Spotlight on Poverty and Opportunity
By: Andrea Levere
June 2, 2010
Most of us understand that a family's income can determine whether children grow up in a safe neighborhood and stable family, get proper nutrition and health care, and receive high-quality child care and schooling. We know that poverty is especially damaging and can permanently impair children's language and memory skills.
By contrast, few of us understand the extent of child poverty and financial vulnerability in the United States. We underestimate these problems because the common way of measuring poverty, comparing a family's income to the federal poverty line, only tells half the story. The other half involves savings and assets. Asset poverty measures a family's financial vulnerability to economic shocks--if one's income was suddenly cut off, due to unemployment, a medical emergency, or even divorce, would they have enough assets to live at the federal poverty level for three months?
The dramatic reality is that fully 22.5 percent of American households are living in asset poverty, compared with 13.2 percent of individuals living below the federal poverty line. And 14.3 percent of them live in extreme asset poverty with no net savings or assets whatsoever (zero or negative net worth).
Assets provide more than a cushion against hard times. Household savings help to build aspirations and expectations for the future, which in turn powerfully affect high school and college completion. A recent study by the Center for Social Development at Washington University in St. Louis found that children in households with dedicated college savings, regardless of income or academic achievement, are four to seven times more likely to attend college.
Yet, it is precisely in households with children that asset poverty is most concentrated. The Financial Security of Households with Children, a new report by my organization, the Corporation for Enterprise Development (CFED), shows that fully 27.3 percent of these households are living in asset poverty, with 16.6 percent of them in extreme asset poverty. For African-American households with children, these figures reach a staggering 49 and 32.1 percent, respectively.
The good news is that there is much we can do to help poor families save and build assets. We can crack down harder and more smartly on predatory lending, whether in the form of payday loans (a typical borrower pays back $793 for a $325 loan), interest-only mortgages, or tax refund anticipation loans. We can facilitate the opening of bank accounts by the 42 percent of unbanked or under-banked households and encourage the direct deposit of paychecks and government benefits into them, thereby limiting the use of check-cashing establishments that charge exorbitant fees.
Congress could pass the revised Savers Credit and auto-Individual Retirement Account legislation. It could establish universal children's savings accounts, as the United Kingdom and one state have done, to jumpstart children's savings and make it easier for them to afford college.
An important immediate step is the reauthorization of the Assets for Independence Act, which leverages funding for the matches that make Individual Development Accounts (IDAs) - special savings accounts that use government and nonprofit money to match low-income families' savings for a home, post-secondary education, or a new business - possible and effective. Recent research by CFED and the Urban Institute shows that individuals who bought their homes through participation in an IDA program were one-third as likely as their non-IDA counterparts to experience foreclosure.
The larger point is that asset poverty is undermining the efforts of too many families trying to raise their kids for success and that we can dramatically reduce asset poverty by taking some relatively modest and practical steps. We already provide incentives for middle-class asset building through a variety of tax credits. Let's resolve to provide more such incentives to the families who most need them. The result will be brighter futures for their kids and for generations to come.
Andrea Levere is president of CFED, a nonprofit group that works to expand economic opportunity by developing and testing new ideas for wealth creation and advocating for taking good ones to scale.