For a low-income family, a day’s wages might only fulfill today’s basic needs: food, clothing and housing that may be temporary. But some families’ daily struggle to support themselves leaves nothing for tomorrow. To help children realize their full potential, families need savings and assets, the currency of the future.
Assets — emergency savings, a college fund, homeownership — provide the financial stability a family needs to create a quilt of resources that turns children’s dreams into plans. That quilt also serves as a security blanket of a family’s own making. Without it, what should be a temporary difficulty — a flat tire, a sick child, an injury — can become a crisis with permanent consequences, including a lost job or impossibly large debts. Family financial stability can easily be undermined by such events, eroding prospects for self-sufficiency and long-term success.1
The Great Recession was devastating for U.S. families, causing a collective $16 trillion loss in net worth.2 This loss disproportionately affected low-income families of color,3 perpetuating a racial wealth gap even as the racial income gap has narrowed.4The median net worth of white households was more than 10 times greater than that of African-American or Latino families in 2013. While white families’ net worth rose by 2% from 2010 to 2013, Latino and African-American families’ net worth fell markedly — by 15% and 34%, respectively.5 The typical white household has slightly more than one month’s income in easily accessible savings, compared with just 12 days for the typical Latino household and only five for the typical African-American household.6 These dramatic differences are especially troubling given the critical importance of assets as an engine of the American Dream — a dream that is, increasingly, unequally achieved.
Change in Median Net Worth, 2010–2013
While white families’ net worth rose by 2% from 2010 to 2013, Latino and African-American family net worth fell markedly — by 15% and 34%, respectively.
An uneven financial foundation causes daily family stress that harms children’s development and hinders their ability to grow into successful adults.7 Childhood is a time to imagine and prepare for the future; poverty can eclipse that horizon. While increasing income is important to moving families out of poverty, building assets helps them become financially stable and open doors to opportunity.
Falling Behind: The Racial Wealth Gap
Throughout much of our country’s history, the federal government has provided incentives to help families save and build assets. However, these policies — from retirement savings tax breaks to the home mortgage interest deduction — disproportionately benefit families with assets and do little for those with low incomes and minimal savings. This regressive pattern creates particular disadvantages for families of color, who are less likely to have savings or inherited resources.8 A home, for example, is a primary driver of net worth, making homeownership an important milestone for many American families.9 Yet systemic prejudice in zoning, building code enforcement, residential restrictions, mortgage practices and home insurance account for stark differences by race in homeownership and, therefore, net worth.10 Although home values among households of color took a much harder hit during the recent recession, especially in some communities, home equity remains an essential long-term asset that all families should be able to access.
For these reasons, many people of color have a far greater hill to climb to build assets — affecting their prospects for generations. We cannot afford to continue these patterns, especially as people of color make up more of our population.11Family assets strongly correlate with indicators of child well-being — such as academic performance and self-esteem — and help children avoid negative consequences such as behavioral problems and teenage pregnancy.12 Yet 47% of Americans cannot handle a $400 emergency13 — the cost of replacing a car alternator, for example — let alone pay for college or a home. Nearly half of U.S. households could not subsist at the federal poverty level for three months if they suddenly lost their income, using experts’ most basic measure of assets.14 Not having savings exacts additional costs: Payday loans cost cash-strapped families $8.7 billion in interest and fees annually.15 Without savings, Americans also cannot start new businesses that stimulate our economy. An analysis of federal data recently found the share of people younger than 30 owning private businesses at a 24-year low, in part due to their low savings rate.16
Unexpected Emergencies Can Start a Spiral of Debt
47% of Americans cannot handle a $400 emergency — the cost of replacing a car alternator, for example — let alone pay for a college education or a home.
Smart policies can help reverse these trends and close the racial wealth gap by allowing more families to steadily build savings. We recommend four federal policy solutions to increase the financial stability of low-income families, especially those of color, through savings and home equity.
U.S. Family Net Worth Over Time
Dramatic differences in family net worth by race, ethnicity and income have persisted for decades.
In 2013, the median net worth of white households was more than 10 times that of African-American or Latino families. While white families’ net worth rose slightly after the recession, Latino and African-American families’ net worth fell markedly.
Source: Marin Economic Consulting analysis of the Federal Reserve Board’s Survey of Consumer Finances, 1989–2013.
Note: Income categories, which vary annually, are based on the Federal Reserve Board’s Survey of Consumer Finances. For example, in 2013, half of U.S. families (bottom 50%) had incomes of $45,000 or less. Forty percent had incomes between $45,001 and $150,000. Seven percent had incomes between $150,001 and $300,000. The top 3% of families had incomes exceeding $300,000.
Saving for a Lifetime
Starting to save in a child’s name from birth can change how kids and their parents think about their future.
Indeed, research shows children with savings accounts in their name are substantially more likely to go to college. As young people become working adults, they should develop their own savings habits, including setting aside funds for emergencies, as well as long-term savings for larger purchases, such as a car or home.
Four Recommendations: Helping All Families Achieve Financial Stability
Promoting savings for a lifetime is the surest way to enable low-income families to build assets.
Improving their prospects means undoing generations of unfair practices and making up for decades of foregone returns — and requires a combination of small, achievable steps and bold vision. We therefore recommend several incremental policy changes to help families develop savings habits and access more sophisticated financial products over time. To incentivize savings from birth, we outline a more ambitious proposal to promote opportunity for children and significantly narrow the racial wealth gap.
Provide portable, safe accounts for retirement and emergency savings
Saving for the future is extremely difficult for workers with low wages, who may not have workplace retirement plans.17 The new My Retirement Account (myRA) can help make long-term saving a habit.18 Employers can voluntarily establish these no-fee starter accounts, which are invested in government savings bonds that eliminate the risk of losing principal. Once the balance reaches $15,000, the funds must roll over to another retirement account.
Because myRAs are funded with after-tax dollars, participants can withdraw contributions without penalty for emergencies. While these accounts are now widely available, Congress should make myRAs permanently accessible through workplaces and banks and increase awareness about them. Employers without other retirement plans should consider automatically enrolling employees in myRAs. While these funds alone are not sufficient for retirement, businesses and government should incentivize rolling them over into vehicles that allow workers to grow a larger nest egg.
Median Family Net Worth in 2013
An analysis of myRA indicates its adoption and expansion could narrow the racial wealth gap. If everyone eligible saved the maximum, myRA could reduce the black-white wealth gap by 5% and the Latino-white gap by 7%, this analysis suggests. Modest participation and savings rates could still increase assets and racial equity.19
Three ways myRAs can help families save
Maximum impact: In this scenario, 100% of workers without pensions through their employer (target group for myRA) open an account and save the maximum possible ($15,000).
Moderate: Seventy-four percent of the target group opens an account, comparable to the 401(k) participation rate in the private sector. In this scenario, 25% of participants save $500 per year for five years with 3% interest; another 25% save $1,000 per year for the same period; and the final 24% save $1,500 per year.
Minimum: Half of the target group opens an account. Twenty-five percent of participants save $500 per year for five years with 3% interest, while the other 25% save $1,000 per year for that period.
Raise asset limits for public benefit programs
Although government policies seek to strengthen economic security for low-income families, they include asset limits that generally discourage savings among those who most need them — participants in public programs, such as Temporary Assistance for Needy Families (TANF). Depending on the state, $1,000 in savings may disqualify a participant for TANF.20 Without being able to increase earnings and savings, families will continue their reliance on these programs.
Federal policy should permit program participants to have at least $12,125 in savings — the equivalent of three months’ income for a low-income family of four.21 Allowing this level of savings — recommended in case of sudden income loss22 — will help families weather financial crises while enabling them to save for education, retirement or a home. This new floor would not restrict states from having higher limits or eliminating them entirely. States that have removed limits for public benefits have not seen participation increase; in Ohio and Virginia, TANF caseloads decreased.23 Programs also should let families keep assets that provide safe and adequate transportation and housing as they work to move off public assistance and become self-sufficient.
Expand Access to Homeownership
Federal policy should help low-income families move toward purchasing a home, increasing net worth and creating more stable communities.26 While lawmakers can broadly promote homeownership through tax and housing policy, they also should bolster one promising underused option.27The U.S. Department of Housing and Urban Development’s (HUD) voluntary Family Self-Sufficiency (FSS) program helps individuals with housing vouchers and those living in public housing increase income, build assets and improve financial stability, including saving for a home. Through the program, an escrow account is established for participants. As their earnings rise, they pay more rent, but the amount of each increase is deposited in their accounts monthly over five years.28
FSS serves nearly 70,000 households — a fraction of the more than 3 million eligible — mostly participating in the housing-voucher program. Congress has temporarily expanded FSS to include project-based Section 8 housing participants,29 making it available to another 1.2 million families. This eligibility should be made permanent, and widely promoted.
In addition, HUD should experiment with new approaches to allow all families entering subsidized housing to increase savings along with earnings. Small pilot projects are underway in Massachusetts and Oregon.30 The Alaska Housing Finance Corporation plans to match up to $1,500 in savings for participants completing FSS and a financial literacy course.31
Build Savings From Birth
Assets are best built over time to leverage the power of compounding interest. To ensure every child has savings, the federal government should create universal savings accounts, seeded with modest deposits, from the moment a child is born. This would foster college enrollment with the dollars the accounts would generate for education and manifest our belief in every child’s potential.
Bipartisan legislation proposed in 2009, for example, would have provided a $500 deposit for all children, with $500 more for kids in low-income families. Research suggests a savings account can change children’s behavior and make it substantially more likely they will attend college.32
Several states have versions of these accounts, often using 529 programs and contributing through direct starter funds or tax incentives. In an Oklahoma pilot, a group of young people received an Oklahoma College Savings Plan 529 account with a seed deposit of $1,000, along with $100 deposits to open separate 529 accounts. In early results, the group receiving the incentive deposits was 16 times more likely to have opened private 529s than peers in a control group.33
The federal government should provide these accounts for every child. Federal funds should seed each account, with larger deposits for infants in low-income families with minimal savings. At age 18, a young person could use the money for tuition or training, a business or a home.
An analysis of this ambitious policy suggests it could have a profound effect on the racial wealth gap among young adult households. Depending on funding and participation, these accounts could reduce the racial wealth gap by about 20 to 80%, while raising the wealth levels of all groups.34 While costly, this investment in children could reduce dependence on public benefits, increase consumer buying power, boost investment in businesses and homes — and move our country to greater equity.
Reducing the Racial Wealth Gap by building savings from birth
Estimated savings for families in 2013 if universal children’s savings accounts had been established in 1979.
Median Net Worth of Young Adult Households in 2013
(without universal children's savings accounts)
Estimated Net Worth With Universal Children's Savings Accounts
Closes Latino-white gap* Narrows black-white gap by 82%*
Narrows Latino-white gap by 84%* Narrows black-white gap by 78%*
Narrows Latino-white gap by 54%* Narrows black-white gap by 47%*
Narrows Latino-white gap by 28%* Narrows black-white gap by 23%*
*These scenarios focus on the potential net worth of young adult households (ages 18–34) if universal, progressive children’s savings accounts had been established in 1979. Each illustrates a different savings account value — $60,000, $30,000, $15,000 and $7,500, respectively — that a young person in a household with no more than $5,000 in net worth could have had by age 18.
For households with more than $5,000 in net worth, public investments would decline incrementally. Those with at least $25,000 in net worth would receive the lowest level of public investment, as follows: $60,000: Incremental decrease to $10,000 in public investment. $30,000: Incremental decrease to $5,000 in public investment. $15,000: Incremental decrease to $2,500 in public investment. $7,500: Incremental decrease to $1,250 in public investment.
The Role of States
While changes in federal policies can provide equal access to savings and credit on a broad scale, states are important in making those policies work. States should:
Curb predatory lending
States should cap interest rates on products such as payday loans, lines of credit, refund anticipation checks and short-term mortgages. States also should target opportunistic credit repair organizations or banks authorizing these products and protect consumers from repeated rollovers of small-dollar loans that can balloon into unmanageable debt.24
Open universal 529 accounts
States should open these accounts, which help families save for college, for all children born in the state, partnering with financial institutions, individuals or philanthropies to seed them. States might match savings with federal funds, as Pennsylvania has done.25
Permit prize-linked savings
These products encourage savings with a chance to win a large prize. Although federal legislation permits states to allow financial institutions to offer these accounts, only 15 states do.
Investing in families allows families to invest in themselves — to imagine and confidently act upon opportunities for their children while cushioning against the financial setbacks that inevitably arise. We should equip all families to take on this responsibility. Doing so will not just help individuals along the road to opportunity. It will increase the stability of whole communities by creating committed homeowners and a workforce with the education and training required for many of today’s well-paying jobs, truly building a solid foundation for our nation’s future.
10 Prakash, S. (2013). Racial dimensions of property value protection under the fair housing act. Cal. L. Rev., 101, 1437.
11 Ostry, J. D., Berg, A., & Tsangarides, C. G. (2014, February). IMF staff discussion note: Redistribution, inequality, and growth. Washington, DC: International Monetary Fund. Retrieved October 16, 2015, from www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf
12 Grinstein-Weiss, M., Shanks, T., & Beverly, S. (2014). Family assets and outcomes: Evidence and directions. The Future of Children, 24(1).
24 Center for Responsible Lending. (n.d.). Payday loans. Retrieved October 22, 2015, from www.responsiblelending.org/payday-lending/
25Building assets for low-income families. Testimony before the Subcommittee on Social Security and Family Policy of the Finance Committee of the Senate, 109th Cong. (2005, April 28) (Testimony of Dorothy Beale). Retrieved from www.finance.senate.gov/imo/media/doc/dbtest042805.pdf. And, The Finance Project. (2007). Connected by 25: Financing asset-building programs for youth transitioning out of foster care. Washington, DC: Author. Retrieved from www.f2f.ca.gov/res/TFPSBAsset.pdf
27 See, for example, Galster, G., Santiago, A., & Smith, R. (2015, November). Evaluating the impacts of an enhanced family self-sufficiency program. Panel paper presented at the APPAM 2015 Fall Research Conference: The Golden Age of Evidence-Based Policy. Retrieved November 7, 2015, from appam.confex.com/appam/2015/webprogram/Paper14593.html
31 Alaska Housing Finance Corporation. (n.d.). Rent reform. Retrieved October 23, 2015, from www.ahfc.us/family-self-sufficiency/
32 Elliott III, W., & Beverly, S. (2010, January). The role of savings and wealth in reducing “wilt” between expectations and college attendance (Research brief). St. Louis, MO: Center for Social Development, Washington University in St. Louis. Retrieved from csd.wustl.edu/Publications/Documents/RB10-04.pdf