Most
of us understand that a family’s income can determine whether children grow up
in a safe neighborhood and stable family, get proper nutrition and health care,
and receive high-quality child care and schooling. We know that poverty is
especially damaging and can permanently impair children’s language and memory
skills.
By
contrast, few of us understand the extent of child poverty and financial
vulnerability in the United States. We underestimate these problems because the
common way of measuring poverty, comparing a family’s income to the federal
poverty line, only tells half the story.
The other half involves savings and assets. Asset poverty measures a
family’s financial vulnerability to economic shocks—if one’s income was suddenly cut off, due
to unemployment, a medical emergency, or even divorce, would they have enough
assets to live at the federal poverty level for three months?
The
dramatic reality is that fully 22.5 percent of American households are living
in asset poverty, compared with 13.2 percent of individuals living below the
federal poverty line. And 14.3 percent of them live in extreme asset poverty
with no net savings or assets whatsoever (zero or negative net worth).
Assets
provide more than a cushion against hard times. Household savings help to build
aspirations and expectations for the future, which in turn powerfully affect
high school and college completion. A recent study by the Center for Social
Development at Washington University in St. Louis found that children in
households with dedicated college savings, regardless of income or academic achievement,
are four to seven times more likely to attend college.
Yet,
it is precisely in households with children that asset poverty is most
concentrated. The
Financial Security of Households with Children, a new report by my
organization, the Corporation for Enterprise Development (CFED), shows that
fully 27.3 percent of these households are living in asset poverty, with 16.6
percent of them in extreme asset poverty. For African-American households with
children, these figures reach a staggering 49 and 32.1 percent, respectively.
The
good news is that there is much we can do to help poor families save and build
assets. We can crack down harder and more smartly on predatory lending, whether
in the form of payday loans (a typical borrower pays back $793 for a $325 loan),
interest-only mortgages, or tax refund anticipation loans. We can facilitate
the opening of bank accounts by the 42 percent of unbanked or under-banked
households and encourage the direct deposit of paychecks and government
benefits into them, thereby limiting the use of check-cashing establishments
that charge exorbitant fees.
Congress
could pass the revised Savers Credit and auto-Individual Retirement Account
legislation. It could establish universal children’s savings accounts, as the
United Kingdom and one state have done, to jumpstart children’s savings and
make it easier for them to afford college.
An
important immediate step is the reauthorization of the Assets for Independence
Act, which leverages funding for the matches that make Individual Development
Accounts (IDAs) – special savings accounts that use government and nonprofit
money to match low-income families’ savings for a home, post-secondary
education, or a new business – possible and effective. Recent research by CFED and the Urban
Institute shows that individuals who bought their homes through participation
in an IDA program were one-third as likely as their non-IDA counterparts to
experience foreclosure.
The
larger point is that asset poverty is undermining the efforts of too many families
trying to raise their kids for success and that we can dramatically reduce
asset poverty by taking some relatively modest and practical steps. We already provide
incentives for middle-class asset building through a variety of tax credits. Let’s resolve to provide more such incentives
to the families who most need them. The result will be brighter futures for
their kids and for generations to come.
Andrea Levere is president of CFED, a nonprofit group that works to
expand economic opportunity by developing and testing new ideas for wealth
creation and advocating for taking good ones to scale.
Viewpoints in this section solely represent the authors’ opinions and not the opinions of "Spotlight on Poverty and Opportunity."