Wealth Inequality: Its Causes and Cures
By Bob Friedman on 03/19/2013 @ 03:15 PM
The video, Wealth Inequality in America, went viral last Tuesday, scoring more than two million hits in less than a week.
Why the interest? A compelling video to be sure, albeit with data that has been around for awhile. It is the wealth gap that is truly stunning; the gaping chasm in wealth between virtually all Americans and the very richest one percent who control more than a third of all wealth. The wealthiest quintile of Americans owns more than 85% of all wealth. Perhaps the greater surprise is at the other end of the spectrum, with the poorest 80% of Americans (270 million people) owning less than seven percent of the nation’s wealth.
The trends are even more sobering (if that were possible): in the last 30 years, the wealthiest five percent of Americans amassed almost three-fourths of all gains, while the bottom 60% of the American people actually lost share (-5.4%).
Last week, Thomas Shapiro and his associates released a study of the causes of the tripling of the black-white racial wealth gap from $85,000 to $236,500 over 25 years. The prime determinants of the increase: duration of homeownership, household income and unemployment over the period.
Why is wealth inequality—and asset poverty—so great, and what should and can be done about it?
It is easier to assert that income inequality is at least somewhat earned—a reflection of work and merit. After all, salaries are reflected here, a clear tie to hours worked, and, arguably, to productivity as well. Earnings disparities due to wealth inequality are harder to justify, let alone explain. Does anyone think that the average billionaire contributes 400 times more to the common good than the average teacher, fire fighter or police officer?
One reason wealth inequality has grown to such an extent is because we fail to tax wealth gains, and we actually penalize low wealth people from pursuing exactly the paths they must to acquire a minimum of wealth: stability and hope.
Last year—like many years before last year—we awarded half a trillion dollars in tax breaks to homeowners, retirement savers and successful investors. Virtually all of these rewarded the richest 40-20-5-1%. At the same time, we denied the 60%--a majority of Americans—any incentive on their savings. In fact, for the poorest Americans, we went the other way, penalizing them for saving for their education, businesses, homes and futures.
There are many policies that have been suggested by New America Foundation newamerica.net, the Brandeis Institute on Assets and Social Policy iasp.brandeis.edu, the Center for Social Development csd.wstl.edu, the Initiative on Financial Security of the Assets Institute aspeninstitute.org, CFED cfed.org and others. But, since such a large part of current subsidies for wealth inequality pulse through the tax system, and since tax reform still appears on the political horizon, we must not miss the opportunity of tax reform to reduce and rationalize savings and asset-building tax incentives. Most crucial: provide a savings incentive to the poorest 60% of taxpayers who, as has been proven by well-documented demonstrations and history, will save, start businesses, buy and keep homes, go to college, create their futures and ours. This can be done for a fraction of the half-trillion dollars we spend annually with questionable effectiveness to incent saving and asset building by the wealthiest 20% of Americans.
We should encourage saving and asset-building—entrepreneurship, education, homeownership, employment—for many reasons, not just because it is fair and productive, but because it is the key to economic growth that we so need. We know that having even a few hundred dollars in savings makes kids 6-7 times more likely to aspire to and attend college, enables individuals to start their own businesses, allows the ill-housed to enter the ripening homeownership market. Research by John Haltiwanger and his colleagues at the National Bureau of Economic Research has established that almost all job growth in the past 30 years has come from new and young businesses—overwhelmingly businesses less than one year old. But investment in new businesses mostly comes from individual savings and savings of friends, families and associates; savings that have been largely wiped out over the last several years. This decimation of savings is a likely reason why job creation by new businesses has fallen from a high of 3.6 million annually before 2008 to a low of 2.2 million in the years since.
If we want to seed the next economy, lets open its doors to all, enabling them to build the skills, businesses and jobs of our future.
State Policymaker Champions Asset Agenda
By Nancy Brown, Guest Contributor and Jennifer Brooks on 03/15/2013 @ 10:00 AM
Nevada has the dubious distinction of ranking dead last overall in the 2013 Assets & Opportunity Scorecard. Both in terms of how families are faring and the strength of our policies, we have a long way to go.
To our advantage, however, we have a policymaker who is using her perch as state treasurer to take on the tough issues that stand in the way of financial security and opportunity. Nevada Treasurer Kate Marshall gave a keynote address at the Assets & Opportunity Summit, which the Financial Stability Partnership of Northern Nevada hosted on February 28 in Sparks, NV. In those remarks, the Treasurer spoke both of our victories and what else must be done.
- Building on the Silver State Matching Grant Program, which since 2010 has provided matching grant dollars to deposits made by qualifying Nevada families in a 529 account, Treasurer Marshall announced a new initiative to open college savings accounts for every kindergartener in 13 of Nevada’s rural counties. The initiative will serve between 2,500 and 2,800 kindergarteners.
- The Treasurer recognizes that as important as having money in the bank is, equally important is having the skills to effectively manage your finances and navigate an increasingly complex financial market. That’s why she advocated for legislation, which the governor signed, that requires personal finance be taught to all high school students.
- Treasurer Marshall also wants to do more to ensure that lenders can’t take advantage of consumers by charging sky-high interest rates to consumers. She wants to replicate Pennsylvania’s Better Choice program, which is a partnership between that Pennsylvania Treasurer and the credit union association to provide lower-cost alternatives to predatory payday loans.
- She is also passionate about removing the harmful savings cap in Nevada’s Temporary Assistance for Needy Families Program (TANF). The Treasurer reached out to Governor Sandoval last fall and requested that he eliminate the TANF asset test. The response was an incremental step forward: the state will exclude college savings from counting against the limit and the human services department is committed to working toward removal of the savings cap.
In a state like Nevada—which even before the recession—has been plagued by periods of boom and bust, Treasurer Marshall’s leadership is a critical arrow in our quiver to make sure Nevada’s policies support family economic security and families’ ability to save for the future.
The Ladder of Giving
By Bob Friedman on 03/14/2013 @ 12:00 PM
EDITOR'S NOTE: This post originally appeared on the 1:1 Fund's blog and can be read here.
“The highest form of charity is to help sustain a person before they become impoverished by offering a substantial gift in a dignified manner, or by extending a suitable loan, or by helping them find employment or establish themselves in business so as to make it unnecessary for them to become dependent on others.”
– Maimonides, 12th Century Jewish philosopher
The creation of the social safety net during the 20th Century – in the U.S. and Europe – represented major progress in the attempt to eradicate poverty. It is and was the essential move against hunger and homelessness and hopelessness. But its limits have also become clear: not only are benefits inadequate, but recipients are often penalized if they seek economic independence through education, training, home ownership, saving, or entrepreneurship. Perhaps most discouraging, dependence on benefits undermines recipients’ faith in themselves and the view of the public toward them: recipients often are viewed as dependents without skills, dreams, pride or promise.
I believe that the quest of the 21st Century is to build the ladder from poverty to self-sufficiency and prosperity, ensuring that the poor have a reasonable chance to save, go to college, and become skilled employees, entrepreneurs, homeowners and citizens – creators of wealth.
Over thirty years, CFED and our many allies, partners and friends, have proved – often with rigorous, random assignment, control group experiments – that, given a reasonable chance, low-income and even very poor people (and therefore, middle-income people) will save, go to college, buy and keep homes, start and grow businesses, and build futures for themselves, their children and the country.
The public sector has begun to respond – at the federal, state and local levels – with innovative programs like the Assets for Independence Act (Individual Development Accounts) and San Francisco’s pioneering Kindergarten to College program.
We created the 1:1 Fund with the belief that private individuals would also embrace this approach, and would be willing – even eager – to match the savings and efforts of low-income children and their parents who are doing the hard work of saving to prepare financially for college. Moreover, unconstrained by legislative restrictions, private matches could unleash the creative power of non-profits and low-income people to demonstrate new uses for matched savings beyond just college savings.
Maimonides – like leaders of many faiths – recognized that giving the gift of livelihood was the highest form of charity. The challenge for us at the 1:1 Fund is to make giving livelihood easy and widespread.
New Report Finds Car Title Loans Cost Consumers $3.6 Billion Annually
By Sean Luechtefeld on 03/13/2013 @ 01:00 PM
All too often, we hear the horror stories of consumers trapped by payday lenders, looking for a way to make ends meet and ending up in a vicious cycle of high interest rates and dwindling paychecks.
Equally problematic but less dominant in discourse about predatory lending is the impact car-title lenders have on American consumers. A collaborative study released last week by the Center for Responsible Lending (CRL) and the Consumer Federation of America (CFA) finds that car-title loans—small-dollar loans secured by the title to one’s own vehicle—cost U.S. consumers $3.6 billion in interest annually on $1.6 billion in loans.
The report, which you can read in full here or in Executive Summary-form here, finds that there are nearly 8,000 auto-title lenders in 21 states. On average, borrowers who use these outlets renew their loans eight times, paying a total average interest amounting to $2,142 on $951 of credit. In other words, the APR on the average title loan is a whopping 225%.
Never has the need to broaden access to safe financial products been more pronounced. Whereas having access to a no- or low-cost checking or savings account may not be the silver bullet for solving predatory lending practices, so many consumers are forced into predatory outlets because they lack access to mainstream financial services, either due to a troubled history of banking or because they lack the information necessary to make sound decisions relating to how they access their money.
Programs like Bank On work to change reverse this trend by increasing access to both safe financial products and quality financial education. With the right tools, consumers can (re)enter the mainstream banking industry and access their money without paying egregious interest.
If you have a minute, I recommend checking out the joint CRL/CFA report. It brings to light another dark spot in the predatory lending field while providing a thoughtful reflection on how we can improve financial access for all Americans.
2013 Action to Eliminate Asset Limits
By Ethan Geiling on 03/12/2013 @ 04:30 PM
Many public benefit programs— like cash welfare, Medicaid and food assistance—limit eligibility to those with few or no assets. Yet, these asset limits force low-income families to “spend down” personal reserves in order to get any government help. These reserves are precisely the kind of personal safety net that can keep families from falling deeper into poverty and help them move to financial security and opportunity.
Inconsistencies in the treatment of assets also mean confusion and a patchwork of complex rules with no overarching logic. And most importantly, asset tests send a signal that the poor should not save.
Many advocates across the country are pushing policymakers to take action on asset limits. In 2013, we’ve already seen significant (and almost all positive!) movement in ten states:
- Hawaii: Advocates in Hawaii have been pushing asset limit reform for many years with mixed success. However, last year, Hawaii enacted legislation requiring the Department of Human Services to study the impact of eliminating asset tests (read the report). This year, the Hawaii legislature introduced SB 1099 and HB 868 to eliminate asset limits in Temporary Assistance for Needy Families (TANF). The current TANF asset limit is $5,000.
- Nevada: The Department of Health and Human Services, at the urging of the State Treasurer Kate Marshall, recently announced that it will exclude 529s from the TANF asset test. The Department has also committed to re-evaluating the state’s asset limit policies, and may ultimately decide to completely eliminate the TANF asset test in the coming months.
- Massachusetts: The Midas Collaborative is working with State Senator Jamie Eldridge and Representative Linda Dorcena Forry to pass legislation that would increase the TANF asset limit (read a blog post).
- Nebraska: Voices for Children Nebraska is pushing legislation that would align asset limits in the TANF and child care subsidy programs with the SNAP asset limit, which was raised to $25,000 in liquid resources in 2011 (see a presentation about Nebraska asset limit reform from the 2012 Assets Learning Conference).
- Illinois: The Illinois Asset Building Group has helped introduce two bills (SB2319 / HB2262) that would remove the asset test in TANF. See these fact sheets for more information.
- Minnesota: Last year the Minnesota legislature required its Department of Human Services to study the impact of eliminating asset tests (read the report). The report concludes that if the state truly wants to support “greater stability and longer-term self-sufficiency …, current asset limit requirements [should] be eliminated completely…”
- California: Advocates in California are advancing legislation to exclude vehicles from the TANF asset test.
- Oregon: Oregon has introduced a bill to exclude modest retirement savings for IDA Initiative participants (check out Neighborhood Partnership’s summary here).
- Arkansas: Southern Bancorp Community Partners just released a new policy report examining state asset limits. Advocates plan to aggressively pursue asset limit eliminating this session.
- Oklahoma: Oklahoma is the only state where we’ve seen negative action so far. A bill is moving through the legislature (HB2017) that would reinstate the SNAP asset test at $5,000.
Since 1996, there has been a huge push to tackle this issue. Twenty-four states have eliminated Medicaid asset limits entirely, and all remaining states will be required to eliminate the Medicaid asset test by 2014 as part of the health care overhaul. Six states have eliminated TANF asset limits and 36 states have eliminated SNAP asset limits.
Two states have substantially increased the asset limits in their Medicaid or TANF programs, and 36 states have excluded important categories of assets from these limits in one or both programs.
Check out our Scorecard Resource Guide for more information about what states have done, research showing the effects of asset limit elimination, and case studies from states that have successfully eliminated their asset tests.
Income and Wealth in America Across Generations
By Sean Luechtefeld on 03/11/2013 @ 12:45 PM
EDITOR'S NOTE: We received notification of this first-of-its-kind tool from the folks at the Pew Charitable Trusts. We think it's a great way to show the cross-generational economic mobility of American families. Credit to the Pew Charitable Trusts for the content of this blog post.
This interactive tool by The Pew Charitable Trusts’ economic mobility project displays not only which Americans are more likely to exceed or fall short of the income and wealth held by their parents, but—for the first time—by how much. It provides a unique way to analyze absolute mobility in America and drill down into the specific effects of education level, race, and number of earners present in a household. Select findings include:
- 83 percent of Americans exceed their parents’ family income by at least $1,000.
- Half of Americans exceed their parents’ family wealth, and 47 percent have at least $5,000 less wealth than their parents.
- Having a college degree is associated with absolute upward mobility at all income and wealth thresholds and is especially important for upward wealth mobility from the bottom.
- Blacks are less likely to experience absolute upward income and wealth mobility than are whites.
- A greater proportion of dual-earner families surpass their parents’ family income than do single-earner families.
To check out this exciting, interactive new tool, visit the Pew Charitable Trusts' website.
Nevada Announces Groundbreaking New Children’s Savings Initiative
Last week, Nevada State Treasurer Kate Marshall announced a new initiative to open a college savings account for every incoming kindergartener in 13 of Nevada’s rural counties. The initiative will serve between 2,500 and 2,800 kindergarteners. Treasurer Marshall made the announcement at the Financial Stability Partnership of Northern Nevada’s statewide Assets & Opportunity Summit, held on February 28 in Sparks, Nevada.
The savings accounts will be seeded with a $50 initial deposit that can be used to pay for postsecondary education expenses at any U.S. Dept. of Education approved educational institution. Funding for the $50 deposits will come from program manager fees; no state taxpayer dollars will be used. An omnibus account will be administered by Upromise, the Nevada College Plans Programs program manager. This groundbreaking initiative builds on a previous innovative education program introduced by Treasurer Marshall. In 2010, the state of Nevada created the Silver State Matching Grant Program, which provides matching grant dollars to deposits made by qualifying Nevada families in a 529 account.
The Nevada initiative is part of a growing national movement to help low-income children save for college and learn how to manage their finances. The City and County of San Francisco paved the way for large-scale children’s savings programs when it launched the Kindergarten to College program in 2010, providing a $50 deposit to public school kindergarteners. In late 2012, Cuyahoga County in Ohio announced a similar initiative to open a college savings account for every incoming kindergartener in the county. Similar pilot programs are underway in Mississippi and Colorado.
Replication of these programs demonstrates the growing recognition by local and state governments that even a small amount of savings can have a dramatic impact on long-term expectations, particularly for low-income children who may otherwise grow up believing college is out of reach. Research shows that students with a college savings account are seven times more likely to attend college, regardless of how much money is in the account. This research reinforces what CFED has often said about savings accounts: they are hope in concrete form.
Take Action on Hunger with 'A Place at the Table'
By Veronica Weis on 03/07/2013 @ 11:00 AM
Most headlines concerning nutrition in America focus on rising obesity rates, especially among children. However, little attention is paid to the problem of food insecurity that leaves about 50 million low-income Americans victims of hunger, including nearly 17 million children. That's one in four kids.
To shed light on this important issue, A Place at the Table, a film concerning hunger in the United States, was released on March 1. As it points out, obesity and hunger are actually interrelated problems. Low-income families struggle to afford healthy, more expensive food despite having jobs, leaving them with empty calories and poor nutrition. To deal with obesity, we also need to tackle hunger.
One notable mention in the film is the role of federal food assistance through food stamps, otherwise known as SNAP, in curbing food insecurity. It suggests that these programs need to be reformed and expanded in order to combat the very solvable problem of hunger in this country. The documentary’s website offers a SNAP alumni gallery that features notable public figures who were once dependent on food stamps and rose out of poverty with the support of federal programs.
A Place at the Table shows the public that hunger poses serious economic, social and cultural implications for our nation, and that it could be solved once and for all. As in the past, if the American public decides that making healthy food available and affordable is in the best interest of us all, we'll be able to tackle this problem together.
The conversation doesn’t stop with the film. The producers and team see it as a call to action. Their website serves as a resource for all kinds of hunger-related advocacy. Take a look around and learn how you can become an advocate to end hunger in America!
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The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide
By Tatjana Meschede, Guest Contributor on 03/06/2013 @ 11:00 AM
EDITOR'S NOTE: CFED invited Tatjana to offer this guest blog post on IASP's groundbreaking new study on the burgeoning racial wealth gap.
Wealth inequality has become central to the debate over whether our nation is on a sustainable economic path. New research by Brandeis University’s Institute on Assets and Social Policy (IASP) shows the dramatic gap in household wealth that now exists along racial lines in the United States. The IASP study, “The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide,” followed 1,700 working-age households over what is now a 25-year period – from 1984 to 2009. This approach offers a unique opportunity to understand what happens to the wealth gap over the course of a generation and the effect of policy and institutional decision-making on how average families accumulate wealth.
This new study found the wealth gap almost tripled from 1984 to 2009, increasing from $85,000 to $236,500. The median net worth of white households in the study has grown to $265,000 over the 25-year period compared with just $28,500 for black households. The dramatic increase in the racial wealth gap has accelerated despite the country’s movement beyond the Civil Rights era into a period of legal equality and the election of the first African-American president. The resulting toxic inequality now threatens the U.S. economy and indeed, American society, the study concludes.
Setting out to determine what is driving the disparity today, IASP was able to statistically validate five fundamental factors that together account for two-thirds of the proportional increase in the racial wealth gap. Those five factors include the number of years of homeownership; average family income; employment stability, particularly through the Great Recession; college education; and family financial support and inheritance. While marriage is another factor that was studied, its impact is quite small. Unmistakably, the rise in racial wealth inequality cannot solely be attributed to personal ambition and behavioral choices, but rather reflects policies and institutional practices that create different opportunities for whites and African-Americans.
The report recommends that policymakers take steps such as strengthening and enforcing fair housing, mortgage and lending policies; raising the minimum wage and enforcing equal pay provisions; investing in high-quality childcare and early childhood development; and overhauling preferential tax treatments for dividend and interest income and the home mortgage deduction.
Why You Absolutely Need an Emergency Fund
By Catherine Hawley on 03/05/2013 @ 02:30 PM
EDITOR'S NOTE: This post originally appeared on SaveUp's blog here and was written by personal finance contributing writer, Catherine Hawley.
One important step in preparing for your future financially is building up an emergency fund. I heard an interesting story on NPR on the subject, “Study: Nearly Half In U.S. Lack Financial Safety Net.” It emphasized the importance of saving up an emergency fund and the fact that far too many Americans still don’t have one. An emergency fund must be in place before you can be effective with many other aspects of your finances.
If you’re not convinced, here are 3 reasons why setting up an emergency fund is important:
1. You have something to fall back on when an unexpected expense arises.
2. You avoid going into debt or pulling from retirement accounts if you are in need of funds.
3. You have peace of mind that if something were to happen to your job you could maintain your lifestyle (for a given period of time).
You might have heard the general rule of thumb about an emergency savings account; set aside between 3-6 months of necessary expenses. Some of my clients feel more comfortable with a years worth on hand, and that’s ok too. Be sure this money is accessible; put it in cash or a short term savings vehicle. That is important because you want to be able to withdraw it today if necessary, and be sure it won’t lose value.
It’s not always easy to start an emergency savings account, and some folks are trying to change that, which I’ll get to in a moment. Even if you only have a few hundred dollars to set aside that is a very important first step. If you just added $20 per week to your emergency account, after a year you’d have $1,040.
Rewards for Saving
Fortunately, there are things being done to promote savings and help people get ahead. Of course, SaveUp is one example, not only are they rewarding people to save, but some of their prizes are focused on the establishment of emergency savings such as a “Rainy Day Fund” worth $25,000 or a “Deposit to Savings” totaling $50,000. SaveUp’s model is similar to prize linked savings mentioned in the NPR story. Prize linked savings is offered though some credit unions and you have the chance to win a grand prize when you save.
Other states and organizations are catching on too. Maryland has established a program called Maryland Cash. They partner with a variety of both public and private organizations to help working families establish financial security. The Corporation For Enterprise Development wants to help low income Americans achieve the American dream and works with federal, state and local governments to form policy which will do so.
You can do your part by personally making emergency savings a priority, and of course, continue to SaveUp!
Insights from the Ideas for Action Awards: Financial Asset Building
By Veronica Weis on 03/04/2013 @ 04:00 PM
Many organizations nationwide are making great strides toward helping low-income individuals achieve financial security. Winners of the 2012 Ideas for Action Award offer innovative examples of those efforts and provide important models for success.
On Monday, March 18, Spotlight on Poverty and Opportunity will host a national audio conference, in partnership with the Evans School of Public Affairs at the University of Washington, the Northwest Area Foundation and the University of Minnesota's Humphrey School of Public Affairs, to explore programs that help families build financial assets. Speakers will discuss best practices for addressing immediate and long-term financial security, and present examples of unique approaches to implementing Individual Development Accounts in financial institutions such as credit unions.
- David Harrison, senior lecturer of public affairs, Evans School of Public Affairs, University of Washington
- Mae Watson Grote, executive director, The Financial Clinic
- Marybeth Foster, executive director, Iowa Credit Union Foundation
To register for this call, click here. You can also follow the conversation on Twitter using the hashtag #Ideas4Action.
Can America Save Itself? Tax Reform, Savings and Financial Security
By Emanuel Nieves on 03/01/2013 @ 12:46 PM
As Congress begins to move towards the first major rewrite of the tax code since 1986, they are presented with an opportunity to solve one of the biggest threats to Americans’ financial security: the lack of household savings. Our research shows that as many as 44 percent of American households – about 132.1 million people – don’t have a basic personal safety net to prepare for unplanned emergencies or the resources to live three months at the federal poverty line, which for a family of four is just $5,763.
This week, CFED sponsored a bipartisan policy forum titled: Can America Save Itself? Tax Reform, Savings and Financial Security that brought together two panels of experts to discuss potential opportunities in tax reform as well as other ideas that can help families save and ultimately become financially secure.
The keynote panel moderated by CFED’s president, Andrea Levere, consisted of Representative Richard Neal (D-MA), Representative Jim Gerlach (R-PA), and Jonathan Mintz, Commissioner of the New York City Department of Consumer Affairs.
Representative Richard Neal (D-MA) spoke about the behavior and thinking around personal and retirement savings, noting that many Americans (mainly younger) are not actively planning for retirement. He emphasized the need for additional savings by pointing out that income from social security alone is not enough for retirement. The Congressman highlighted the Automatic IRA Act of 2012, a bipartisan legislative proposal he last introduced during the previous Congress that would provide tax incentives to employers to set up Automatic IRA accounts to promote retirement savings at the workplace. Representative Jim Gerlach (R-PA) echoed Representative Neal’s comments but also added that as the House tax writing Committee works on tax reform he hopes to see a good, comprehensive piece of legislation that achieves three things: simplifies the tax code, is more equitable and encourages investment in the domestic economy.
Jonathan Mintz, Commissioner of the New York City Department of Consumer Affairs, spoke about need to provide an on-ramp for families to stabilize their finances in the short-term as well as build long term savings by making it as easy as possible for them to save. Commissioner Mintz discussed New York City’s SaveUSA initiative that is incentivizing families to save by strategically targeting them during a time when many receive a large sum of money at one time – tax season. The SaveUSA initiative partners with Volunteer Income Tax Assistance (VITA) sites throughout New York City to offer the opportunity to open a SaveUSA account at the time of filing with participants required to save a portion of their refund for a year and every dollar saved earns them a .50 match for up to $500.
The second panel of key experts, moderated by CFED Founder Bob Friedman, were asked to present one policy idea that they believed could help to support savings.
Pamela Everhart of Fidelity Investments spoke about the importance of defaults in program design and the role of employer-sponsored saving. She proposed changing the federal government’s guidance to employers on Safe Harbor 401(k) accounts from the current 3% savings default rate to 6%. She highlighted the level of inactivity seen on the part of the participant as another barrier for families to save enough for retirement with about 59% of workers within Fidelity’s portfolio staying at the 3% default rate. By changing the Safe Harbor guidance to require employers to set a 6% automatic savings default it would greatly help families save early, save more, and save enough for a range of retirement needs.
David John of The Heritage Foundation talked about the United Kingdom’s innovation with "corporate platform" accounts as an encouraging, flexible, and portable tool that can allow participants to simultaneously save for retirement while saving for other non-retirement related purposes. The accounts could greatly help with retirement account leakage as the non-retirement savings can be structured to meet needs such as mortgages, debt reduction, educational expenses, and a variety of other purposes. In addition, these accounts can also provide many lower income participants a bridge to other previously unknown savings opportunities and because of their portability they can include targeted financial literacy trainings as milestones are reached.
Reid Cramer of the New America Foundation discussed the need to elevate the conversation that savings are not just a long-term issue but also an intermediate and short-term issue. He highlighted the Financial Security Credit, which would replace the existing saver’s credit to help encourage, incentivize, and reward families who save.
Lisa Mensah of the Aspen Institute spoke about seizing the tax reform debate to address savings and financial security. She highlighted the Freedom Savings Credit, which would also expand the existing saver’s credit – currently missing about 69 million eligible Americans – by providing a match incentive to promote and reward saving.
The current tax code, as noted in our report, is upside down as it rewards millionaires an average of $96,000 a year in federal subsidies and tax breaks for their efforts to save, while those earning $19,000 a year or less receive less than $5 apiece. If we can turn this aspect of the tax code right side-up, provide the right tools and incentives and target families during key moments, many will save and ultimately achieve financial security.
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Only Half of Americans Have Good Savings Habits
By Katie Bryan on 02/28/2013 @ 04:00 PM
EDITOR'S NOTE: This post originally appeared on the America Saves Week blog and can be read here.
The sixth annual national survey assessing household saving, released February 25 as part of America Saves Week, revealed that only about half of Americans reported good savings habits.
For more information, please click here.
Children’s Savings Accounts: Helping Kids Attain Higher Education
By Vince Lampone on 02/27/2013 @ 09:00 AM
EDITOR'S NOTE: Vince Lampone interned with CFED's Savings & Financial Security Team in 2012 and is now pursuing a Master's in Public Policy at Harvard's Kennedy School of Government with a focus on educational achievement gaps.
For more than a century, the strength of the U.S. educational system has earned the envy of leaders worldwide, and fueled our country’s dominance in the world. Yet in past few decades, America’s number one perch in higher education has slipped out of our fingers. These days, three in five adults between 25 and 34 are failing to earn a four-year degree; this is no improvement upon their parents’ generation, and a lower college graduation rate than Russia and France.
This is an urgent problem. While a college degree alone is not an iron-clad guarantee of success, America’s current share of college graduates simply is not large enough to sustain our country’s competitive advantage in today’s global economy. And this failure explains so much of what we see in the newspaper and our own lives – growing inequality between the “haves” and “have-nots,” stubborn unemployment and an economy that continues to function well below its full potential.
Particularly vexing is the widespread academic misfortune of today’s low-income children: only one in ten kids from economically disadvantaged families is currently earning a Bachelor’s degree.
How do we improve upon this situation? Politicians give us standard-issue solutions – breaking up teachers’ unions, distributing vouchers for private education, increasing financial aid. Each may be worth exploring. Yet they all overlook one of the most important barriers to educational success: a lack of motivation and psychological investment among many children themselves. If young people don’t believe that “kids like them” are made for college, and they aren’t intrinsically committed to it, then all the academic and financial readiness in the world won’t convince them to take full advantage of their opportunities.
This is why one solution – Children’s Savings Accounts specifically devoted to higher education – holds such great promise. Imagine a country in which kids, no matter their means, know that they have a special pot of savings dedicated in their name, for the sole purpose of attending a college or vocational school of their choice when they grow up. Furthermore, imagine what would happen if every child and parent received effective training on how to save for college, along with financial incentives to save, and education on the exciting career paths that a college degree opens up to bright young minds.
We all know that skyrocketing tuition fees have pushed higher education out of reach for too many families. Children’s Savings Accounts (CSAs) are one way to empower all families with a tax-free way to build the financial assets necessary to secure a path to college. Even more importantly, these accounts serve as a powerful vehicle for lifting children’s expectations about what they can achieve for their own futures. In both cases, the strong potential of CSAs to succeed is based on the principles of behavioral science that underpin their design.
Investing the effort for college preparation is a classic example of what behavioral psychologists call a “want/should conflict.” In other words, kids may see a college degree as a distant goal, but Hannah Montana is more compelling for them this afternoon. Parents and educators can help children build their commitment to academic work by enlisting concrete “buy-in” for their future college attendance from a very young age. This helps them to construct a college bound identity that can be further reinforced by adults over time, and that is more resistant to outside temptations.
To put it another way: When a young girl saves pennies and dollars in her savings account, she is openly and freely committing to the goal of attending college. By making this public declaration, she subconsciously reinforces her motivation to act in ways that support this goal. (After all, she doesn’t want to back down on what’s she’s expressed to the people around her!) This makes the prospect of not following through more painful – and the likelihood of actively investing in her studies more real.
For both kids and their parents, CSAs offer another essential perk – funds invested in a Children’s Savings Account can only be used for higher education, not for any other purpose. Thus, like a 401(k), this pool of money cannot be raided for emergencies or impulse purchases. This program feature is particularly valuable for low-income children, whose families often discount the value of long-term savings in order to meet their immediate needs.
Without concerted intervention, too many children will miss out on the well-documented benefits of higher education, suffering from limited life opportunities and human potential as a result. This does not have to be the case.
Call for Presenters: National Community Tax Coalition 2013 Conference
By Veronica Weis on 02/26/2013 @ 03:00 PM
The National Community Tax Coalition is holding its 9th national conference this September in New Orleans. This year’s conference centers on advancing, sustaining and growing the community tax preparation and asset building field. It is clear that there has been a significant shift in the landscape, with tax reform, affordable health care, and improving the nation’s fiscal health all being national priorities. It is essential that the VITA field seize the moment and realize the opportunity to design and launch innovations in sustaining the viable services that are provided to the most vulnerable and most difficult-to-serve populations by elevating promising practices, practical policies and applied research that will move the field forward.
In preparation, they'd love for engaged, knowledgeable partners such as you to consider not only joining them, but presenting on matters of interest to their members and conference attendees - hundreds of folks who are interested in helping low- to moderate-income, working people through good policies and practices involving taxes, community-based tax preparation, asset building and financial education services, among other things.
Please take a look at the invitation to present here and note that the March 8 deadline for submission of proposals about workshops and research papers is fast approaching!
Six Steps that City Leaders Can Take to Increase Family Economic Security
By Kristin Lawton on 02/25/2013 @ 02:30 PM
EDITOR'S NOTE: We're happy to help promote National League of Cities' webinar this Thursday, which features CFED's Chief Program Officer, Ida Rademacher.
You're invited to a free, hour-long webinar, which will be held this Thursday, February 28, at 2:30 pm EST. The webinar will feature strategies described in a new report published by the Corporation for Enterprise Development (CFED) and the YEF Institute. The report, Taking the First Step: Six Ways to Start Building Financial Security and Opportunity at the Local Level, highlights innovative, low- or no-cost ideas for how city officials can get started in helping families achieve financial stability. These strategies include raising awareness about available services and consumer protections; increasing access to financial education and safe, affordable financial products; preventing foreclosures and predatory lending; and developing model human resource policies.
Webinar speakers will include:
- Sybongile Cook, Program Manager - Economic Development, Banking Bureau, Department of Insurance, Securities and Banking, District of Columbia
- The Honorable Ann M. Horton, Mayor Pro Tem, City of Bryan, Texas
- Ida Rademacher, Chief Program Officer, CFED
Speakers will discuss how the six strategies featured in the report have laid the foundation for robust, citywide financial empowerment agendas.
Gearing Up for America Saves Week 2013
By Kim Pate on 02/22/2013 @ 02:30 PM
America Saves Week 2013 officially kicks off on Monday, February 25 and runs until Saturday, March 2! CFED is joining hundreds of leading not-for-profits, government agencies and financial institutions to support the week-long event coordinated by America Saves and the American Savings Education Council. Started in 2007, ASW is an annual opportunity for organizations to promote good savings behavior and a chance for individuals to assess their own saving status. Typically thousands of organizations participate, reaching millions of people.
CFED plans to share America Saves Week content next week on Twitter and Facebook so please follow the conversation along with us there using #ASW2013. Ready.Save.Grow., a campaign sponsored by the U.S. Department of the Treasury's Bureau of the Public Debt, complements this year’s America Saves Week theme of “Set a Goal. Make a Plan. Save Automatically.” For example, people can start saving with just $25 to buy U.S. Savings Bonds. Plus, contributions can be made to TreasuryDirect accounts by using annual tax refunds and IRS Form 8888, and automatically through payroll direct deposit.
If you're interested in raising up this important campaign next week through your networks, the U.S. Department of the Treasury is offering sample newsletter content, social media posts or a banner for your organization's website in a toolkit. You can also download the official ASW 2013 toolkit here.
College Board’s 2013 CollegeKeys Compact Innovation Award Presented to FUEL
By Jimmy Crowell on 02/21/2013 @ 11:00 AM
Last month, at the College Board’s New England Regional Forum, the CollegeKeys Compact Innovation Award was presented to Families United in Educational Leadership (FUEL). FUEL, a Boston-based nonprofit that motivates and assists low-income families trying to access higher education, won the award for demonstrating innovation and success in increasing the number of low-income students entering and completing college. Along with this recognition, the organization will receive $5,000 from the College Board to support their programs.
FUEL, which offers programs that help students save for college, identify local scholarships and prepare for academic success, was also recognized by the College Board for their impact and potential to be replicated and brought to scale. The award is given to high schools, colleges or nonprofit organizations across the country that can demonstrate their efficacy in combating the financial and social barriers that often limit the amount of low to moderate income students that attain college degrees.
“Guided by the College Board’s principles of excellence and equity in education, the Advocacy & Policy Center works to ensure that students from all backgrounds have the opportunity to succeed in college and beyond,” said Christen Pollock, Vice President, College Board Advocacy & Policy Center. “The winning programs embody the mission we seek to fulfill, and we are proud to support them as we work towards a common goal.”
CFED’s President, Andrea Levere, has also been an advocate for FUEL’s expansion and development by serving on their Advisory Board. CFED applauds FUEL for their award and for their dedication to bringing incentivized college savings accounts to low-income students.
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New From Citi: Money Matters EITC Report
By Sean Luechtefeld on 02/20/2013 @ 10:30 AM
For the second time, Citi has created Money Matters, a free publication available in English and Spanish that is customized for a number of states across the country. This four-page publication is designed to enable hard-working taxpayers to take advantage of the tax benefits that are available to them, and provides information on savings, claiming the EITC, and connecting with local organizations. Most importantly, Money Matters provides lists of local Volunteer Income Tax Assistance (VITA) sites, where IRS-certified volunteers provide free assistance with preparing and filing tax returns.
One of the most important services that these volunteers provide is to ensure that working people claim the benefits to which they are entitled, like the Earned Income Tax Credit (EITC), which can result in substantial tax refunds.
The Money Matters publication provides details about the EITC, the availability of free tax preparation services through the VITA program of the Internal Revenue Service (IRS), partner spotlights and helpful tips on how to save your money and make the most of your tax return.
To read the Money Matters publications, visit the Citi Community Development website today.
New Data on Student Debt Highlights Need for College Saving
By Carl Rist on 02/15/2013 @ 10:00 AM
Last week’s release of CFED’s 2013 Assets and Opportunity Scorecard was another reminder that too many American families are living on the edge. One particular finding that is drawing considerable public attention is the growing burden of student debt on American households. According to data from the Institute for College Access and Success (as reported in the Scorecard), 66% of all seniors graduating from four-year colleges are carrying student loan debt, and the average size of that debt is more than $26,000. One wonders about the future of young graduates in states such as New Hampshire, which has both the highest average debt per college senior ($32,440) and one of the highest rates of graduates with debt (75%). Given these statistics, it should be no surprise that, as the Scorecard reports, default rates for student loans are on the rise. In the most recent year for which data is available, 13.4% of borrowers (almost 1 in 7) had defaulted on their student loans, indicating that recent graduates have either unsustainable debt burdens or have been unable to secure jobs that pay a sufficient wage to cover debt payments. Some of the worst statewide default rates (e.g. Arizona’s at 22.9%) make student debt look like junk bonds.
So, what is the average American household to do? On the one hand, data indicates that college graduates earn, on average, almost $1 million more than high school graduates. What’s more, President Obama has pledged to increase the college graduation rate in the U.S. to improve the global competitiveness of our economy. On the other hand, mounting college debt and the related financial stress would seem to make earning a degree a daunting challenge. In fact, new findings from the National Survey of Student Engagement indicate that money troubles interfere with the academic performance of about one-third of all college students.
One solution that’s gaining traction sounds old-fashioned, but it works: saving for college. Research indicates that a student with a college savings account is four times more likely to go to college, and six times more likely if the account is in his or her name. But saving is difficult for all households – less than 50% of American families with dependent children have college savings, according to a FINRA survey, and it is even more difficult for low-income households who face significant challenges meeting day-to-day expenses. Indeed, given the financial barriers to college success, it is no wonder that less than 10% of students from low-income homes graduate from college by their mid-20s.
That’s why CFED has created the 1:1 Fund, an online community that promotes saving and educational opportunity for low-income students. We believe in the importance of saving for college and want to bring this opportunity to all children, especially those from lower-income backgrounds.. Leveraging the power of social and traditional media, the 1:1 Fund connects low-income students with individual donors who match their savings in qualified children’s savings accounts (CSAs). Donors can search online to find the community or sponsor organization they would like to support and are assured that all matching funds will be held until the child reaches college age and will only be used for qualified educational expenses. To find out more, go to www.1to1fund.org.
Graduating from college has long been part of the American Dream, and it especially critical for expanding opportunity for children from lower income families. With help from the 1:1 Fund and our donors, young savers not only build a nest egg for college expenses, but they add college and a bright future to their goals and dreams.
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