Pathways Out of Poverty: Asset Building in Puerto Rico

Pathways Out of Poverty: Asset Building in Puerto Rico

Published on April 27, 2003

Center for a New Economy

Executive Summary

Traditional social welfare policies focus on providing a monthly income flow to support a minimum level of consumption. However, as Michael Sherraden, one of the leading experts on welfare policy in the United States, has stated, โ€œvery few people manage to spend their way out of poverty.โ€ Poverty is overcome by savings, investment and asset accumulation rather than through spending and consumption.

Asset accumulation is particularly significant because assets have important welfare effects in addition to deferred consumption. Research in the United States shows that assets have significant positive non-economic effects on children, families, and neighborhoods. In general, there is growing evidence that assets are associated with greater household stability, higher educational attainment, local civic involvement and increased levels of health and satisfaction among adults. Assets are also associated with decreases in both marital dissolution and intergenerational poverty transmission.

Contrary to popular belief, asset accumulation by households is not the product of what is left over after consumption is subtracted from income. In a high consumption society like Puerto Rico, savings often enter households as assets from the beginning because the tax system is structured to facilitate and subsidize asset accumulation by middle and upper class households. As we will explain below, the Puerto Rico tax code already provides incentives for homeownership, college education, business ownership, investments and retirement that disproportionately benefit the upper socioeconomic classes. Thus, in Puerto Rico we have policies that encourage asset-building for the non-poor but not for the poor. The relevant policy question is: Why not expand asset accumulation programs to include the poor as well?

In this policy brief we offer a brief summary of the asset building approach to social policy, review the arguments in favor of implementing asset building policies to reduce poverty, analyze current incentives in the Puerto Rico tax code that favor asset accumulation by the non-poor, and offer some policy recommendations to promote asset accumulation by the poor in Puerto Rico.