Building Savings and Assets

The goal of ending poverty must not only include strategies to address the crisis of right now, it must also include long-term policies that create sustained wealth. For many years, welfare policy for the poor has primarily on income support. Federal income assistance programs such as SNAP (food stamps) and Temporary Assistance for Needy Families (TANF), while critical to the current well-being of many poor families, are not as effective in building long-term wealth, i.e. assets. According to the 2010 New America Foundation (NAF) report, The Assets Agenda 2011: Policy Options to Promote Savings, "Economic well-being is a function of having access to both income and assets, which can be invested and deployed productively over a lifetime."

Unfortunately, asset-building is largely overlooked in anti-poverty policy. RESULTS is working to change that.

Why Assets Matter

Assets are forms of capital, including savings, financial securities (stocks and bonds), and personal or property. Other less tangible forms of assets include educational achievement, job skills and training, and access to credit. A recent analysis from the Corporation for Enterprise Development (CFED) shows that one in four American children are born into families with negligible savings to weather financial emergencies or invest in the future. In addition, these habits are passed on from generation to generation. By correcting these trends through asset development, especially when children in the household are young, we can start families on a different path - one toward prosperity. In addition, studies have demonstrated that assets provide families with numerous important social, psychological, and economic effects. People tend to think and behave differently when they are accumulating assets, and the world responds to them differently as well. Demonstrated benefits include:

Improved household stability: Major illness, job loss, or marital breakup can lead to sudden income shortfalls. A stock of assets helps to bridge these periods of financial need, reducing the chances of disorder in the household.

Reduced economic stress. New data highlighted by the New America Foundation shows that that low-income families who hold assets (home, savings) show lower levels of economic strain over time. In fact, the data found a direct relationship between having assets and less stress.

An orientation toward the future: When people are secure in the present, they tend to look toward the future. There is considerable evidence that people who own assets are, by and large, more optimistic about their ability to succeed.

Enhanced welfare of children: Given that parents pass on their wealth to their children, an effective asset-based policy for the poor could effectively reduce intergenerational poverty. Children with a savings account in their name are six times more likely to attend college than those without an account.

Additionally, there is evidence that homeownership and asset development is associated with improved access to credit, social and political involvement, reduced domestic violence, marital stability, and higher educational attainment. See this informative "asset building continuum" from the Maryland Cash Campaign to see how various asset building programs, product, and policies help lift and keep people out of poverty.

The Wealth Gap between Rich and Poor

Unfortunately, low-income families are finding it harder and harder to acquire the assets needed to build wealth. Recent research shows just how difficult it is for these individuals and families.

A March 2009 report from CFED, Return on Investment?, shows that of the three largest asset-building policies — the mortgage interest deduction, the property tax deduction, and preferential rates on capital gains and dividends — over 45 percent of subsidies go to the top 1 percent of households, whose average income exceeds $1.25 million. Meanwhile, the bottom 60 percent of households receive only 3 percent of the benefits. The Economic Policy Institute reports that in 2009, the wealthiest one percent of Americans had a net worth 225 times larger than the median family net worth, nearly double the gap in 1962.
The Corporation for Enterprise Development (CFED), an organization dedicated to expanding economic opportunity, estimates that more than one out of every five American households is asset poor, i.e. if faced with a loss of income, the household would have insufficient savings and assets to live more than three months at the poverty level.
In households of color, one in four is in extreme asset poverty, meaning they have no savings or assets at all. According to United for Fair Economy, African-Americans are 2.7 times as likely as Whites to have zero or negative net worth; Latinos are two times as likely.
A 2011 MarketWatch article reported that in 2001, African-American families had a median net worth of $12,500, while white families had a median net worth of $124,600. During the stock market rally and the housing bubble in 2007, that number for white families jumped to $143,600, but African-American net worth dropped to $9,300. To put it more starkly, for every dollar of capital a white family owned in 2007, an African American family owned 6 cents; in 2009, it dropped to two cents. In addition, a 2011 Pew Research report shows that white households now own twenty times the wealth compared to African-American households and eighteen times the wealth compared to Latino households. From 2005 to 2009, Latino households saw their median wealth drop 66 percent and African-American households saw theirs drop 53 percent, compared to just 16 percent for white households.
In a May 2010 report, CFED shows that for households with children, the asset gap is even worse: 27 percent of households with children live are asset poor, and 16.6 are extremely asset poor; 49 percent of African-American households with children and 39 percent of Latino households with children are asset poor; between 2004 and 2006, the median net worth for the bottom twenty percent of families dropped by 27 percent.
An Insight Center for Community Economic Development report shows that the racial wealth gap has a significant impact on the development of young children. The data shows that at nine months, all children start out with similar results on a standard child development test. However by age two, children in African American and Latino households, which hold only a fraction of the assets possessed by white households, begin to lag way behind their white counterparts; this gap becomes even more stark when these children enter kindergarten.

Wealth disparities are no accident; the government has long encouraged asset development for the middle and upper income classes through tax incentives. CFED's Upside Down Report shows that of the $400 billion in tax benefits, half goes to the top 5 percent of taxpayers, those earning more than $167,000. Low-income families get next to nothing. The substantial benefits that the government extends already to upper-income families must be extended to include the poor. Fortunately, there are a number of new savings vehicles that address this imbalance and are proving successful.

Low-income Asset Building Policies

While asset development is not a cure-all, there is convincing evidence that having a stock of capital can enable families to lift themselves out of poverty. RESULTS has made it a domestic campaign goal to enact federal legislation that creates progressive asset-based programs. While there are many options, among those receiving serious consideration are:

The Saver’s Bonus

The Saver’s Bonus uses the tax system to provide incentives for low-income families to save. The Bonus is available to families with incomes below 120 percent of EITC eligibility. Households can only receive the bonus by making a commitment to direct deposit all or part of their tax refund into a designated savings product. The appeal of this idea is that people can make this commitment directly on their federal income tax forms, thus making it easy to enroll and accessible to everyone. Households could also receive a match for deposits made into these accounts, up to the $500 per year.

In 2011, RESULTS will work to raise awareness of the Saver’s Bonus and work with targeted congressional offices to get Saver’s Bonus legislation introduced and eventually passed. See our Saver’s Bonus page for more details on this proposal.

Individual Development Accounts

Individual Development Accounts (IDAs) are subsidized savings accounts in which, like the Saver’s Bonus, a saver’s deposits are matched by sponsors dollar-for-dollar (and sometimes more) up to a certain amount (generally $500 per year). Sponsors may be foundations or government agencies. There are restrictions on use of the proceeds, which are typically home ownership, higher education, starting a small business or retirement. See our IDAs page for more details about these accounts.

Children’s Savings Account

Children’s Savings Accounts (CSAs), or KIDS Accounts, are savings accounts for children that begin at birth. The government would make an initial deposit into a designated account, typically $500, for each child born after a certain date. Children of low-income families would get a larger deposit and/or be eligible for annual matched contributions than wealthier families. In 2005, the United Kingdom created the Child Trust Fund, which is now the most developed CSA program in the world. To date, over 4 million accounts have been created. See our CSAs page for more details.

RESULTS supports these initiatives and urges Congress to pass legislation that creates and expands these important poverty-reduction tools.

Other Proposals Worthy of Note

The Saver’s Credit is a non-refundable tax credit of up to $1,000 per person available to low-income individuals and households that contribute to qualified retirement savings plans. The credit reduces one’s tax liability thus reducing the cost of contributing to a retirement plan which can serve as an incentive to save for retirement. Unfortunately, the credit is non-refundable. Because lower income households have little or no tax liability, non-refundable tax credits are not much benefit to them. By making the credit refundable, i.e. people would get a refund check if their credit is more than what they owe in taxes, low-income tax filers would have a greater incentive to save. There was legislation to address these limitations to the Saver’s Credit. The Savings for American Families’ Future Act of 2009 (H.R.1961/S.3090 ) would have expanded the Saver’s Credit to families earning up to $65,000 (currently $33,000), match fifty percent of the first $1,000 of savings for families earning less than $65,000, and best of all, make the credit refundable. Unfortunately, the bill did not make it out of committee before the 111th Congress adjourned.

Automatic 401(k) plan enrollment asks employers to make enrollment automatic for all new employees. Employees could opt out if they wished. Departing employees would have their savings automatically rolled over. The rationale is that if the plan is “opt-out” rather than “opt-in”, more people are likely to stay enrolled and save for retirement than would choose to enroll if it were not automatic.

Family Self-Sufficiency Program is a little-known idea for assisting people in subsidized housing, either public housing or Section 8 rental vouchers. As these families increase their incomes, their rent (pegged at 1/3 of income) also rises. Under Family Self-Sufficiency, the additional rent goes into an escrow account. Then if the renter follows the advice of his or her case manager, he/she can eventually use that money for education, down payment on a home, or other similar purposes. See our homelessness and housing page.