Comment on "Enabling Families to Weather Emergencies and Develop"

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This paper is a response to New Safety Net Paper 7, "Enabling Families to Weather Emergencies and Develop: The Role of Assets," by Signe-Mary McKernan and Caroline Ratcliffe.

The McKernan-Ratcliffe paper considers the role of assets and debts in enabling low-income families to cope with financial exigencies. As the authors note, means-tested social welfare programs have not proven adequate to deal with most of the difficulties faced by these families. For example, only 22 percent of families with a low-income unemployed worker received any Unemployment Insurance benefit in 2006. In addition, the actual benefits received were in most cases inadequate to pay for the basic expenses of the family. The paper proposes asset policies to deal with financial emergencies. Such asset policies can also help families achieve long-term goals such as buying a house and providing for retirement.

Almost all the policy proposals presented in the paper are excellent, and I am in agreement with them. However, as a general point, I think the authors should emphasize asset building more and debt policy less. With adequate financial savings, the need for short-term loans becomes much smaller. I think the general emphasis should be on providing refundable tax credits to low-income families as opposed to deductions since, as the authors note, the tax benefits from deductions for low-income families are rather minimal. These could be modeled after the earned income tax credit (EITC). In addition, these credits could be earmarked for specialized savings accounts like Individual Development Accounts (IDAs). For example, in the 2008 presidential campaign, Barack Obama has proposed refundable tax credits in lieu of a deduction in the case of mortgage interest and property taxes. As the McKernan and Ratcliffe note, more than 99 percent of the dollars spent by the federal government to subsidize asset building are in the form of tax expenditures and less than 1 percent in direct outlays such as IDAs.

I very much agree with the idea of further promoting IDAs and introducing children’s accounts as in the United Kingdom. However, I think that children’s accounts should remain tax free for all families as in Britain. It is hard to predict the socioeconomic status of children when they become adults. Also, having a universal benefit like social security will make the program easier to adopt politically. I also agree with the proposal for the federal government to match EITC dollars that are deposited in savings accounts or used to buy U.S. savings bonds. I think this idea will enhance savings among low-income families.

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