Means testing leaves people vulnerable to severe economic shocks because it discourages savings and assets. A UBI is a better alternative.

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.