Asset Building for Today's Stability and Tomorrow's Security

Abstract

Today's weak economy, highlighted by job layoffs, high unemployment, and limited lines of credit, underscores the need for families to have savings to draw on during an emergency. Yet, the majority of low-income families have too few assets to weather emergencies. Even prior to the current recession, 57 percent of low-income families were liquid asset poor. This article discusses low-income families' asset holdings and promising policies aimed at addressing their short- and long-term needs. The package of proposals addresses the needs of families over the life course and considers the tension inherent in meeting families' short- and long-term asset-building goals.

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Introduction

Savings and assets can play an important role in low-income families' short-term needs and long-term development. In the shortterm, savings can help families weather unexpected employment gaps or pay unexpected medical and car repair bills. In the long term, families can realize goals such as owning a home or financing a secure retirement. A key concern is that low-wage jobs can be unstable, leaving families struggling to cope with employment gaps and financial emergencies that can arise without warning. Today's weak economy, highlighted by job layoffs, high unemployment rates, and limited lines of credit, underscores the need for families to have savings to draw on during an emegency. Means-tested and social insurance programs can help families weather hard times, but not all families are eligible for these benefits. For example, only 22 percent of low-income families with an unemployed worker for some part of 2006 received one potential solution to this problem. This article discusses low-income families' asset holdings and promising policies aimed at addressing their short- and long-term needs.

Asset Holdings of Low-Income Families
Most low-income families have trouble weathering emergencies. Many low-income families are "asset poor"—without enough assets to finance consumption for three months at the federal poverty level. Yet unemployment spells averaged two to four months even before the current recession (Caner and Wolff 2004; Vroman 2007). If only financial (i.e., liquid) assets are considered (e.g., savings, 401(k)s, bonds), then more than 57 percent of low-income families are asset poor.¹ This is a concern because unexpected gaps in employment can leave families unable to pay bills and can lead to serious consequences, such as eviction. The asset picture improves if net worth (excluding home equity) is considered, but it is still tenuous. In this case, nearly 40 percent of low-income families are asset poor. Further, one in five low-income families has zero or negative net worth (excluding home equity) and median net worth is $7,200 (See Figure 1).

A closer look at low-income families' asset holdings reveals that the typical (median) family has limited savings and does not own a home or have a retirement account. Many such families have no car. Most low-income families (83 percent) have a bank account, but often the balance is too small—$1,100 is the median—to see a family through even a short employment gap or other financial emergency.

Few in this population save for retirement. Only 23 percent of low-income families report any type of retirement savings. Families headed by older adults are more likely to have retirement accounts, although the differences are somewhat small (17 percent versus 26 percent). Among families that do have a retirement account, the median value is $10,000. While modest when spread out over an individual's expected retired lifetime, it does represent nontrivial savings for these families. Homeownership is more prevalent than retirement savings among low-income families. In 2007, nearly half (48 percent) owned a home, and the median value of home equity for these homeowners was $81,000. For the U.S. population, homeownership rates increased steadily between 1994 and 2004, but have decreased with the housing crisis. In the first quarter of 2009, homeownership rates fell below 2001 rates.²

Most (75 percent) low-income families own a car, with a median value of $7,100. While only a minority of families do not have a vehicle, a vehicle can be necessary to get and keep jobs. This need has become more pronounced as many jobs have moved from cities to suburbs, where public transportation is more limited and less reliable.

(End of excerpt. The full article is available in PDF format. The views expressed in this paper are solely those of the authors and do not necessarily represent those of the Federal Reserve Bank of Boston or the Federal Reserve System. This paper was originally published in New England Community Developments, Issue 2, 2009. )

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