There are a discouragingly large number of reasons to see a bleak economic future for many Americans, including rising inequality, low social mobility, and shockingly pervasive financial insecurity. Princeton economists Anne Case and Angus Deaton have documented “deaths of despair” tied to deterioration in economic and social wellbeing that creates a “cumulative disadvantage” that is all but insurmountable.
A recent study found that men’s lifetime earnings have been falling since 1942. Women entering the workforce meant that overall household incomes increased until 1999, but they have been falling since. Another paper found that American children’s chances of earning more than their parents have been shrinking for 50 years. Where 90% of children born in 1940 earned more than their parents, only 50% of the generation entering the labor market today will earn more. The middle class has been particularly hard hit by that trend.
Carol Graham, a Brookings Institution researcher, told the Washington Post that hopelessness can be passed down from generation to generation. She is looking for lessons in the lives of those who demonstrate resilience. She asked, “Why do some people maintain hope, when they’re not advantaged in terms of education, skills, or jobs?”
According to Andrea Levere ’83, president of the nonprofit Prosperity Now (formerly CFED), one important factor in maintaining hope is the ability to build assets. She talked to Yale Insights about the daunting scope of the problem and the policies and programs that can make a difference.Q. By many measures we’ve seen a significant recovery since the Great Recession. What does the economy look like to low-income families?
Fourteen percent of American households meet the formal definition of poverty, but many more households are really struggling to make ends meet. When Prosperity Now looked at financial insecurity more broadly, we found 44% of households are in liquid asset poverty. That is, they don’t have the savings to cover basic expenses for three months if their main source of income is disrupted—they lose a job, get sick, or face some other financial shock. Similarly, when the Federal Reserve asked households if they could cover an unexpected $400 expense without selling something or borrowing, 46% percent of Americans said they could not. Focusing on assets changes the entire conversation. Instead of “those poor people,” it’s nearly half of us.Q. What led us to this?
There are a range of reasons, but Jacob Hacker, a Yale professor, has written about how we have shifted more and more risk to individuals and households. We have to manage all sorts of risks that used to have institutional supports. Pensions have all but disappeared, leaving many with no retirement fund automatically set aside other than Social Security, even as steady income is turning into volatile income as long-term employment gives way to the gig economy.
For so many people, income is a safety net. We’d like it to be a ladder to economic opportunity. We need to figure out how to help each person, wherever they are starting on the income continuum, build the assets that it takes to attain financial strength, stability, and opportunity.
A decade ago, we might have thought that a class in financial education would solve all our problems, and while education is key, we now know that it’s insufficient. People need to combine knowledge and actual experience in opening bank accounts, in saving over time. And we need to ensure that the financial structures that families and individuals rely on are safe and affordable. We know these core elements can be put together successfully, but not nearly enough people have access to the knowledge and the structures. Changing that is a huge focus of Prosperity Now's work.Q. Which structures are helping low-income households and which are hurting?
If there’s anything we’ve learned from the explosion of predatory lending, it’s that there’s lots of money to be made in low-income communities. Unfortunately, too much of it is undermining the long-term financial security and stability of those communities. About one quarter of American consumers are either completely unbanked or underbanked.
Underbanked means they have some kind of mainstream account, but they still use alternative financial services such as a check casher, payday lender, or rent-to-own store. On average, a financially underserved person spends $2,400 a year on fees and interest.
I spend nothing on fees or interest, yet those with much fewer resources too often pay too much. If we simply solve the question of getting people access to fair and affordable banking, and they save just half of what’s currently going to fees and interest, they’d have over $1,000 in the bank each year.
One of the single most important institutions that has been created to address this is the Consumer Financial Protection Bureau. In just five years, it has returned $12 billion to consumers who were unfairly treated by a whole set of financial institutions. But today that bureau is under serious threat.Q. How does the tax code shape opportunity and asset building?
In 2015, the tax code provided $660 billion to build the wealth of Americans, of which the overwhelming majority doesn’t just go to the top 1%, but to the top 0.1%. Virtually nothing goes to the bottom 60% of the income scale.
The economic productivity and growth of the nation would benefit enormously by providing more incentives to low-income people to help them save and create a more stable future. Along those lines, Prosperity Now is co-leading with PolicyLink a national coalition called the Tax Alliance for Economic Mobility, which is a group of over 30 organizations, all focused on how we turn the tax code into a tool to address both wealth inequality overall as well as the racial wealth gap.
The earned-income tax credit and child tax credit are the most effective anti-poverty programs in America for working adults. And for many low-income families, tax time is when they see the largest amount of cash all year. From behavioral economics, we know that many tax filers already have spent their refunds “in their heads” before they file their taxes. If we want to encourage low-income taxpayers to consider the opportunity to split the refund so some goes to savings, we need to talk to them earlier and we need to make things as automatic as possible, perhaps even creating an account where the refund will be directly deposited. One basic idea would be to create a tax credit that matches what low-income taxpayers set aside as we have done in legislation recently introduced call the Rainy Day Savings Act.
We’ve learned through years of research, demonstrations, and experimentation that assets are hope in concrete form. We did a national demonstration almost two decades ago with individual development accounts, which are match savings accounts to build long-term assets such as buying a home, investing in education, or starting or expanding a business. One of the most unexpected outcomes from that research was that the lowest-income people saved the highest percentage of their resources. When asked why they did that, they said that was the price of hope.
We have a guiding assumption at Prosperity Now that low-income people have more capacity than opportunity. Our task is to create the on-ramps into the economy to allow them to be productive. In the context of profound changes in technology and an uncertain economy, we need more and better on-ramps.Q. How does race play into opportunity, financial well-being, and asset building?
We published a report with the Institute on Policy Studies which showed that if black wealth continues to grow at the same rate it is growing today, it would take a black household 228 years to match the average wealth of a white household today. It would take a Latino household 84 years. This level of disparity is unconscionable. It is the result of centuries of racism and discrimination which, in many ways, continue today.
When you look at the enormity of this gap, it’s clearly going to require multiple strategies to address. One of the areas we focus on is housing because it continues to be the largest source of wealth for Americans, and we provide it with some of our deepest subsidies. Black and Latino households lag white households by 30% in the rate of home ownership. Are we using taxes and other incentives to support asset building effectively?
The Institute on Assets and Social Policy at Brandeis University has developed a tool that helps assess whether policies reduce or increase the racial wealth gap. On the face of it, the mortgage-interest deduction should benefit everybody, but people of color don’t have the savings to be able to put a down payment down on a house. White people get access to down-payment savings from their families at a dramatically different rate than people of color because of the wealth gap.
Even if we think we’re doing the right thing, we may be exacerbating the wealth gap. We’re not all starting at the same place, and only by bringing this very specific lens do we understand we may need to very explicitly look at how to help these families build a down payment so they can benefit from the policies that are already helping others. We could support home ownership and help with down payments by capping the mortgage interest deduction, which is one of our largest expenses.Q. Does education play a role in providing more opportunity?
In a demonstration on children’s savings accounts, we found in our largest experimental site, five Head Start centers outside Detroit, that the majority of the parents had given up on their children going to college by age three. It’s not because they love their children less; they thought they could never afford it. One of the heartbreaking parts of that is their understanding of the net cost of college for someone in their income level was wrong. They hear what it costs an upper middle class person to go to a school like Yale and think, “I could never afford that. I don’t want to create those expectations in my child.” Part of our work with building financial capability and savings is to help people understand what different educational paths cost for someone in their income bracket. How does a Pell grant change the math? What would it look like to go to a community college or a public university? With better information, there is an option that is a realistic aspiration for their child.
Research has shown a child with a savings account in his or her own name with as little as $500 in it is three times as likely to go to college and four times as likely to graduate as a child without. We also know that currently only one in ten children from a low-income family graduates with a four-year college degree by their mid-20s.
We know this is a situation that must be addressed. In 2015, we launched the Campaign for Every Kid’s Future to make sure that 1.4 million children have a child savings account by 2020, and every child in America by 2025.
We’d like to see national legislation to support making savings accounts available to every child in the United States. Over the last several years, the ability to do major legislation has been at the state and local level. We’re using that as an opportunity to incubate innovations and create lessons for when we can move forward at the national level.
It would have a profound impact on the next generation, but also we’ve learned that parents will do for their children what they won’t do for themselves. We’ve seen in Mississippi, and many other communities, that parents get banked when their children are banked, and, in that way, begin to build their own financial capability.
[This article has been reproduced with permission from Qn, a publication of the Yale School of Management http://qn.som.yale.edu]