The Savings Net

This article appeared previsouly in the 2010 Hunger Report, published by Bread for the World Institute.

Meet Mary. She and her two young children aren’t destitute, but they’re not exactly on firm financial ground either. Working full-time, Mary earns about $18,000 a year, which means that she falls into the lowest 20 percent of U.S. earners.¹ When all is going well, Mary’s checking account balance hovers around $500, but she has no savings for an emergency and she often runs out of money by the end of each month.

Rather than buy infant formula right when she needs it, Mary waits until minutes after midnight on the first of the month—when the monthly paycheck is safely deposited to her account—before heading to the store. Sadly, her strategy is not unusual. Consider this report from Wal-Mart’s CEO about the discount chain’s odd new pattern of sales:² “Most of our stores are open 24 hours, and we’ve seen an increase in sales just after midnight on the first of the month,” Mike Duke recently told an assembly of Wall Street investors. “And sales of the most basic items, even infant formula, spike on the first and second day of the month. Our customers have been under a real strain, and [are] having to manage very, very carefully.”³

Every year Mary incurs approximately $2,000 in unplanned, emergency expenses, meaning she must rely on credit cards to keep emergencies from ending up as catastrophes. Living within her means doesn’t make it less likely that the car will break down or one of her children will get sick; at those times, she needs to tap easily accessible emergency funds.

Before the economic downturn, it was safe to say that she lived “paycheck to paycheck.” In a jam, she could ask a friend or family member for a small loan, and in a bigger jam she could turn to a payday lender. But now many of her friends and relatives are unemployed or worried about becoming so.

The Role of Savings

More than one in five Americans do not have enough savings to support their most basic needs for three months if they suddenly had no more income.⁴ Not being able to meet basic needs for three months is called asset poverty, and it’s now the norm in working-class America. In 2004, minorities suffered asset poverty at more than twice the rate of non-minorities.⁵

In times of financial instability, savings are an important asset that everyone should have. But savings matter more than that. Over time, savings can grow and then be used to make investments that help families climb the economic ladder. For example, parents who invest $300 per year, beginning the year their child is born, can amass $20,000 to pay tuition by the time she reaches 18.⁶ Furthermore, research over the last two decades indicates that savings can also change how people think about the future and helps them to become more circumspect when making financial decisions.

The federal government currently spends more than $400 billion annually on asset-building activities, including promoting post-secondary education, homeownership, entrepreneurship, and retirement security.⁷ The majority of these efforts are designed to encourage savings⁸, but they are almost entirely for people who need financial security the least. None of the programs reach those who need it most: the working poor.⁹

Given the uneven incentives to save and build assets, it should not come as a surprise that the nation’s wealth is unevenly distributed across income groups. The richest 1 percent of the population owns 25 percent of the nation’s wealth, while the bottom 80 percent owns less than 15 percent.¹⁰ As the figure shows, wealth is even more skewed to the top than income.

How Policy Can Help

It is possible for people living paycheck to paycheck to save—and with some changes in public policy and business practices it could be made easier. Two pragmatic ways to boost individual saving are to provide (1) access to impartial financial education and (2) access to a low-fee savings account where families can make easy and automatic deposits. The following proposals explain how policymakers can do this.

Create a Volunteer Financial Services Corps to make budgeting and financial advice available for wage workers.

In 2007, a group of financial education experts representing a cross-section of industries proposed the creation of a Financial Services Corps to close the gap between the demand for financial knowledge and the limited supply of affordable instruction. They envisioned that it would harness the expertise of volunteer financial experts, planners, and advisors to deliver targeted (“one-on-one”) financial expertise and advice to lower-income individuals and families. As the Legal Services Corporation supports the provision of free or reduced-price legal services through a network of legal aid programs,¹¹ the Financial Services Corps could operate similarly, with the express purpose of increasing access to unbiased financial experts on a range of financial topics.¹² The subprime lending epidemic was driven by a proliferation of bewildering financial products. A Financial Services Corps could help to demystify such products, ensuring that affordable, expert financial advice and coaching is available to the low-income families who need it.

Promote saving for unrestricted purposes at the workplace.

While it is important to acknowledge that households living paycheck to paycheck have limited choices when it comes to setting aside discretionary income, we know that even a small amount of savings can prevent some problems from turning into bigger ones—for example, getting the car repaired to avoid losing one’s job.

We also know people will be more likely to begin saving and establish a habit of saving if they have information and structures to help them get started. One such structure which can help make it easier for families to save is the AutoSave approach. AutoSave gives employers the ability to directly deposit an employee’s take-home wages into multiple accounts. The majority of the money goes into a checking account, but a small percentage can be regularly deposited into an individually-owned, unrestricted savings account. Over time, this account can grow into a respectable emergency savings cushion. And the best part is that it doesn’t require any major effort from employees; they just sign up at work and the savings automatically accumulate in their account.

The New America Foundation and MDRC are conducting a national pilot to explore the AutoSave approach’s feasibility, specifically looking at employers’ willingness and ability to offer a simple enrollment process; financial institutions’ willingness and ability in this context to furnish banking products with suitable terms; worker participation rates and sustained contributions to their unrestricted savings; and the costs associated with implementing an automatic-savings mechanism.

Conclusion

Savings are more important now than ever to the economic security of American families. Minimizing financial harm to these families and our economy will require government policies that encourage and make it easier for families to save and build productive assets. Households need a new framework for achieving economic security —and it’s not the credit card.

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Footnotes

1. 2007 Survey of Consumer Finances, upper range of income for the 20^th percentile of income.
2. Sean Gregory (March 14, 2009), “Wal-Mart vs. Target: No Contest in the Recession,” Time.
3. Sarah Mahoney (September 9, 2009), “Wal-Mart CEO: 'Purchase Deferral Is the New Normal',” MediaPost News.
4. Corporation for Enterprise Development, CFED 2009-2010, Assets and Opportunity Scorecard.
5. Ibid.
6. Reid Cramer (October 2007), ASPIRE ACT FAQ, Estimate from Question 26, New America Foundation.
7. Reid Cramer and Collin Siu (July 2009), The Assets Report 2009, New America Foundation.
8. Ibid. New America Foundation estimates FY2010 includes $63.55 billion in direct spending and $362.39 billion in tax subsidies.
9. Ibid. New America Foundation estimates (p. 17) 90 percent of the benefits in the two largest tax expenditure categories (homeownership and retirement) primarily reach households with incomes above $50,000 a year.
10. Lawrence Mishel, Jared Bernstein and Heidi Schlerholz (2008), The State of Working America 2008/2009, Economic Policy Institute: Table 5.6.
11. Legal Services Corporation.
12. Melissa Koide (April 2008), Financial Services Corps : A Policy Proposal,  New America Foundation.