Building Savings and Assets

The Importance of Building Savings and Assets

Welfare policy for the poor has thus far focused nearly exclusively on income support. Federal income assistance programs such as SNAP (food stamps) and Temporary Assistance for Needy Families (TANF), while critical to the well-being of many poor families, have done little to bolster their assets.

What are assets? Strictly speaking, assets are a stock of capital, including savings, financial securities, and property. Other less tangible forms of assets include educational achievement, job skills and training, and access to credit.

It is unfortunate that assets are largely overlooked in anti-poverty policy. Wealth inequality outstrips income inequality by large margins.

A March 2009 report from CFED, Return on Investment?, says 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.

A May 2006 report (PDF) from Citizens for Tax Justice shows that the wealthiest 1 percent of Americans owned 33.4 percent of the wealth in 2004, up from 30.4 percent in 1989. The wealthiest 5 percent owned 55.5 percent of the wealth in 2004. The poorest 50 percent collectively owned 2.5 percent of the wealth in 2004, down from 3.0 percent in 1989.

United for a Fair Economy, on its Growing Divide web page, asserts that as of early 2009, the gap between rich and poor was the widest since 1929.

CFED, an organization dedicated to expanding economic opportunity, estimates that one out of four Americans are asset-poor; they have insufficient net worth to live more than three months at the poverty level.

People of color clearly are at the bottom of the wealth scale:

• In 1995, median white households held seven times more assets than median African American households, according to Melvin L. Oliver and Thomas Shapiro in their book Black Wealth/White Wealth.
• A report prepared by United for a Fair Economy, titled The Silent Depression: State of the Dream 2009, shows the racial wealth gap has grown since 1995. The report says that while the American economy went into recession in 2008, people of color have been in a recession for five years. A recession that long is called a depression.

Wealth disparities are no accident; the government has long encouraged asset development for the middle and upper classes through tax incentives. However, according to a report by CFED, titled Hidden in Plain Sight, the poor do not enjoy such benefits: While the government spends over $300 billion annually on asset-building incentives, nine out of ten of those dollars go to families earning over $50,000. Moreover, asset accumulation is disallowed or penalized by many federal assistance programs. For example any individual with over $2,000 in savings cannot receive SNAP benefits (food stamps). The substantial benefits that the government extends already to upper-income families must be extended to include the poor.

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, including IDAs and KIDS accounts, a type of child savings account.

Why Assets Matter

Aside from the obvious benefits of having money, 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.
• 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 offspring: Given that parents pass on their wealth to their children, an effective asset-based policy for the poor could effectively reduce intergenerational poverty.

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.

Options for Supporting Assets Building

While there are many options, among those receiving serious consideration are:

Individual Development Accounts (IDAs) are subsidized savings accounts in which a saver’s deposits are matched by sponsors one-for-one or sometimes more than one-for-one. Sponsors may be foundations or government agencies. There are restrictions on use of the proceeds. Typically they can be used for buying a first home, higher education, or retirement.

Children’s accounts that begin at birth are being implemented in Britain and elsewhere. The government makes an initial deposit in the account, with children of low-income families getting a larger amount than children in better off families.

Saver’s tax credit would give a refundable income tax credit for voluntary retirement savings (up to some maximum amount) contributions by moderate- and low-income workers.

Saver’s bonus would provide a government dollar-for-dollar match to low-income individuals who contribute to a designated savings account. It uses the ease of direct deposit of tax refunds into a qualified savings account as incentive to participate.

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.

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 the homelessness and housing page.

RESULTS has made it a domestic campaign goal to enact federal legislation that creates progressive asset-based programs, including IDAs and KIDS accounts, a type of child savings account.

Update on Asset Building Policies

During the 2008 presidential election campaign, then-Senator Barack Obama and the Democratic platform cited several asset building ideas that might be enacted in 2009:

• Saver’s Tax Credit would be made refundable and would return a match of 50 percent for retirement account savings up to $1,000.
• Automatic Retirement Accounts rules would require employers to make automatic payroll deductions to fund Individual Retirement Accounts (IRAs).
• Mortgage Credit would make home ownership more affordable. A tax credit of 10 percent would be given to homeowners who file income tax returns but do not itemize deductions.

Advocates also see opportunities for progress on these ideas:

• Children’s Savings Accounts would help families save for their children’s future. See the KIDS accounts page for more information.
• Expand Individual Development Accounts (IDAs). A tax credit would be given to financial institutions for opening and managing IDAs. As many as 900,000 families could benefit. See the IDA page for a full description.

In the last two Congresses, a bipartisan children’s savings bill called the American Savings for Personal Investment, Retirement and Education (ASPIRE) Act was introduced but did not pass. It would have created KIDS accounts at birth for every child born in the United States.