial assets play an important role in helping households cope with financial shocks, making it less likely that these shocks result in material hardship Collins and Gjertson 2013;Gjertson 2016;McKernan et al 2009). Our prior study confirms that liquid assets mediate the relationship between financial shocks (emergency) and material hardship in LMI households, where 90.5% of the effect of financial shocks on material hardship is direct, and 9.5% of this effect is indirect via assets .…”