In order to understand the need for programs like Opportunity Fund, experts on IDAs like Washington University professor of social work Michael Sherraden say it is important to understand some of the barriers low-income families face when trying to save. The answers, according to Sherraden, aren’t about behavior or income but are caused by structural issues.
Lack of incentives are a big part of the reason low-income Americans don’t save as much as they could, according to Sherraden. The three largest asset-building programs in the United States (the mortgage interest deduction, the property tax deduction and preferential rates on capital gains) basically don’t apply to the poor, Sherraden said. Forty-five percent of these subsidies go to the “1 percent,” or households with an income that exceeds $1.25 million, according to a 2010 report from the Corporation for Enterprise Development. By contrast, the bottom 60 percent of households only receive 3 percent of the benefits of these subsides.
“Wealth inequality in this country isn’t happenstance,” Sherraden said. “The government encourages asset development for the middle and upper income earners through tax incentives.” During his career, Sherraden says he has been saving for retirement. "I am possessive of that money," he said, "as most people are about their savings, but what we often forget is that we'd all had enormous public assistance [in the form of tax credits] to save that money."
It also is a misconception that the poor don’t save. According to research done by the Urban Institute, they just have difficulty hanging on to those savings long-term. People living near the poverty line generally are employed in part-time and temporary jobs and because of that those workers are the most susceptible to reduced hours and layoffs. Since their income is unpredictable, the working poor actually need to save, knowing that sometime in the not too distant future they will need it to pay for essentials like car repairs, groceries or medicine, according to Urban Institute research. These are immediate needs that can’t easily be put off, which makes accumulating savings for larger purchases, say a down payment on a home, extremely difficult.
Benefits of saving
Having assets, including tangibles like savings accounts or personal property, and intangibles, like education or access to credit, improves economic well-being, according to a 2010 report from the New America Foundation. Of those surveyed, nearly 80 percent said that money is a source of stress in their home. Families who reported they had enough in savings to cover three months of expenses in the event of job loss, regardless of their income level, reported considerably lower levels of economic stress.
Households with savings also tend to be more stable. Illness, job loss and divorce can lead to sudden income shortfalls, said Sherraden. “A stock of assets can help bridge these periods of financial need and reduce the chances of household disruption,” he said. The family will be less likely to have to move because they can’t pay their rent, less likely to go without food and less likely to have utilities turned off for failure to pay.
Having assets may also help people think more about the future. Saving money gives people a sense of security. “When people are secure in the present, they look to the future,” said Sherraden. His research shows that people with assets are more optimistic about their ability to suceed, regardless of income levels. Sherraden reasons that part of this mindset may be related to the fact that saving is difficult, and successfully accumulating a particular sum of money gives people a sense that they can do hard things.
Saving may also improve child welfare, according to Sherraden. When parents accumulate assets, they pass that wealth on to their children. In this way, saving may actually help to reduce intergenerational poverty because instead of passing on debt to their children, parents pass on their assets. Children who have savings accounts in their name are six times more likely to go to college. Sherraden also has found that saving is positively correlated with marital stability.
The end of poverty?
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