The Secret Ingredient for Solving Economic Inequality: Savings

By and / 1.30.2013

In his second inaugural address, President Obama laid out a bold vision for solving economic inequality. “We are true to our creed,” he said, “when a little girl born into the bleakest poverty knows that she has the same chance to succeed as anybody else because she is an American.”

The president has hinted at a variety of approaches for solving inequality, ranging from education reform to job training. But he has yet to spotlight one critical ingredient: savings. Without an aggressive plan to help all Americans save and build wealth, genuine equality of opportunity is impossible.

Stagnant household incomes are unquestionably inequality’s principal source of nourishment. The Census reports 2011 real median income was down nearly 9 percent from its high in 1999.

But Americans are also held back by profound levels of household financial insecurity due to diminished savings and opportunities to build wealth. Consider this new data from the Corporation for Enterprise Development’s (CFED’s) 2013 Assets and Opportunity Scorecard:

· Fully 44 percent of American households, including nearly two-thirds of households of color, have less than $5,800 in emergency savings — or the cash to survive three months at the poverty level if an accident or job loss cuts off income.
· Families lacking this emergency cushion include one quarter of “middle class” households earning between $55,000 and $90,000 a year.
· Nearly one-third of U.S. households have no savings account at all.

The linkage between savings and opportunity is clear. Savings can buffer households from an unexpected financial crisis. A few grand in the bank can mean paying the mortgage versus facing foreclosure following a job loss.

Savings are also the launch pad to financial security. Owning a savings account, no matter how small, can help individuals build credit and practice good financial habits. Over time, the account can become a down payment, a college savings fund or small business start-up capital.

Finally, savings give people hope. Researchers at Washington University in St. Louis found that children with savings accounts in their own names are up to six times more likely to attend college than children without savings.

If President Obama is serious about inequality, savings should be central to his agenda. He should begin with three steps:

Make savings a part of tax reform

If Congress takes up tax reform, it shouldn’t miss the chance to create more effective incentives for helping all Americans save. The tax code’s current benefits for retirement, education and homeownership (via the mortgage interest deduction) are also the government’s largest savings programs, costing nearly $400 billion a year.

But many Americans don’t benefit. Millionaires get $188 in tax breaks for savings for every $1 middle-income families receive. One small fix, as Rep. Richard Neal (D-Mass.) has proposed, is to expand and make refundable the Saver’s Credit to provide a modest “match” to lower-income people saving toward retirement. Despite pressure to divert any revenues from tax reform toward deficits or lower rates, policymakers should at least preserve—but ideally enhance — the tax code’s fundamental role in encouraging savings.

Promote responsible homeownership

Despite the housing crash, homeownership remains the first rung of wealth for most families, accounting for one-third of Americans’ total wealth.

In the post-crash era, policymakers should create a “safe” path to homeownership that focuses on down payment savings and ensures that federally-supported homeownership counseling programs include access to a savings account. CFED research shows that low-income homeowners who bought their homes with the help of a specially matched savings account were one-third less likely to have faced foreclosure.

Policymakers should also consider expanding options for affordable homeownership. Manufactured housing, for example, is an often-overlooked but significant source of affordable homeownership, yet it is largely unsubsidized.

End federal penalties on low-income savers

Finally, policymakers should reform limits on the assets someone can have and still qualify for federal programs such as federal disability insurance and, in some states, food stamps.. Currently, beneficiaries typically can’t have more than $2,000 in savings and assets to be eligible for benefits. This not only causes undue hardship, it punishes savings and traps people in poverty.

Two good ideas, proposed by the Center on Budget and Policy Priorities, are to create a “safe harbor” for retirement savings and to index the current limit (untouched since 1989) to today’s dollars.

Savings is of course no silver bullet.

But as part of a multi-pronged strategy including better schools, better jobs and better wages, it’s essential to the new “opportunity society” the President seeks – and a critical component of sustainable economic recovery.

This item is cross-posted from the Hill. Anne Kim is a senior fellow at the Progressive Policy Institute.