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. Research 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, and the wealth gap between the rich and poor is getting larger.
How Did the Wealth Gap Get So Large?
While there are many factors that have contributed to the wealth gap in the U.S. (globalization, decline of unions, stagnant wages for the bottom 90 percent), tax policy has been a significant factor in the redistribution of wealth upward the last three decades.
For the decades following World War II, the U.S. tax code remained very progressive. During that time, the income tax rate for the wealthiest individuals ranged between 70 and 90 percent. That started to change under President Ronald Reagan. During his presidency, the top marginal rate was slashed from nearly 70 percent down to 28 percent, where it stayed until the 1990s. In addition, payroll taxes were increased. This meant a huge income tax cut for the wealthy but higher overall taxes for middle class and low-income Americans. The top income tax rate was raised to nearly 40 percent under President Clinton, it was again cut to 35 percent by President George W. Bush in 2001, before returning to the Clinton levels in 2012.
Cuts in taxes on capital gains and dividend income have also had an enormous impact on the wealth gap. Capital gains are income generated from the sale of investments, whether property, stocks, or bonds. These assets make up the bulk of income for people at the very top, who rely less on salary income than working individuals and families. Between 1997 and 2007, Congress cut the capital gains tax rate in half, from nearly 30 percent to 15 percent, before it went back up to 23.8 percent in 2013 when temporary tax cuts expired. This means that billions of dollars in investment income each year are taxed at rates lower than what many middle class taxpayers pay on their ordinary income. It is estimated that the preferential tax rates on capital gains and dividends will cost the federal government over $1.3 trillion over 10 years, with most of the benefit going to wealthy taxpayers. In addition, cuts to the federal estate tax, a tax on inherited wealth which affects less than one percent of the population, have further helped concentrate wealth at the very top.
Additionally, the government has long encouraged asset development through tax incentives that disproportionately benefit middle- and upper-income households. CFED's Upside Down Report shows that of the $400 billion in the four largest wealth-building tax incentives, nearly 80 percent goes to households in the top income quintile while only 3 percent goes to bottom 40 percent of households - those making less than $77,000. 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 Financial Security Credit (FSC; formerly called the Saver’s Bonus) uses the tax system to provide incentives for low-income families to save. Households can only receive the credit 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 can also receive a 50% match for deposits made into these accounts, up to $500 per year. FSC legislation was introduced in the House by Representative Jose Serrano (D-NY) as H.R. 2917 - the Financial Security Credit Act of 2013. The Senate is expected to introduce similar legislation sometime in 2014. See our Financial Security Credit page for more details.
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 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. Legislation has been introduced to address these limitations to the Saver’s Credit. The Savings for American Families’ Future Act of 2013 (H.R.837) would make the credit refundable, allowing low-income families to benefit. The bill will also create a 50 percent match for the first $500 of savings (increasing by $100 each year until it reaches $1,500) and increase the income eligibility thresholds to allow more families to receive the credit.
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.