30 FALL 2012

BOB FRIEDMAN, YING SHI, & SARAH ROSEN WARTELL

to cover housing costs, and 20 million of them pay more than half. Further, only
one in four families that would qualify for federal housing assistance currently
receives it. And housing assistance funding is expected to decline in 2013 and
likely will continue to decline as the country grapples with its scal challenges.
Meanwhile, approximately seven million owners of manufactured homes
in parks and on owned lotswith incomes that average around $30,000 live in
almost completely unsubsidized housing. Almost three million of them live pre-
cariously, faced with the chronic risks of displacement through change of land
use, unforeseen increases in the rents they pay for the land under their homes,
and underdeveloped lending markets that make it expensive to purchase or
improve their homes and difcult to sell them.
How can we best protect the interests and assets of these Americans? Easier
nancing terms for both homes and co-ops and support for training and techni-
cal assistance would be a start. Project subsidies for health-and-safety improve-
ments like water and septic systems would be valuable as well. Other policy
solutions would have to occur on the state level, as consumer-protection laws
in this sector are still largely the domain of the states. Some of those protections
include increasing notice periods for park closures, using receivership when
neglect of infrastructure becomes a health risk, and creating tax incentives for
resident ownership.
It is incumbent on us to preserve and stabilize this naturally affordable hous-
ing stock. It is simply unacceptable to punish families that embody the national
ideal of self-sufciency by raising the cost of being poor. D
Savings: The Poor Can Save, Too
Bob Friedman, Ying Shi, & Sarah Rosen Wartell
W
hen some people think about poor and low-income families, they often
hastily conclude that these are nancially irresponsible households
that cannot or do not save. This view was unfortunately and wrongly
reinforced by the housing collapse, when many low-income homeowners with
subprime mortgages lost their homes.
But that assumption is wrong: Lower-income families can and do save. The
foreclosure crisis was as much due to badpredatorylending and stagnant
incomes as to inadequate saving. Indeed, getting low-income households to
save following the terrible loss of wealth suffered by millions of Americans
in the Great Recession will be essential to restoring our prosperity. While
improving consumers buying power will always be an important progressive
DEMOCRACYJOURNAL.ORG 31
SAVINGS
approach to sustainable growth, we also need to focus on savings as a founda-
tion for household and national economic stability. Saving helps people avoid
the hardships that prevent them from reaching their potential and limit their
contributions to society. Moreover, broad-based asset policies can reduce debt,
increase childrens well-being, and build potential down payments for homes
and college tuition.
Years of rigorous research by experts at the Urban Institute and the Corpora-
tion for Enterprise Development (CFED), based on experiments and initiatives
on the ground, as well as the work of other experts in the eld, have shown that
many low- and moderate-income families can save and accumulate assets. One
2011 Urban Institute study followed low-income, low-asset households to see
whether such families can build savings. It found that, despite very low incomes,
a substantial portion (44 percent) of these households accumulated enough to
escape asset poverty after 12 years. That is, they accumulated enough wealth-
type resources to sustain consumption for three months at the poverty line.
Other studies tell a similar story. One study of Individual Development
Accountsmatched savings accounts for lower-income saversfound that, with
an average match rate of nearly two-to-one, the typical participant accumulated
almost $600 per year in savings. For participants averaging $18,000 in annual
income, this is not a trivial amount. Several years ago, New York City launched
a matched savings program called SaveNYC and found similar outcomes. Indi-
viduals saved an average of $561 over three years on a meager average income
of $17,000. One participant said, When I opened the SaveNYC account, I was
able to save for the rst time. . . . I hold back, deprive myself, so that I can get the
computer for my son and other things. These individuals show a willingness
to save when presented with an opportunityand many succeed.
I
f the literature shows that low- and moderate-income people are in fact capable
of saving, the question then becomes: Should they do it? Considering their
meager resources, should the poor really make an effort to set aside savings?
The literature answers with a resounding yes.
First, assets help households weather material hardship. Low-income fami-
lies are more likely to face difculties after job loss, illness, death, or divorce.
bob friedman is founder, chair, and general counsel of the Corporation for
Enterprise Development (CFED). ying shi is adviser to the president of the
Urban Institute and a doctoral student in public policy at Duke University.
sarah rosen wartell is the president of the Urban Institute and former
deputy assistant to the President for economic policy.
32 FALL 2012
BOB FRIEDMAN, YING SHI, & SARAH ROSEN WARTELL
A recent study showed that adverse events are especially painful for families
in the bottom third of the income distribution. After a job loss, almost half of
these households experience hardship compared with 16 percent of households
in the top third. Savings act as a crucial buffer: Low-income families with some
liquid assets are signicantly less likely than their asset-poor counterparts to
experience deprivation during stressful events. In one study, access to $500 of
credit had as much effect on easing hardship as multiplying a familys income
by a factor of three.
Savings and credit make a difference because income is more volatile for
those hovering around the poverty line. Low-income families usually work in
low-wage and temporary jobs, making them more susceptible to reduced hours
and layoffs. Low-income families also have higher rates of unexpected home and
auto repairs, and often lack insurance.
The resulting month-to-month income
instability leads to a higher incidence
of hardship.
Second, savings can lower costs.
Even small asset holdings can allow
families to avoid high interest on credit
cards. One study found that households
with minimal liquid savings were sub-
stantially less likely than those with no savings to pay high fees to get their tax
refunds a few days early.
Third, assets help protect families when the social safety net is insufcient.
Because of budgetary pressures, many social-insurance programs may shrink or
grow less quickly than demand. Savings-oriented policies can work to comple-
ment the social safety net.
Fourth, and perhaps most importantly, savings encourage families to imagine
a future better than the present, and to prepare and plan for that future. Lower-
income families can convert savings into home purchases, education, microen-
terprise, and retirement accounts. Considerable literature demonstrates that
homeownership can improve childrens well-being through better educational
attainment and lower incidences of teenage pregnancy. Residential stability can
be particularly important for low-income families to ensure childrens behavioral
and cognitive development. In a nation where childhood poverty is estimated
to cost up to $500 billion a year, homeownership and asset building can help
reduce the societal and scal cost of poverty.
Savings are also the gateway to self-employment and job creation. As stud-
ies have shown, new and young businesses, including self-employment, are an
Lower-income families can and
do save. Getting them to save
following the Great Recession
will be essential to restoring the
nations prosperity.
DEMOCRACYJOURNAL.ORG 33
SAVINGS
important contributor to net job creation. Of the more than 20 million self-
employed, over half have family incomes under $50,000. Microenterprise pro-
grams in the United States and overseas consistently demonstrate that self-
employment is often the only source of work for the unemployed. Savings are
key: Most of the initial nancing for new business and self-employment comes
from savings of the entrepreneur and friends, family, and associates. Indeed,
one of the reasons that new jobs generated by new and young businesses have
declined from a high of 3.6 million to a low of 2.2 million over the past several
years is the decimation of savings.
Finally, savings are key to higher education and, thereby, to employment
and living wages. Studies by researchers at the Center for Social Development
and the University of Pittsburgh show that students entering high school with
college savings accounts in their own name are six times more likely to go to
college than those withouteven though the average amount in those accounts
is less than $500. Assets are indeed, in Michael Sherradens memorable words,
hope in concrete form.
T
he coming debate on tax reform may present a signicant opportunity to
help low-income Americans save more. Weve heard repeated vows from
politicians of both parties, and special commissions like Bowles-Simpson,
to pursue comprehensive tax reform, including signicant reductions to tax
expenditures. There is little evidence that the current incentives are effective.
Furthermore, the regressivity of these tax expenditures is incontrovertible. More
than a third of benets (37 percent) accrue to the richest 1 percent of taxpayers
and more than half (55 percent) accrue to the wealthiest 5 percent. Meanwhile,
the poorest 60 percent of taxpayers share less than 5 percent of the benets. In
dollar terms, people making more than $1 million per year get an average tax
benet of more than $95,000, while the average family in the poorest quintile
receives an average benet of less than $5 a year.
In short, subsidies are primarily going to families who are already in a good
position to build assets. Proposals to slash these tax incentives will meet oppo-
sition from current beneciaries and powerful lobbies. Yet what is preserved
should be better targeted to those most in need of a boost to savings.
We also encourage reforming current savings incentives aimed at specic
categories of investment. For instance, the Savers Credit provides a tax break to
low- and moderate-income taxpayers saving for retirement. Because the neediest
families face a minimal tax burden, the credit is of limited utility. If the Savers
Credit were made refundable, as was originally proposed, it would reach 50
million low-income households instead of the six million it currently reaches.
34 FALL 2012
BOB FRIEDMAN, YING SHI, & SARAH ROSEN WARTELL
Those saving for education can also be targeted. States currently offer 529
plans, which nudge parents to save for their childrens college education by offer-
ing a tax deduction. But tax deductions are of little use to most middle-income
households, let alone low-income families. Offering a matching grant for the
college savings of low- and middle-income households, as a dozen states have
done, would open college aspiration and opportunity to millions.
Another area where policy can help is homeownership, which has long
been the primary saving mechanism for low- and moderate-income families.
Unfortunately, the mortgage-interest deduction doesnt benet those who do
not itemize their taxes, and it provides the largest subsidy to those who buy the
largest houses. Offering a credit instead of a deduction, with a declining cap to
gradually lower the eligible home value, would produce savings for the govern-
ment and allow homeowners with low tax burdens to benet.
Savings-incentive policies also need to become less restrictive to give sav-
ers latitude in how theyd like to spend their money. Most such policies restrict
usage to buying a home, pursuing postsecondary education, and starting a small
business. But the more immediate goal of saving is to avoid being plunged into
nancial crisis and expensive debt by everyday illness or accident. Evidence
from the SaveNYC experiment (discussed in greater detail in Bob Annibale and
Wade Hendersons Tax Policy: Spreading the Benets More Widely, p. 35) and
other programs demonstrates the benet of allowing low-income participants
to save for emergencies.
The very least we should do is not penalize low-income people for saving.
Yet virtually every safety net program does sofrom Temporary Assistance for
Needy Families to the Supplemental Nutrition Assistance Program (commonly
known as food stamps) to disability insurance and Supplemental Security Income
reducing and often denying benets to families who save, effectively pulling the
rug out from folks for doing what they should. Fortunately, over the past two
decades, states and the federal government have begun reducing and eliminating
such penalties, but more action is necessary. Any new savings incentives should
exempt savings accounts from affecting eligibility and benet determination.
W
e live in a nation that celebrates ownership. From the rst large-scale
federal Individual Development Accounts demonstrations under Bill
Clinton to George W. Bushs Ownership Society, the appeal of own-
ership extends across ideological boundaries. Yet todays upside-down subsi-
dies waste scarce resources and do too little to encourage saving for low- and
moderate-income families. Families often lack the necessary tools to build assets
alone. We should help these families help themselves.
DEMOCRACYJOURNAL.ORG 35
TAX POLICY
For todays threatened middle- and working-class families, assets provide
much needed economic dignity in an uncertain world. As economist Amartya
Sen said in his Nobel Prize acceptance speech, I have tried to argue in favor of
judging individual advantage in terms of the respective capabilities, which the
person has, to live the way he or she has reason to value. An emphasis on capa-
bilities is at the heart of an asset-based approach. It broadens the possibility to
achieve and allows families to invest in their future welfare. It is empowering
in a way that income transfers are not.
As with any story, there are caveats. An asset-based strategy should comple-
ment rather than displace income-based policies. We are not arguing for a
smaller social safety net. Instead, we advance a system that both encourages
lower-income families to save and provides them with essential income transfers
and other support when needed. We are also not calling for universal homeown-
ership. The past few years have made it clear that homeownership is not right
for everyone, though its still important to lower homeownership barriers and
offer incentives for capable families.
Economic opportunity and asset accumulation go hand-in-hand. Low- and
moderate-income families need to rely on assets to navigate tough times and
prosper as productive members of society. It is time to harness the broad and
bipartisan support for these ideas to make them a reality. D
Tax Policy:
Spreading the Benets More Widely
Bob Annibale & Wade Henderson
W
hatever our individual circumstances, having savings is critical to achiev-
ing nancial security. But this is especially true of the poor. According
to the Federal Reserve, only one-third of families on very low incomes
(less than $20,291) saved any of their income in 2007. This compares to almost
60 percent of households on incomes between $39,000 and $62,000 that man-
aged to save something. Encouraging savings and providing the necessary tax
incentives and nancial products to put some money away is critical up and
down the income ladder, but especially on the lower rungs. [See Bob Friedman,
Ying Shi, and Sarah Rosen Wartell, Savings: The Poor Can Save, Too, p. 30]
bob annibale is the global director of Citi Community Development. wade
henderson is president & CEO of The Leadership Conference on Civil and
Human Rights.