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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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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