Means testing increases income inequality and reduces economic security because it discourages families that invest in Precautionary Savings

Universal Basic Income: An Alternative to Asset Means-Testing? The effects of means-testing on households’ behavior can also have broader consequences for macroeconomic inequality and households’ welfare, as shown in our documentation of the disparities between recipients and nonrecipients along the income distribution. Evidence of these disparities raises questions as to whether alternative designs of the transfers system that depart from the means-testing paradigm, such as a UBI, could improve overall economic welfare. An important component of the distributional effects of means-testing is the role of precautionary savings, that is, savings for an emergency. Precautionary savings can be discouraged by the presence of transfers focused on the bottom of the income distribution. In this case, asset-testing can add an extra effect in a household’s consumption and savings decisions to frontload the former by diminishing the latter because households are confronted with the potential loss of benefits prompted by crossing testing thresholds (Hubbard, Skinner, and Zeldes, 1995). For example, in the case of Medicaid’s asset test, Pashchenko and Porapakkarm (2016) find that asset tests that differ depending on the work status of households, with stricter limits to nonworkers, can generate fewer distortionary effects. In a structural model of the economy, Wellschmied (2021) shows that removing all types of asset means-testing in transfer programs decreases by half the share of households that have low wealth and become jobless. The elimination of means-testing leads low-income households to accumulate more savings, an action which improves a household’s financial stability and reduces the potential vulnerability of the nonemployed. Such elimination of means-testing in transfer programs is in similar spirit to a UBI. According to the theoretical model, this reform increases the overall welfare of households. But the reform also means that in the absence of a test, a fixed budget for government spending on transfers decreases the dollar value of transfer per household as transfers are paid to more families. This issue is especially relevant when one expands the analysis to depend on the family composition of households. In another theoretical model of the economy, Ortigueira and Siassi (2022) find that the current system has large distortionary effects on the decisions of working households with children. The authors assess that the main distortions do not stem from the EITC, given the nonbinding nature of the investment income limit, but mainly from SNAP and TANF, further finding that asset-testing thresholds will induce single parents that are dependent on such benefit programs to allocate less money toward savings. Accordingly, these households accumulate less wealth, making them more financially vulnerable.