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Abstract

Nearly one quarter of low-income families do not have a checking or savings account, more than one-third do not own cars, 60 percent do not own a home, and 90 percent have no retirement account. In contrast, the typical middle-income family has checking or savings accounts, retirement accounts, owns a car and a home. This brief synthesizes current research on the assets and liabilities of low-income families into a variety of portraits and provides suggestions for future research and policy.

Introduction

Savings and assets can cushion families against sudden income loss, increase economic independence, and bolster long-term economic gains. Yet, most low-income families lack meaningful assets. In fact, 24 percent of low-income families lack a bank account and 35 percent lack even a vehicle, according to the 2004 Survey of Consumer Finances. Hurricanes Katrina and Rita revealed the vulnerability of families that do not have such assets as vehicles, savings, or housing insurance to fall back on in times of crises.

Assets alone may improve outcomes, but assets alone do not tell the whole financial story. That is why it is important to look at the entire balance sheet: comparing the different assets of families against their liabilities to arrive at net worth. This brief portrays the assets and liabilities of lowincome families and provides suggestions for future research. The focus is on the bottom 20 percent of families ranked by income level (those who have annual incomes of less than $18,000) and how their net worth compares with middle–income quintile families. In addition, the brief presents the net worth of other categories of at-risk families, such as single-parent and minority families.

Data Sources

Wealth data for this brief come from Urban Institute tabulations and tables produced by Bucks, Kennickell, and Moore (2006) using the 2004 Survey of Consumer Finances (SCF) and by Lerman (2005) using the 2001 Survey of Income and Program Participation (SIPP). These are both highquality surveys, but it is still important to recognize such data limitations as the use of imputations for missing asset and liability data, survey response rates of 68–87 percent, and the exclusion of some assets that are difficult to measure. For example, Social Security benefits and defined benefit pensions are particularly important assets for low-income families, yet national surveys generally do not capture them (Ratcliffe et al. 2007). Vehicles are often included, but surveys often miss other consumer durables such as appliances (the SIPP is an exception). As this brief depends on national household surveys for the portraits of assets and liabilities, little can be said about Social Security benefits, defined benefit pensions, and holdings of durable goods other than vehicles.

The Strong Relationship between Asset Holdings, Net Worth, and Income

The relationship between asset holdings and income is very strong—in fact, it is exponential (figure 1, dark bars). The median level of assets of middle-income (third-quintile) families is nine times the comparable asset level of low-income (bottom-quintile) families. The gap is especially dramatic between low- and high-income families, with median asset holdings in the top income quintile over 47 times the median assets of those in the bottom quintile.

The relationship between net worth and income is even stronger than the relationship between asset holdings and income (figure 1, light bars).1 This is because highincome families are more likely to hold financial assets like stocks that do not carry corresponding liabilities, thereby significantly bolstering their net worth. The effect of these holdings is substantial: the typical high-income family has 82 times as much net worth as the typical low-income family.

(End of excerpt. The entire brief is available in PDF format.)

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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