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Enabling Families to Weather Emergencies and Develop

The Role of Assets

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Document date: July 16, 2008
Released online: July 16, 2008

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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Abstract

Low-wage jobs can be unstable, leaving families struggling to cope with employment gaps and financial emergencies that can strike without warning. About four in five low-income families are "asset poor," lacking enough liquid savings to live for three months at the federal poverty level without earnings. In this essay, McKernan and Ratcliffe suggest a cluster of policies that would improve financial markets and savings opportunities for low-income families across the life cycle.


Introduction

Low-wage jobs can be unstable, leaving families struggling to cope with employment gaps and financial emergencies that can strike without warning. Such means-tested social programs as Temporary Assistance for Needy Families (TANF) and Food Stamps and such social insurance programs as Unemployment Insurance can help families weather hard times, but not all families are eligible for these benefits. For example, only 22 percent of low-income families with an unemployed worker for some part of 2006 received unemployment insurance benefits. Further, these program benefits may not cover families’ rent, utilities, and food. One potential solution to this problem is asset building: savings and assets can help low-income families weather unexpected employment gaps or pay unexpected medical and car-repair bills, as well as realize such long-term goals as owning a home or financing retirement. This essay discusses low-income families’ needs for assets and examines promising policies aimed at addressing them.

Asset Holdings of Low-Income Working Families

Most low-income working families have too few assets to weather emergencies. Over three-quarters of low-income working families are “asset poor”—without enough assets to finance consumption for three months at the federal income poverty level. Yet, unemployment spells average two to four months (Caner and Wolff 2004; Vroman 2007). If only financial (i.e., liquid) assets are considered (e.g., savings, 401(k), bonds), then nearly 80 percent of low-income working families are asset poor—highly vulnerable to eviction and other financial vagaries and assaults. The asset picture improves if net worth is considered, but it is still tenuous. In this case, just under half (44.9 percent) of low-income working families are asset poor. While an improvement, this still leaves roughly half of families in precarious financial situations. At the bottom of the asset totem pole, nearly 30 percent of low-income working families have zero or negative net worth. Overall, the median net worth among low-income working families is $6,565 (table 1).

A closer look at low-income working families’ asset holdings reveals that the typical family has limited savings and does not own a home or have a retirement account. Many such families have no car. A slim majority (56.5 percent) of low-income working families has a bank account, but often it is too small—$800 is the median—to see a family through even a short employment gap or other financial emergency. These overall numbers mask asset differences by age, race, and family structure. The percentage of low-income working families with bank accounts, for example, differs by nearly 30 percentage points across racial and ethnic groups, from 67 percent for white families to 44 percent for Hispanic families and 38 percent for black families. Earnings among families with bank accounts also differ by demographic group. For family heads from age 30 to 39, the median is $707, rising to $1,460 for those age 50 to 60. Similarly, the median level of bank account savings is $305 for single female-headed families and $1,000 for two-parent families.

Few in this population save for retirement. Only 21.2 percent of low-income working families report having any type of retirement account (table 1). Families headed by older adults are slightly more likely to have one—26 percent versus 17 percent. These accounts have a median value of $10,000— not much when spread out over an individual’s expected retirement years but not trivial as a defense against the unforeseen either. The value of families’ retirement savings varies by age, from roughly $6,000 for 30- to 39-year-olds to $23,000 for 50- to 60-year-olds. Low retirement savings rates may reflect lack of an employer-sponsored retirement savings plan or the diversion of funds to more pressing needs. Also, fear of penalties for early withdrawals for bill-paying or other unauthorized uses of these funds may discourage saving for retirement. As Beverly, Schneider, and Tufano (2005) document, the most common savings goal among a sample of low-income tax filers in Tulsa, Oklahoma, was “general precautionary”—or rainy day—savings. Further, many of the tax benefits that better-off families enjoy for saving for retirement elude low-income families because their tax bills are relatively low.

Homeownership is more prevalent than retirement savings among low-income working families. Nearly half (45.6 percent) own a home, and the median value of home equity for these homeowners is $45,000 (table 1). Homeownership among low-income working families differs substantially by race and ethnicity. While 56 percent of white families own a home, only 38 percent of Hispanic and 25 percent of black families do so. For the U.S. population, homeownership rates increased steadily between 1994 and 2004 but have since decreased with the current housing crisis. In 2007, homeownership rates fell below 2003 rates.

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Topics/Tags: | Economy/Taxes | Families and Parenting | Poverty, Assets and Safety Net


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