Savings: The Poor Can Save, Too
When some people think about poor and low-income families, they often hastily conclude that these are financially irresponsible households that cannot or do not save. This view was unfortunately and wrongly reinforced by the housing collapse, when many low-income homeowners with subprime mortgages lost their homes.
But that assumption is wrong: Lower-income families can and do save. The foreclosure crisis was as much due to bad—predatory—lending and stagnant incomes as to inadequate saving. Indeed, getting low-income households to save following the terrible loss of wealth suffered by millions of Americans in the Great Recession will be essential to restoring our prosperity. While improving consumers’ buying power will always be an important progressive approach to sustainable growth, we also need to focus on savings as a foundation for household and national economic stability. Saving helps people avoid the hardships that prevent them from reaching their potential and limit their contributions to society. Moreover, broad-based asset policies can reduce debt, increase children’s well-being, and build potential down payments for homes and college tuition.
Years of rigorous research by experts at the Urban Institute and the Corporation for Enterprise Development (CFED), based on experiments and initiatives on the ground, as well as the work of other experts in the field, have shown that many low- and moderate-income families can save and accumulate assets. One 2011 Urban Institute study followed low-income, low-asset households to see whether such families can build savings. It found that, despite very low incomes, a substantial portion (44 percent) of these households accumulated enough to escape asset poverty after 12 years. That is, they accumulated enough “wealth-type resources” to sustain consumption for three months at the poverty line.
Other studies tell a similar story. One study of Individual Development Accounts—matched savings accounts for lower-income savers—found that, with an average match rate of nearly two-to-one, the typical participant accumulated almost $600 per year in savings. For participants averaging $18,000 in annual income, this is not a trivial amount. Several years ago, New York City launched a matched savings program called SaveNYC and found similar outcomes. Individuals saved an average of $561 over three years on a meager average income of $17,000. One participant said, “When I opened the SaveNYC account, I was able to save for the first time…. I hold back, deprive myself, so that I can get the computer for my son and other things.” These individuals show a willingness to save when presented with an opportunity—and many succeed.
If the literature shows that low- and moderate-income people are in fact capable of saving, the question then becomes: Should they do it? Considering their meager resources, should the poor really make an effort to set aside savings? The literature answers with a resounding yes.
First, assets help households weather material hardship. Low-income families are more likely to face difficulties after job loss, illness, death, or divorce. A recent study showed that adverse events are especially painful for families in the bottom third of the income distribution. After a job loss, almost half of these households experience hardship compared with 16 percent of households in the top third. Savings act as a crucial buffer: Low-income families with some liquid assets are significantly less likely than their asset-poor counterparts to experience deprivation during stressful events. In one study, access to $500 of credit had as much effect on easing hardship as multiplying a family’s income by a factor of three.
Savings and credit make a difference because income is more volatile for those hovering around the poverty line. Low-income families usually work in low-wage and temporary jobs, making them more susceptible to reduced hours and layoffs. Low-income families also have higher rates of unexpected home and auto repairs, and often lack insurance. The resulting month-to-month income instability leads to a higher incidence of hardship.
Second, savings can lower costs. Even small asset holdings can allow families to avoid high interest on credit cards. One study found that households with minimal liquid savings were substantially less likely than those with no savings to pay high fees to get their tax refunds a few days early.
Third, assets help protect families when the social safety net is insufficient. Because of budgetary pressures, many social-insurance programs may shrink or grow less quickly than demand. Savings-oriented policies can work to complement the social safety net. Fourth, and perhaps most importantly, savings encourage families to imagine a future better than the present, and to prepare and plan for that future. Lower-income families can convert savings into home purchases, education, microenterprise, and retirement accounts. Considerable literature demonstrates that homeownership can improve children’s well-being through better educational attainment and lower incidences of teenage pregnancy. Residential stability can be particularly important for low-income families to ensure children’s behavioral and cognitive development. In a nation where childhood poverty is estimated to cost up to $500 billion a year, homeownership and asset building can help reduce the societal and fiscal cost of poverty.
Savings are also the gateway to self-employment and job creation. As studies have shown, new and young businesses, including self-employment, are an important contributor to net job creation. Of the more than 20 million self-employed, over half have family incomes under $50,000. Microenterprise programs in the United States and overseas consistently demonstrate that self-employment is often the only source of work for the unemployed. Savings are key: Most of the initial financing for new business and self-employment comes from savings of the entrepreneur and friends, family, and associates. Indeed, one of the reasons that new jobs generated by new and young businesses have declined from a high of 3.6 million to a low of 2.2 million over the past several years is the decimation of savings.
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