A Research Focus of the Urban Institute
Given the chance, many low-income families can acquire assets and become more financially secure.
About the Research
Conservatives and liberals increasingly agree that it's time to go beyond traditional antipoverty programs to encourage savings, homeownership, private pensions, and microenterprise. Such assets can give lower-income families a foothold into the middle class through financial security and growth opportunities. However, there's a wide gulf between traditional welfare entitlement policies that restrict wealth buildup and newer policies promoting ownership. Navigating that divide requires that Americans gain a much better understanding of asset building for low- to moderate-income families.
While wealth building is important for families at all ages, different concerns emerge as particularly important at various stages in the life cycle. Early in the life cycle, financial literacy and finance of education and vehicles are often the greatest concerns. In the middle of the life cycle, home ownership and mortgages may become the most significant issues. For the end of the life cycle, families often focus on retirement savings.
Comprehensive analysis of wealth accumulation requires examining the full range of asset and debt issues that arise over the course of the life cycle. Only from a full understanding can we move to an integrated wealth-building policy, which will better meet the needs of society.
What's New
Three pieces in the Opportunity and Ownership Facts series were published in March 2008:
- "Older Americans' Reliance on Assets" posits that despite growing awareness about the importance of saving for retirement, many elderly people cannot rely on their financial assets. Author Barbara Butrica suggests that adults with lower income are relying primarily on Social Security and public transfers for their retirement security. Read more.
- "Do Assets Change the Racial Profile of Poverty among Older Adults?" Yes, according to Barbara Butrica's work with data from the Health and Retirement Study. She demonstrates that including assets in calculations reduces the overall poverty rate but increases racial disparities. Read more.
- Unforeseen expenses cost lower-income households more, Lynette A. Rawlings and Kerstin Gentsch find in "How Households Expect to Cope in a Financial Emergency." Households with higher income have built assets providing them with conventional resources, while lower-income households must use alternative, more expensive methods to pay unexpected bills. Read more.
The Urban Institute—along with the Center for Social Development and the New America Foundation, with funding from the U.S. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation (DHHS/ASPE)—has recently released another new report from Poor Finances: Assets and Low-Income Households, a series of reports on poverty, asset building, and social policy. The purpose of the series is to assess the state of knowledge and policy development and to synthesize recent progress in these areas. Read more.
- "Determinants of Asset Building" provides a policy-oriented conceptual framework that has the potential to explain saving and asset accumulation across the entire population and to account for the low levels of saving and asset accumulation in the low-income population. The report also reviews empirical evidence that supports or challenges the framework. Read more.
Recent Findings
Below are findings, analyses, and recommendations from our research:
Although housing is an important asset for many families, risky mortgages and foreclosures can mean losing everything.
The recent development of the subprime mortgage market is sweeping low- and moderate-income households into a second housing boom. Rising interest-payment burdens for many subprime borrowers, however, might mean delinquencies and foreclosures.
Having gotten involved in affordable housing issues as a member of the Federal Reserve System's Board of Governors, UI Senior Fellow Edward Gramlich became one of the first to write on the benefits—and risks—of subprime mortgages. His book, The Rise and Fall of the Subprime Mortgage Market, was recently released by the Urban Institute Press.
For more information:
New policies are needed to protect low-income renters and encourage homeownership.
Asset ownership is vital to households seeking to expand opportunity, solidify family finances, and hedge against economic uncertainty. And no asset is more important in achieving these objectives than housing.
The current system of housing assistance differs enormously from an ideal system based on compelling arguments for government action. Any real attempt to create an "ownership" society by expanding asset ownership among those with modest means must confront housing policy head-on. Positive reforms would allow more low-income families to become homeowners by providing similar subsidies for renters and owners under the two largest programs for low-income housing, Section 8 and the Low-Income Housing Tax Credit. Homeownership tax breaks should be distributed in a way that provides benefit to low-income families as well as those with greater means.
Those who do not own housing may be vulnerable to changes in neighborhood demographics—for example, gentrification. UI researchers suggest a policy that would encourage development while protecting low-income families: rent options at a given price for a specified number of years, or the purchase of insurance against rent increases.
For more information:
Greater financial literacy is needed to help families make informed decisions.
Many low- and moderate-income families lack the basic knowledge needed to save and invest wisely, build wealth, and avoid excessive debt. Unwise debt and large numbers of personal bankruptcies bespeak poor financial literacy. Yet, financial literacy and education programs—some showing early signs of success—must make sense of an increasingly complex array of choices that many people are ill-prepared to handle.
The evolution of market economies has dramatically broadened the opportunities of consumers, workers, investors, and firms. A new UI report explains that this new financial freedom doesn't help everyone. Some of the confusion arises because of the speed at which financial markets and new financial instruments have emerged. It's difficult to know how many people are making poor decisions.
For more information:
Greater retirement security for low-income families may require more pension saving.
Almost half of all full-time workers do not participate in a pension plan. For most poor and lower-middle class workers, private pensions play little or no role in asset building. This makes the "three-legged stool" of retirement savings—which includes Social Security, employer-sponsored pension plans, and personal savings—lopsided. Only the Social Security leg has any real strength. Threats to long-term Social Security solvency also provoke a closer examination of pension participation and other retirement assets.
Many low-income people could save more for retirement, but our current patchwork of retirement programs and incentives stacks the deck against saving. Government and employer policy tends to subsidize deposits into retirement savings vehicles, but it doesn't ensure that those dollars stay there and accumulate interest rather than being cashed out.
For more information:
Building up assets and avoiding excessive debt can help families reach the middle class.
U.S. families, even those less advantaged, accumulate assets primarily through owning homes, cars, and pensions. Yet, nearly 12 percent of households carry more debt than assets. Any asset or opportunity-building agenda should target those least able to accumulate wealth. For instance, racial minorities have much lower net worth, even compared to other low-income and less educated counterparts.
Life cycle factors also influence asset accumulation. Young people borrow to invest in education, expecting substantial increases in earnings when they are older. In retirement, most people consume more than their income. Our data shows that people in the lowest education group seldom accumulate assets before retiring.
However, married couples in the middle class experience rapid growth in net worth as they age, even with modest income growth.
For more information:
Small business and microenterprise are important but challenging components of an asset building agenda.
Promoting small businesses, especially microenterprises (the smallest), is a popular antipoverty strategy overseas, generating income in places where finding employment is difficult. In the United States, however, such obstacles as less self-employment, higher training and start-up costs, and complex regulatory barriers stand in the way. So small business and microenterprise are a natural, but not easy, place to start expanding the ownership society.
Based on findings, and the suggestions of expert roundtable participants, the Urban Institute recommends a number of broad directions for future research, funding, and policymaking. For instance, future research should evaluate the approaches used by small business subsidy programs and microenterprise programs and determine whether they improve low-income families' well-being.
For more information:
Asset tests in social programs can create a disincentive to save.
Families with savings above a certain threshold may be ineligible for public assistance benefits if they fail the "asset test" designed to target payments to those most in need. For example, a household with a bank account of $2,000 or more can't receive food stamps, no matter how low the household's income. Similarly, an elderly couple with $3,000 or more in liquid assets is ineligible for Supplemental Security Income. Asset tests like these can discourage saving.
Asset tests vary widely across government social programs. Confusing differences in how each program treats assets further discourage savings. Some asset tests also ignore a family's liabilities, even if they exceed assets. Any policy agenda should make asset tests more equitable by taking account of liabilities and by treating all types of assets similarly.
For more information:
Evaluation methods are needed to understand assets and liabilities and create asset-building policies
Political support around asset building has led to the development of many proposed policies, some of which have become law. Yet good methods for evaluating those policies have not yet been established. UI Senior Fellow Robert Lerman made an initial attempt by examining traditional criteria for the ways they could be applied. Other researchers identified the most reliable and informative data sources for understanding low-income households’ assets and liabilities, then provided options for improving them.
For more information:
Events
The Future of Subprime Mortgages: A new Urban Institute Press book, Edward Gramlich's Subprime Mortgages: America's Latest Boom and Bust, was the starting point for this July 25, 2007 discussion. A panel of experts analyzed what ails the subprime mortgage market and argued what should be done to preserve the benefits of subprime financing while safeguarding homebuyers.
Event page (with audio files)
First Tuesday: Opportunity, Assets & Ownership: An expert panel spoke on this evolving policy agenda at the Urban Institute on March 1, 2005. Topics included the sharp contrast between policies that promote ownership and the income-tested programs that typically impose saving disincentives, the president's agenda for promoting ownership, the importance of savings initiatives, and the emerging problem of home mortgage foreclosures.
Full transcript
Asset-Related Research
View by Topic
Select from the topics below to display relevant research.
Wealth Accumulation Over the Life Cycle
Wealth Accumulation Early in the Life Cycle
Wealth Accumulation in the Middle of the Life Cycle
Wealth Accumulation at the End of the Life Cycle
Toward an Integrated Wealth Building Policy
The Opportunity and Ownership Project is made possible by generous funding from the Annie E. Casey Foundation and the Ford Foundation. Specific publications cited above have also been supported by other valued funders.
Contributing Researchers
Edward Gramlich was an integral, inspiring member of the Opportunity & Ownership research team. A sagacious public servant, forward-thinking researcher, and patient teacher, Ned died in September 2007 from leukemia. We dedicate our work to him.
- Barbara Butrica, senior research associate, an economist and expert in retirement income security;
- Adam Carasso, research associate, an analyst in tax, transfer, and retirement policy;
- Henry Chen, research assistant, an analyst in the causes and effects of asset building for low-income households;
- Edward Gramlich, senior fellow, an expert in macroeconomics, public finance, and affordable housing;
- Robert Lerman, senior fellow, an expert in economic inequality, economics of family structure, and labor markets;
- Signe-Mary McKernan, senior research associate and economist, an expert in credit and asset-building for low-income families;
- Gordon Mermin, research associate, an economist focused on factors affecting future retirement needs;
- Lynette Rawlings, research associate, an expert in housing, self-sufficiency, and concentrated poverty;
- Gillian Reynolds, research assistant, an analyst in tax policy;
- Eugene Steuerle, senior fellow, former Deputy Assistant Secretary of the Treasury;
- Desmond Toohey, research assistant, an analyst in retirement policy and asset development;
- Margery Austin Turner, center director, an expert in housing market discrimination and segregation, housing choice and residential mobility, and housing needs and market assessments; and,
- Sheila Zedlewski, center director, an expert in retirement policy and income security.
