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Avoiding Material Hardship: The Buffer Function of Wealth

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By Richard Rodems and Fabian Pfeffer

Abstract

We assess how a variety of disruptive life-course events impact the well-being of U.S. households and trace the importance of household wealth in helping families experiencing these events avoid entering a spell of material hardship. Using longitudinal data from two panels of the Survey of Income and Program Participation (SIPP), we draw on direct measures of material hardship, disruptive events, and household assets. Regression and decomposition analyses reveal that the relationship between disruptive events and the likelihood of experiencing a new spell of material hardship strongly varies across the wealth distribution, suggesting that high household wealth provides an effective private safety net. By distinguishing different types of disruptive events, we also demonstrate that divorce, disability, and income instability entail the risk of falling into material hardship but also that this risk is effectively buffered by substantial wealth. Different types of hardship – namely, financial, food, and medical hardship – respond in similar ways.

Like public insurance schemes, wealth insurance helps buffer the effects of disruptive events on material hardship, but unlike public insurance schemes, reliance on private wealth further stratifies the economic well-being of households. Policy options for addressing this highly stratified private insurance scheme includes disposing of the need for it by funding a more robust public insurance, for instance through wealth taxation.

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