Bill Emmons Talks Family Finances: Challenges, Changes and Opportunities

Posted September 25, 2018, By Lisa Hamilton

Subscribe in iTunes

William

Interviewee:

William Emmons serves as assistant vice president and lead economist with the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis.

A prominent voice on American family finances and the economy, Emmons can has written extensively about homeownership and household wealth, the racial wealth gap and trends related to higher education, wealth and age.

The mission of the St. Louis Fed is to promote stable prices and financial stability and support maximum sustainable economic growth. Located in St. Louis, Missouri, it is one of 12 regional reserve banks that — along with the Board of Governors in Washington, D.C. — makes up the central banking system of the United States.

“There are very clear differences along racial and ethnic lines in all of the dimensions we're talking about — income, wealth, access to pensions, other savings and home ownership.”

–Bill Emmons

Show Notes

Families who build assets — such as saving for an emergency, buying a home, or seeding a college fund — can gain the financial stability needed to move their children forward on the pathway to opportunity.

But for many low-income families, building assets is a pipe dream. Too often, their paychecks can fall short of covering even basic needs, including food, clothing and rent.

This struggle is unsurprising to William "Bill" Emmons, lead economist with the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. Emmons is one of the nation’s leading experts on family finances.

The Annie E. Casey Foundation’s Lisa Hamilton chats with Emmons about household income and wealth and the roles that race, age and education play in shaping family savings, debts and assets. Emmons also explains how changes in the economy — coupled with rising education costs and a shift away from pension plans — have made it harder for young adults and families to build wealth in America today.

Original theme music composed by Stephen R. Frank at Baltimore Studios.

View Transcripts

Lisa Hamilton:

From The Annie E. Casey Foundation, I'm Lisa Hamilton and this is Casey Cast.

Money for an emergency, college savings, home ownership, these and other assets give families that financial stability to move their children forward on the pathway to opportunity. However, for low-income families, a paycheck might only be enough to meet immediate needs, such as food, clothing and shelter; not enough to enable them to save for tomorrow. Helping us better understand the financial prospects of America's families is Bill Emmons, one of the nation’s leading experts on the household finances of Americans and what it means to the broader economy.

Bill is the Assistant Vice President and Lead Economist with the Center For Household Financial Stability at the Federal Reserve Bank of St. Louis. He's written extensively on home ownership, the racial wealth gap, and trends related to higher education, assets and race.

Welcome to the podcast, Bill.

Bill Emmons:

Thanks, Lisa.

Lisa Hamilton:

We are so glad you could join us. So first I think we ought to start with explaining what wealth is. Wealth is such an evocative word that often makes people think about mansions and fancy cars. What do we mean by wealth in this context?

Bill Emmons:

Wealth is not exactly income. Income is what you earn and wealth is what you own minus what you owe. So it's your assets, things like your house, your durable goods, but also financial assets, savings accounts minus your debts. So your wealth is net worth.

Lisa Hamilton:

So you've written a lot about the distribution of wealth in the United States and something we've heard lots talked about, certainly as we have debated recent tax laws. But you've noted that the distribution of wealth in the U.S. is becoming rapidly more unequal. Can you talk about this trend?

Bill Emmons:

Yes, and as you say, Lisa, there has been discussion of wealth inequality, probably not as much as income inequality.

Both of these concepts, the income is what you earn, the wealth is what you earn minus what you owe. They're both becoming more unequal and they're related to each other because people who earn a lot more income probably are able to save more, to build up more of their wealth. So in both cases, both income and wealth and inequality, it appears that the trends are going in the direction of more inequality probably related to changes in the economy. More technologies competing with people in the middle of the income distribution. It's also the case that a lot more responsibility is being put on people to make financial decisions and so that's going to be more difficult. Someone who doesn't have a lot of wealth or a lot of income maybe can't afford a financial advisor, maybe doesn't have enough time or education background to make those decisions.

Lisa Hamilton:

Does it also have to do anything with pensions?

Bill Emmons:

So if you want to think about say kind of a broad concept but the middle class, the person who years ago maybe was a high school graduate. Maybe today it's more common for a college graduate to be required to get into the middle and middle upper range.

And for many years after World War II, most of those jobs came along with healthcare insurance and a pension, what was called a defined benefit pension. Just a formula that says once you retire, if you've worked for this company for enough years, we'll pay you a certain amount every month. That goes to the point I just mentioned about that was pretty simple. You didn't have to think too much about that. But the corporate environment has changed and more and more companies are now instead of giving you this defined benefit, a promised payment, it's an account where they put some money in maybe and you put in money. This is the defined contribution model, and you have to make all the decisions about how that money is invested. Then figure out what to do with it when you get to retirement.

Another thing that's going along with this trend away from the defined benefit pension is simply the loss of these more traditional, middle class, secure jobs. There's more job instability, more part-time work or jobs that don't have those kinds of benefits. So I think you're right that pension wealth or your retirement savings, more broadly, has been a very important part of people's wealth along with their home typically. Those changes in the retirement system have made it more difficult, especially for people who maybe relied on those simpler pensions in the past.

Lisa Hamilton:

Right.

What have you found about how race and education and age play into the wealth of households in this country?

Bill Emmons:

There are very clear differences along racial and ethnic lines in all of the dimensions we're talking about: Income, wealth, access to pensions, other savings, home ownership. I think there has been progress, but really one of the messages of the work that I'm doing or one of the conclusions that comes out of it is that we have so much more work to do.

Lisa Hamilton:

So you continue to see a persistent what folks often call the racial wealth gap?

Bill Emmons:

Yes

Lisa Hamilton:

Across the data you see.

Bill Emmons:

I'll mention there, we talked a little bit about income inequality and wealth inequality. So the racial gaps exist in both dimensions, but the gaps are much, much larger in wealth.

Lisa Hamilton:

Say more about that.

Bill Emmons:

This is consequential. It matters because income is necessary to put food on the table, shelter, transportation, etc. Wealth maybe doesn't seem as important on a day to day basis, and yet, we know and there's all lots of evidence that suggests that wealth really is important for things like stability. When you get hit with an unexpected expense, for example, having money in the bank is hugely important so you don't have to go out and borrow money at a very, very high interest rate or sell an asset. So it's stability, absolutely. Wealth is very, very important.

It's also important for mobility, for education either for yourself or for your children.

Lisa Hamilton:

Right. So we understand there are stark differences in terms of wealth along racial identity lines. What about education and age?

Bill Emmons:

But, again, the education gaps on wealth are much larger than they are for income. We think that's probably related to what I mentioned earlier about having higher income maybe gives you a little more flexibilities that you can save more. But I also seems, and we've found a lot of evidence of this, that people with more education tend to make financial decisions that are more conducive to wealth accumulation over time. It starts with the basic, just saving money. It's not a given. Not everybody can or does save, only about half of Americans regularly save, and people with more education are more likely to save.

It's also true that they're more likely to save a higher fraction of their income and even things that maybe aren't so obvious right off the top of your head, but willingness to take some risk to build assets. So, for example, holding some stock mutual funds in your retirement account rather than having it all in a very safe bond or a deposit kind of asset.

Lisa Hamilton:

Greater risk and greater reward.

Bill Emmons:

Yes.

Lisa Hamilton:

But you know something interesting I saw was that you noted having more education certainly leads to higher wealth, but it does not eliminate the racial and ethnic wealth gaps.

Bill Emmons:

That's I would say probably the number one focus right now for the work we're doing. As you say, Lisa, both the mobility aspect but also the stability aspect seems to be different across racial and ethnic lines. So let me be more specific, we can trace out what happens to some extent in this great housing bubble and crash and the great recession period across virtually every group, however you want to cut up the population. Everybody lost some money in the down turn. Many people also lost jobs. But what happened it seems in the recovery we've seen kind of a bifurcation. White and Asian college graduates have bounced back much more quickly and we're not seeing it as much among Hispanic and black families. We think a substantial amount of or the reason for this is because of the portfolios, the assets owned by different families and the liability side, the debts.

It's also true that there are some persistent gaps in earnings, in the income of white college graduates say versus Hispanic and black college graduates, but by our estimation, those aren't quite bit enough to explain the big differences in wealth outcomes.

Lisa Hamilton:

Interesting.

Bill Emmons:

So we're definitely looking into that and trying to understand that better.

Lisa Hamilton:

Great. Then finally I think age, you've done some work about the demographics of wealth and age. One that I found personally devastated, but you can share with our listeners.

Bill Emmons:

Let me talk a little bit about that. Most people by age 40 have finished their education, most people who will marry have married by that time, maybe they've bought a house, all of those sorts of things. Then the middle aged years we say from about 40 to early 60s, we cut it at 62. So that's the period when you're fully engaged in all of these activities. Your earnings typically reach their peak at some time in this age range, and then after 62, we see an increasing number of people retiring, withdrawing from the workforce. So income typically goes down somewhat. You start to rely on pensions and savings of various sorts.

Wealth is similar but a little different. Typically, most young families start off with very, very little wealth, build it up during their working years. It peaks in their 50s or 60s maybe, and then a little bit different from income, the data suggests that wealth doesn't drop off quite as much. So people save and from surveys we know that a lot of people save for unexpected things like healthcare expenses. So if you are lucky enough to not to need to spend a lot on healthcare, then that wealth is still there. In some cases, can be passed on to heirs.

But what we have seen and others have looked at the data and found something similar is that it looks like it's a lot tougher to be young these days. The wealth trajectories are not rising as quickly. It seems to be starting out even at the lower level, and we think that's probably related to the cost of education to some extent. It's also true that some of the job opportunities that young people face, particularly those say without college education. Those jobs aren't paying as much as they used to. So it does look like the younger end of the life cycle is tougher today. It's also the case that we've just been through this very, very severe recession so the scaring effects of that are still evident in young people.

So the complimentary way of looking at that is to say, "Well, let's just go back through the 20th century and think about when you were born, when in historical time in what year were you born, are there any differences?" Again, we're not the first to find this, but the answer is yes, there are some differences. It does look like there are better times to be born and worse times to be born.

Lisa Hamilton:

Because of economic cycles that have happened?

Bill Emmons:

Yes. Even things like the example I use and I think that's what you're referring, Lisa, is it looks like the best time to be born was about 1940.

Lisa Hamilton:

That wasn't me, Bill. That's very disappointing.

Bill Emmons:

That was probably after the Great Depression in the 1930s, birth rates were very low. So these were small groups of young people. After World War II, the economy boomed and so there were lots of good opportunities for these young people. So they got a good early start on their careers. The economy grew very rapidly. Standard of living grew very strongly. There was also expansion of investments in education and healthcare and retirement so that when those people born in say 1940, I'm taking broadly, years before and years after. By the time they hit retirement, they had had a good long period of time when the economy was strong. Probably retired by the time of the great recession. They'd paid off their debts. Social security and medicare were there for them, and they've sort of cruised through this period.

Conversely, what looks like about the worst time to be born is about 1970.

Lisa Hamilton:

That stings, Bill.

Bill Emmons:

That really stings. Yes. Because by no fault of anyone born in 1970, you didn't choose to be born then, you were just coming of age at the time when the economy did start to slow down. Just in advance of the great recession, the housing crash, and I would say another dimension was that the financial challenges, temptations if you will, have changed also. So that in the last few decades, there's been a lot more availability of borrowing and in some cases a necessity to borrow whether because house prices have run up so much benefiting those older home owners, and also the cost of education has run up so much. So people born in later years in the 20th century were much more likely to borrow just to pay for their education. Whereas their parents or grandparents might have gone to college basically for free and that's one of those things where policies have changed, attitudes have changes.

We're asking young people to pay a lot more for education today than we used to. So I think it's really the economy has changed, the types of jobs available, the housing situation has changed, higher education has changed, and the access… I think you can tell from what I'm saying that the access to credit can be beneficial but it also can be harmful. Whether it's high cost credit or even what you think of as more reasonable credit, but if people are borrowing so much that they're at risk of say losing a house during the down turn or maybe borrowing for education more than they can reasonably repay.

Lisa Hamilton:

Well, this is certainly very important for us to understand the demographics and the trends and how they affect the prospects for overall household financial stability. When I looked at some of your work, I saw you identified sort of three markers of struggling families. I thought giving Casey's work it would be helpful to explore. The first is around too much wealth in homes and we can talk about the role of homes and the American dream. The second was about families that have too much debt. It sounds like we can explore something around student loan debt there. Then the third is around too little savings, and there's been shocking data about the very, very small amount that families have for emergencies. So I'd love to explore all three of those with you.

So first, why don't we talk about too much wealth in homes. How's that impacting families?

Bill Emmons:

I think the best illustration is just this big crash we went through. So if all of your wealth was in a house and the house value goes down, in the worst case even you could lose your home altogether. Over the long haul it's true that investors do better when they have a spread of investments, so a diversified portfolio, not just in housing but also in things like some mutual funds that are invested in the stock market. Maybe some bond funds. Maybe a small business or some investment real estate. So just some way to… It's essentially insurance against…

Lisa Hamilton:

Spreading the risk.

Bill Emmons:

…having all your eggs in one basket because if you drop that one basket, as in the housing crash, there's nothing to buffer.

Lisa Hamilton:

Mm-hmm (affirmative). Interesting. So I guess your message isn't that homes are bad investments. It's just that they shouldn't be a family's only investment.

Bill Emmons:

Yes. The ideal would be to have something beyond your house as part of your savings and investment. That obviously creates a problem for young families. If you want to become a home owner and you don't have a lot of wealth, well, a house is expensive. How are you going to afford lots of other assets?

One of the other points you make is a good way to think about okay, so what's the next priority say if you did want to become a home owner? As you said, it's having those liquid assets, those emergency savings, and not just $100 but more like $1,000 or $2,000 or $5,000 because once you become a homeowner, you're on the hook for a new roof or a new furnace or anything else. Your car can conk out at any moment or get in an accident. So it's one of those things you don't leave in the morning expecting to get into a fender bender, but it happens.

Lisa Hamilton:

The sort of too little savings was our third sort of characteristic of many struggling families. I read, I think it came out from the Federal Reserve that most families don't even have $400 for an emergency.

Bill Emmons:

Yes, a survey. This is the survey of household economic decision making. That's exactly right that a large number of families would struggle without going to a higher cost lender to put $500 together for a car repair.

Lisa Hamilton:

So certainly something that will go to improve family stability is having at least some small cushion to help. I think the third characteristic you noted was too much debt. You started talking about student loan debt. Could you explain if that's really the primary driver of this issue or if there's other types of debt that families get trapped in.

Bill Emmons:

There are two ways to think about it. In terms of the dollar amounts of debt, the biggest when you look across all families, the biggest type of debt is mortgage debt.

Lisa Hamilton:

Understandable given the size of…

Bill Emmons:

Not necessarily harmful, although we do know that in the last housing boom, there were a lot of mortgage loans that were if not predatory, certainly complicated and hard for people to understand and maybe had some features that cause problems. A lot of those problems I think, fingers crossed, I think some of those problems are solved. We're not seeing those kinds of loans being made anymore. But that still is its possible even if you think of it as a "good" type of debt finance this asset of housing. It's certainly the case that some families have too much mortgage debt, that they have trouble making the payments. Say it's a couple and one spouse loses a job, can you still make the payment? So that needs to be built into the decision making at the beginning.

For young people, as you say, student debt is increasing. Year by year, young people are facing these costs.

The other type of debt that I would like to mention, which doesn't show up as being so large as mortgage debt or even in some cases student debt, but that's unsecured types like credit cards. It could also be another secured type would be an auto loan, but these sorts of personal debts, and again, you maybe need a car to get to work or to school so auto loan makes perfect sense. But it does add up to the dollars that you need to be able to pay every month because if you can't, you can lose the asset. With the case of credit cards, a lot of discussion that it's easy to buy something with a credit card and say, "Well, I'll pay it off next month." Then the bills come and say, "Well, I'll pay it off next month." So this procrastination cycle, especially if it starts to accrue interest at double digit interest rates, quickly can accumulate to be a problem. So that we know that can be kind of a temptation to not pay off your bills as soon as possible.

Another thing that's important in many cases is medical debt. People who maybe have some insurance but it doesn't cover what the needs they have or maybe don't have insurance at all, and then you incur some expense. $1,000 for whatever, a broken bone or a pregnancy.

Lisa Hamilton:

Well, I have two final questions. One is given how complicated it can be for a family to figure out how to manage their finances, how are families getting information about how to invest or how to manage debt or how to make responsible choices? How can we help more families get better information about smart choices?

Bill Emmons:

I think the fact is most people get their information from family and friends. It's one of the reasons why, going back to one of the first things we talked about, why there are such differences across racial and ethnic groups. If, for example, a group of people has been excluded from financial institutions or educational institutions, whatever kinds of opportunities, then older generations, the grandparents or the parents, maybe not have the experience to help young people. On the other hand, somebody whose parents and grandparents have always had access or have been included in the financial mainstream maybe have more expertise that they can share.

So I think recognizing that there is this difference, that not everybody has someone at home or next door who can give them good advice. Then we do need to be thinking about where else can people get information. A logical place seems to be schools, and I think for reasons I don't fully understand but there's a lot of resistance I think in the educational world to provide financial education.

It's an issue too getting the information to people but then also helping them turn that into decisions. That's I think maybe one argument why people have said, "Well, you can't really teach this in primary school because third graders aren't making financial decisions about housing or student loans or credit cards." But I guess thinking would be is there must be a way to kind of prime the pump and get people thinking in these terms. As we reinforce it throughout a young person's life, when it gets to the point when they do need to make these decisions, maybe then some of the concepts are there for them.

Lisa Hamilton:

Right. I found one of your suggestions really interesting that the same way they often advise us for retirement planning, my dad often said, "Start planning for retirement the first day you work."

Bill Emmons:

Right. Right.

Lisa Hamilton:

You've recommended starting savings accounts at birth or when kids enter kindergarten. So this notion of starting early really maybe appropriate for helping families think about how to help even their children prepare for the future. So I guess we've heard a lot about lots of ways that demographics impact wealth and maybe behavioral decisions, knowledge about different financial choices. I guess I'm curious sort of to close what does the data tell us about where Americans are headed in terms of their finances and economic opportunities? Do you see any bright spots or things we might need to focus on either in policy or practice to help more families become financially stable? Here at Casey we do the Kid's Count Report every year to sort of talk about child well-being and every year their economic well-being is the one area we're always so very concerned about. So this is vitally important for the future of our country. What do you think could help us?

Bill Emmons:

I think the bright spots are, and I'm not just saying this because I'm talking with you, but it's people like you, Lisa, and The Annie E. Casey Foundation groups that are not involved for a profit motive, but groups who see both that it helps individuals and it helps the country for people to learn more about their own economic and financial lives so they can make better decisions for themselves, their children, their communities, etc. So I think the more people who have an interest, and as I say, a non-financial interest. So that I think is a real bright spot.

On the not so optimistic side, all the trends that I've seen suggest that these forces driving toward inequality are probably pretty strong and unless we can do the things we've been talking about to try to slow that down, it's going to continue. It hits people with lower skills. The job market is pretty tough for people without marketable skills. Not that you can't get a job, but you can't get a job that has a high wage, a potential for lots of advancement, benefits like health insurance and pensions. That's something that our country and others are struggling with. How do you create that opportunity for the entire population? Not just people with education, college level or post graduate degrees.

Again, I'm speaking only for myself, not for the Federal Reserve system. But there is evidence that suggests that part of the widening of the income and wealth gaps is related to changes in tax policy. That cutting tax rates, especially the higher marginal tax rates, is a fairly significant reason why we're seeing more concentration of income and wealth at higher levels. So that's an obvious way that policy could help slow down this process.

Lisa Hamilton:

Gotcha. Well, I certainly appreciate the insight and information you've provided today. The Federal Reserve is an amazing resource for this vital information about how families are doing, and thank you so much for your leadership in trying to make sure that this great information gets out. It's certainly the data that we need in order to make better decisions so that we can make sure that more and more of our families and ultimately our children have the bright economic futures they deserve.

So thank you so much for joining us today, Bill.

Bill Emmons:

Thank you, Lisa.

Lisa Hamilton:

I want to thank our listeners for joining us as well. If you've enjoyed today's conversation, rate our show on Apple Podcast to help others find us. You can ask questions and leave us feedback on Twitter by using the Casey Cast hashtag. To learn more about Casey and the work of our guests, you can find our show notes at AECF.org/podcast.

Until next time, I wish all of America's kids and all of you a bright future.