The Long-term Effect of the EITC on Cognitive Ability among Aging Adults

Cognitive ability remains one of the most important factors associated with healthy and fulfilling aging (Rowe and Kahn 1997). Reduced cognitive function in older ages – due to Alzheimer’s disease, related dementia and other forms of mild cognitive impairment – can significantly limit the ability of individuals to age independently. Cognitive decline also appears to negatively impact investment behavior, suggesting that cognitive decline can also have negative implications for the financial wellbeing in retirement (Korniotis and Kumar 2011). As the American population ages, the ranks of older Americans afflicted with cognitive impairments are likely to grow. As such, the need to understand the determinants of cognitive impairment – and the policy tools available to combat its rise – is growing.

One such tool is income transfers. Descriptive studies have uncovered positive associations between income and cognitive ability (Cagney and Lauderdale 2002; Lee et al. 2010; Lee et al. 2006). In a causal study exploiting variation in Social Security income, Ayyagari and Frisvold (2016) find that increased income received in old age due to expansions to Social Security result in improvements in working memory, knowledge, language and orientation, and overall cognition. Existing studies have primarily focus on the impact of income received in old age, concurrent to the period of potential cognitive decline. What about income received earlier in life? Can income received at earlier ages also help to combat decreases in cognitive function at older ages?

In this paper, we examine this question using data from the National Longitudinal Survey of Youth 1979 cohort, the youngest of whom have turned 50 in 2014. We focus on the sample of women with children with less than a college degree (N=2304) – the main target demographic of the Earned Income Tax Credit (EITC) policy. We exploit policy-driven expansions to EITC benefits during the early and mid-1990’s, which generated income increases for NLSY respondents during their late 20s and early 30s. Using the state of residence and family structure of NLSY respondents, we exploit the policy-driven variation in EITC benefit income for which different families would have been eligible. Using the measures of cognitive ability available in the NLSY for older adults, we identify whether a causal relationship exists between early-life income windfalls and later-life cognitive ability.

The NLSY79 survey instrument asked all respondents a series of questions intended to measure cognitive ability at age 50. Our main analytical approach relates lifetime, after-tax and transfer income to the cognitive ability measures discussed above. We begin by testing whether lifetime income correlates with the measures of cognitive ability measured at age 50. The results show that for all measures, there is a positive relationship between lifetime income and cognitive ability at age 50. For depression, we find that respondents with higher lifetime income report lower incidence of depression symptoms. Our preliminary results suggest that the EITC may have long-run impacts on the wellbeing of older Americans. They suggest a role for anti-poverty programs to help support healthy aging and cognitive functioning into older age.