Four policy recommendations that could narrow the racial wealth gap.

January 20, 2016

For a low-income family, a day’s wages might only fulfill today’s basic needs: food, clothing and housing that may be temporary. But some families’ daily struggle to support themselves leaves nothing for tomorrow. To help children realize their full potential, families need savings and assets, the currency of the future.

Assets — emergency savings, a college fund, homeownership — provide the financial stability a family needs to create a quilt of resources that turns children’s dreams into plans. That quilt also serves as a security blanket of a family’s own making. Without it, what should be a temporary difficulty — a flat tire, a sick child, an injury — can become a crisis with permanent consequences, including a lost job or impossibly large debts. Family financial stability can easily be undermined by such events, eroding prospects for self-sufficiency and long-term success.1

The Great Recession was devastating for U.S. families, causing a collective $16 trillion loss in net worth.2 This loss disproportionately affected low-income families of color,3 perpetuating a racial wealth gap even as the racial income gap has narrowed.4 The median net worth of white households was more than 10 times greater than that of African-American or Latino families in 2013. While white families’ net worth rose by 2% from 2010 to 2013, Latino and African-American families’ net worth fell markedly — by 15% and 34%, respectively.5 The typical white household has slightly more than one month’s income in easily accessible savings, compared with just 12 days for the typical Latino household and only five for the typical African-American household.6 These dramatic differences are especially troubling given the critical importance of assets as an engine of the American Dream — a dream that is, increasingly, unequally achieved.

Change in Median Net Worth, 2010–2013

While white families’ net worth rose by 2% from 2010 to 2013, Latino and African-American family net worth fell markedly — by 15% and 34%, respectively.

An uneven financial foundation causes daily family stress that harms children’s development and hinders their ability to grow into successful adults.7 Childhood is a time to imagine and prepare for the future; poverty can eclipse that horizon. While increasing income is important to moving families out of poverty, building assets helps them become financially stable and open doors to opportunity.

Falling Behind: The Racial Wealth Gap

Throughout much of our country’s history, the federal government has provided incentives to help families save and build assets. However, these policies — from retirement savings tax breaks to the home mortgage interest deduction — disproportionately benefit families with assets and do little for those with low incomes and minimal savings. This regressive pattern creates particular disadvantages for families of color, who are less likely to have savings or inherited resources.8 A home, for example, is a primary driver of net worth, making homeownership an important milestone for many American families.9 Yet systemic prejudice in zoning, building code enforcement, residential restrictions, mortgage practices and home insurance account for stark differences by race in homeownership and, therefore, net worth.10 Although home values among households of color took a much harder hit during the recent recession, especially in some communities, home equity remains an essential long-term asset that all families should be able to access.

For these reasons, many people of color have a far greater hill to climb to build assets — affecting their prospects for generations. We cannot afford to continue these patterns, especially as people of color make up more of our population.11 Family assets strongly correlate with indicators of child well-being — such as academic performance and self-esteem — and help children avoid negative consequences such as behavioral problems and teenage pregnancy.12 Yet 47% of Americans cannot handle a $400 emergency13 — the cost of replacing a car alternator, for example — let alone pay for college or a home. Nearly half of U.S. households could not subsist at the federal poverty level for three months if they suddenly lost their income, using experts’ most basic measure of assets.14 Not having savings exacts additional costs: Payday loans cost cash-strapped families $8.7 billion in interest and fees annually.15 Without savings, Americans also cannot start new businesses that stimulate our economy. An analysis of federal data recently found the share of people younger than 30 owning private businesses at a 24-year low, in part due to their low savings rate.16

Unexpected Emergencies Can Start a Spiral of Debt

47% of Americans cannot handle a $400 emergency — the cost of replacing a car alternator, for example — let alone pay for a college education or a home.

Smart policies can help reverse these trends and close the racial wealth gap by allowing more families to steadily build savings. We recommend four federal policy solutions to increase the financial stability of low-income families, especially those of color, through savings and home equity.

U.S. Family Net Worth Over Time

Dramatic differences in family net worth by race, ethnicity and income have persisted for decades.

In 2013, the median net worth of white households was more than 10 times that of African-American or Latino families. While white families’ net worth rose slightly after the recession, Latino and African-American families’ net worth fell markedly.

Source: Marin Economic Consulting analysis of the Federal Reserve Board’s Survey of Consumer Finances, 1989–2013.

Note: Income categories, which vary annually, are based on the Federal Reserve Board’s Survey of Consumer Finances. For example, in 2013, half of U.S. families (bottom 50%) had incomes of $45,000 or less. Forty percent had incomes between $45,001 and $150,000. Seven percent had incomes between $150,001 and $300,000. The top 3% of families had incomes exceeding $300,000.

Saving for a Lifetime

Starting to save in a child’s name from birth can change how kids and their parents think about their future.

Indeed, research shows children with savings accounts in their name are substantially more likely to go to college. As young people become working adults, they should develop their own savings habits, including setting aside funds for emergencies, as well as long-term savings for larger purchases, such as a car or home.

Four Recommendations: Helping All Families Achieve Financial Stability

Promoting savings for a lifetime is the surest way to enable low-income families to build assets.

Improving their prospects means undoing generations of unfair practices and making up for decades of foregone returns — and requires a combination of small, achievable steps and bold vision. We therefore recommend several incremental policy changes to help families develop savings habits and access more sophisticated financial products over time. To incentivize savings from birth, we outline a more ambitious proposal to promote opportunity for children and significantly narrow the racial wealth gap.

Provide portable, safe accounts for retirement and emergency savings

Saving for the future is extremely difficult for workers with low wages, who may not have workplace retirement plans.17 The new My Retirement Account (myRA) can help make long-term saving a habit.18 Employers can voluntarily establish these no-fee starter accounts, which are invested in government savings bonds that eliminate the risk of losing principal. Once the balance reaches $15,000, the funds must roll over to another retirement account.

Because myRAs are funded with after-tax dollars, participants can withdraw contributions without penalty for emergencies. While these accounts are now widely available, Congress should make myRAs permanently accessible through workplaces and banks and increase awareness about them. Employers without other retirement plans should consider automatically enrolling employees in myRAs. While these funds alone are not sufficient for retirement, businesses and government should incentivize rolling them over into vehicles that allow workers to grow a larger nest egg.


Median Family Net Worth in 2013

An analysis of myRA indicates its adoption and expansion could narrow the racial wealth gap. If everyone eligible saved the maximum, myRA could reduce the black-white wealth gap by 5% and the Latino-white gap by 7%, this analysis suggests. Modest participation and savings rates could still increase assets and racial equity.19



Three ways myRAs can help families save


Maximum impact: In this scenario, 100% of workers without pensions through their employer (target group for myRA) open an account and save the maximum possible ($15,000).

Moderate: Seventy-four percent of the target group opens an account, comparable to the 401(k) participation rate in the private sector. In this scenario, 25% of participants save $500 per year for five years with 3% interest; another 25% save $1,000 per year for the same period; and the final 24% save $1,500 per year.

Minimum: Half of the target group opens an account. Twenty-five percent of participants save $500 per year for five years with 3% interest, while the other 25% save $1,000 per year for that period.

The Role of States

While changes in federal policies can provide equal access to savings and credit on a broad scale, states are important in making those policies work. States should:

Curb predatory lending

States should cap interest rates on products such as payday loans, lines of credit, refund anticipation checks and short-term mortgages. States also should target opportunistic credit repair organizations or banks authorizing these products and protect consumers from repeated rollovers of small-dollar loans that can balloon into unmanageable debt.24

Open universal 529 accounts

States should open these accounts, which help families save for college, for all children born in the state, partnering with financial institutions, individuals or philanthropies to seed them. States might match savings with federal funds, as Pennsylvania has done.25

Permit prize-linked savings

These products encourage savings with a chance to win a large prize. Although federal legislation permits states to allow financial institutions to offer these accounts, only 15 states do.

Conclusion

Investing in families allows families to invest in themselves — to imagine and confidently act upon opportunities for their children while cushioning against the financial setbacks that inevitably arise. We should equip all families to take on this responsibility. Doing so will not just help individuals along the road to opportunity. It will increase the stability of whole communities by creating committed homeowners and a workforce with the education and training required for many of today’s well-paying jobs, truly building a solid foundation for our nation’s future.

Endnotes

1 See, for example, Ratcliffe, C. (2013). Asset poverty and emergency savings. Washington, DC: The Urban Institute. Retrieved November 9, 2015, from www.urban.org/sites/default/files/alfresco/publication-pdfs/412911-Asset-Poverty-and-the-Importance-of-Emergency-Savings.PDF

2 Board of Governors of the Federal Reserve System. (2011). Flow of funds accounts of the United States, first quarter, 2011. Washington, DC: Author. Retrieved October 19, 2015, from www.federalreserve.gov/releases/z1/20110609/z1r-5.pdf

3 Pew Research Center. (2011). Wealth gaps rise to record highs between whites, blacks, and Hispanics. Washington, DC: Author. Retrieved October 9, 2015, from www.pewsocialtrends.org/2011/07/26/wealth-gaps-rise-to-record-highs-between-whites-blacks-hispanics/

4 Inequality.org, a project of the Institute for Policy Studies. (n.d.). Racial inequality. Retrieved November 8, 2015, from inequality.org/racial-inequality/

5 Analysis of the Survey of Consumer Finances, 1989–2013, by Marin Economic Consulting for the Annie E. Casey Foundation.

6 The Pew Charitable Trusts. (2015). The role of emergency savings in family financial stability: What resources do families have for financial emergencies? Washington, DC: Author. Retrieved November 19, 2015, from www.pewtrusts.org/~/media/assets/2015/11/emergency-savings-report-2_artfinal.pdf?la=en

7 See, for example, Sledge, J., Gutman, A., Schintz, J., & Schneider, R. (n.d.). Leveraging innovation to support the financial health of LMI families with children. Chicago, IL: Center for Financial Services Innovation. Retrieved from www.cfsinnovation.com/CMSPages/GetFile.aspx?guid=730d0ddd-8c27-4605-b67f-8412341aa21e

8 See, for example, Shapiro, T., Meschede, T., & Osoro, S. (2013, February). The roots of the widening racial wealth gap: Explaining the black-white economic divide (Research and Policy Brief). Waltham, MA: Institute on Assets and Social Policy, Brandeis University. Retrieved from iasp.brandeis.edu/pdfs/Author/shapiro-thomas-m/racialwealthgapbrief.pdf

9 Gottschalck, A., Vornovytskyy, M., & Smith, A. (n.d.). Household wealth in the U.S., 2000 to 2011. Washington, DC: U.S. Census Bureau. Retrieved October 16, 2015, from www.census.gov/people/wealth/files/Wealth%20Highlights%202011.pdf

10 Prakash, S. (2013). Racial dimensions of property value protection under the fair housing act. Cal. L. Rev., 101, 1437.

11 Ostry, J. D., Berg, A., & Tsangarides, C. G. (2014, February). IMF staff discussion note: Redistribution, inequality, and growth. Washington, DC: International Monetary Fund. Retrieved October 16, 2015, from www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf

12 Grinstein-Weiss, M., Shanks, T., & Beverly, S. (2014). Family assets and outcomes: Evidence and directions. The Future of Children, 24(1).

13 Board of Governors of the Federal Reserve System. (2015, May). Report on the economic well-being of U.S. households in 2014. Washington, DC: Author. Retrieved from www.federalreserve.gov/econresdata/2014-report-economic-well-being-us-households-201505.pdf

14 CFED Assets & Opportunity Scorecard Liquid Asset Poverty Calculator. Retrieved October 23, 2015, from scorecard.assetsandopportunity.org/latest/calculator#

15 Hecht, J., Jefferies, LLC. (2015). The state of short-term credit in a constantly changing environment. Report presented to the CFSA 15th Annual Meeting and Conference.

16 Simon, R., & Barr, C. (2015, January 2). Endangered species: Young U.S. entrepreneurs. New data underscore financial challenges and low tolerance for risk among young Americans. The Wall Street Journal. Retrieved November 8, 2015, from www.wsj.com/articles/endangered-species-young-u-s-entrepreneurs-1420246116

17 Employment Benefit Research Institute. (2014). Retirement Confidence Survey: Preparing for retirement in America (2014 RCS Fact Sheet #6). Washington, DC: Author. Retrieved November 7, 2015, from ebri.org/pdf/surveys/rcs/2014/RCS14.FS-6.Prep-Ret.Final.pdf

18 U.S. Department of the Treasury. (n.d.). myRA (my Retirement Account): How it works. Retrieved October 22, 2015, from https://myra.gov/how-it-works/

19 Racial Wealth Audit™ analysis of myRA by the Institute on Assets and Social Policy, Brandeis University, for the Annie E. Casey Foundation, 2015.

20 CFED Assets & Opportunity Scorecard. (n.d.). Financial assets & income: Asset limits in public benefit programs. Retrieved October 22, 2015, from scorecard.assetsandopportunity.org/latest/measure/asset-limits-in-public-benefit-programs

21 Low-income family income is calculated at 200% of the federal poverty level, or $48,500 per year.

22 See, for example, Babiarz, P., & Robb, C. A. (2014). Financial literacy and emergency saving. Journal of Family and Economic Issues, 35(1), 40–50. Retrieved October 22, 2015, from link.springer.com/article/10.1007/s10834-013-9369-9#page-1

23 CFED Assets & Opportunity Scorecard. (n.d.). Resource guide: Lifting assets limits in public benefit programs. Retrieved from assetsandopportunity.org/scorecard/rg_LiftingAssetsLimitsInPublicBenefitPrograms_2014.pdf. And, Parrish, L. (2005). To save, or not to save? Reforming asset limits in public assistance programs to encourage low-income Americans to save and build assets. Washington, DC: New America Foundation. p. 9.

24 Center for Responsible Lending. (n.d.). Payday loans. Retrieved October 22, 2015, from www.responsiblelending.org/payday-lending/

25 Building assets for low-income families. Testimony before the Subcommittee on Social Security and Family Policy of the Finance Committee of the Senate, 109th Cong. (2005, April 28) (Testimony of Dorothy Beale). Retrieved from www.finance.senate.gov/imo/media/doc/dbtest042805.pdf. And, The Finance Project. (2007). Connected by 25: Financing asset-building programs for youth transitioning out of foster care. Washington, DC: Author. Retrieved from www.f2f.ca.gov/res/TFPSBAsset.pdf

26 See, for example, Coulson, N. E., & Li, H. (2013). Measuring the external benefits of homeownership. Journal of Urban Economics, 77, 57–67. Retrieved October 22, 2015, from www.sciencedirect.com/science/article/pii/S0094119013000296

27 See, for example, Galster, G., Santiago, A., & Smith, R. (2015, November). Evaluating the impacts of an enhanced family self-sufficiency program. Panel paper presented at the APPAM 2015 Fall Research Conference: The Golden Age of Evidence-Based Policy. Retrieved November 7, 2015, from appam.confex.com/appam/2015/webprogram/Paper14593.html

28 Cramer, R., & Lubell, J. (2005). The family self-sufficiency program: A promising, low-cost vehicle to promote savings and asset building for recipients of federal housing assistance. Washington, DC: New America Foundation. Retrieved October 22, 2015, from staging.community-wealth.org/sites/clone.community-wealth.org/files/downloads/paper-cramer-lubell%20(1).pdf

29 161 Cong. Rec. H3817–H3877 (daily ed. June 3, 2015). Retrieved October 26, 2015, from www.congress.gov/congressional-record/2015/6/3/house-section/article/h3817-1?q=%7B%22search%22%3A%5B%22%5C%22family+self-sufficiency%5C%22%22%5D%7D&resultIndex=2

30Lubell, J. (2014). Housing more people more effectively through a dynamic housing policy. Washington, DC: Bipartisan Policy Center. Retrieved October 22, 2015, from www.abtassociates.com/AbtAssociates/files/ce/ce7c306c-3cce-4dda-96c8-6098abe8a5ac.pdf

31 Alaska Housing Finance Corporation. (n.d.). Rent reform. Retrieved October 23, 2015, from www.ahfc.us/family-self-sufficiency/

32 Elliott III, W., & Beverly, S. (2010, January). The role of savings and wealth in reducing “wilt” between expectations and college attendance (Research brief). St. Louis, MO: Center for Social Development, Washington University in St. Louis. Retrieved from csd.wustl.edu/Publications/Documents/RB10-04.pdf

33 Butrica, B. (2015, March). A review of children’s savings accounts. Washington, DC: The Urban Institute. Retrieved October 16, 2015, from www.urban.org/sites/default/files/alfresco/publication-pdfs/2000157-A-Review-of-Childrens-Savings-Accounts.pdf

34 Racial Wealth Audit analysis of children’s trust accounts by the Institute on Assets and Social Policy, Brandeis University, for the Annie E. Casey Foundation, 2015.