Four ways to help low- and moderate-income families build wealth
You may have read about the worrying trends concerning wealth and mobility in America. Americans were hit hard by the Great Recession, and household balance sheets have been slow to recover.
Worse, young families and families of color have been falling behind on wealth-building for some time. The good news is that there are opportunities to move the dial, if even a little, to counteract these trends.
Policies that enable families to save early, often, and automatically are key. Last fall, a group of the nation’s leading wealth experts convened here at the Urban Institute to identify possible policies to help families onto a wealth-building path. Last week, the conversation continued at an Urban Institute-sponsored briefing on Capitol Hill.
Addressing attendees, Representative Thomas Petri recalled the famous quip attributed to Einstein that compound interest is the most powerful force in the universe. Being on the wrong side of that force, Petri noted—having inadequate savings, high levels of debt, and little training or education—can crush vulnerable families. Being on the right side, however, can open up opportunities for upward mobility and self-sufficiency.
So what policies can help?
- Children’s savings accounts (CSAs) can be valuable tools for building savings and teaching financial capability. CSAs get families and communities involved and hopeful about their children’s financial futures. Even having small amount of savings for college by high school graduation has been shown to increase college enrollment, possibly by creating a college-bound identity for children. CSAs can do double duty if seed funds and matches on contributions are tied to achieving other outcomes, such as graduating from high school.
- Make savings automatic. Having a safe place to deposit money and earn a decent return is the first step toward building savings. Access is crucial. Policies that expand access to retirement accounts at work and automatically enroll workers are a good place to start, and some efforts are already underway at the state level.
- Paying down a mortgage and building equity in a home, month by month, can be a powerful, automatic way to build assets to draw on later in life. Unfortunately, conversations about homeownership often encourage low-income families to buy when prices are high, and discourage homeownership for the same families when prices are low. Further, current tax incentives for homeownership (and other forms of saving) are “upside down”—going mainly to high-income households that are likely to own anyway, and promoting larger and more expensive homes in the process. Replacing the mortgage interest deduction with more targeted incentives could help more low- and moderate-income families into homes.
- Remove barriers to building assets and help families build emergency savings. Asset limits in safety net programs such as TANF and SSI can punish families for having savings or even owning a car. Tax time is a strategic moment for encouraging saving and connecting families to financial services. Families receiving refundable tax credits could be encouraged to save a portion of their refund with an additional match into a savings account, building a foundation for vital emergency savings.