Prepared remarks of Justin King, from the Congressional Out-of-Poverty Caucus' September 30 event, "An Emergency Response to the Crisis of Poverty in America."
Thank you for having me here today, it’s a pleasure to speak on such a distinguished panel and on such an important topic. I’m Justin King from the Asset Building Program at the New America Foundation. My purpose today is to bring two concepts into your awareness, the first is that the problem of poverty is more widespread than the official numbers show and second, that our current approach to fighting poverty is fundamentally flawed and can be improved significantly.
The problem of poverty is much bigger than what is currently measured. As you have heard, the current poverty measure is outdated and doesn’t accurately reflect the needs of a modern family.
In addition, the poverty measure looks at income at a moment in time and gives no weight to a family's overall economic condition.
A more complete measure of family economic security would include the concept of "Asset Poverty." In determining Asset Poverty we ask if a family can survive a loss of income for three months, existing only on savings in that time?
By this measure, 22.5% of all Americans are in Asset Poverty. 37% of non-White Americans are asset poor. Those numbers are based on 2006 data from the Corporation for Enterprise Development, and the figures are most assuredly larger now.
While income poverty tells us who is experiencing hardship, asset poverty tells us who is on the cusp.
This measure of vulnerability is critical since it better reflects economic stability. Families in poverty or in asset poverty are both extremely susceptible to small fluctuations in income or expenses. The presence of assets creates a buffer and families above and below the poverty line often do not have enough cushion.
Second, safety net programs address income poverty but exacerbate asset poverty by discouraging and preventing savings among low-income Americans.
While families receive assistance from safety net programs, the presence of asset limits within these programs prevents them from developing the cushion that will allow them to weather financial shocks, become financially independent, and move toward the middle class. Safety net programs are designed to provide stability in times of need, savings aids stability and programs that ignore this undermine their own goals.
In many cases, asset limits within federal programs are set by the individual states. This creates a maze of eligibility requirements that confuses both families in need and the program staff who are trying to administer aid.
Many families are eligible for assistance from multiple sources and as such the lowest programmatic asset limit becomes the de facto limit for all sources of aid. In many states, the TANF asset limit is as low as $1,000. By keeping asset limits so low, we set families up to fail.
Regardless of the size of the asset limit, research suggests to us that the mere existence of asset limits, regardless of the level, has a “chilling effect” on savings behavior as families avoid saving or avoid reporting savings for fear that their meager holdings would eliminate them from eligibility.
Also, consider the case of a middle class family that lost their employment in this Great Recession. In order to qualify for temporary assistance they must spend down their assets, losing control of the markers of middle class life in order to cope with a short-term emergency. Our current policy sends these families back to square one. The same place our policy works to keep too many low-income families who receive aid.
Preventing low-income families from saving is bad policy. Families that can save have better outcomes.
Research done by New America and the Pew Economic Mobility Project shows that children of high-saving, low-income parents are much more likely to be upwardly mobile economically than children of low-saving, low-income parents (71% to 50%, according to the Pew Economic Mobility Project).
High savings rates also help adults escape poverty within their lifetime (55% to 34% for low savers, Pew again.)
We all agree that education is a key tool to fight intergenerational poverty. When children have a savings account in their name, they are seven times more likely to attend college, even when controlling for family income, household net worth, and parental educational attainment (Elliott and Beverly, “The Role of Savings and Wealth in Reducing “Wilt” Between Expectations and College Attendance.”)
Steps can be taken to remove savings disincentives, connect families with safe financial products, and alleviate short-term and intergenerational poverty.
The first, and biggest step for families in poverty would be to raise or eliminate the asset limits on federal means tested programs. The Obama Administration has proposed a $10,000 national floor for asset limits in federal means-tested programs. This is a strong and promising step to take and would do a great deal to promote savings and the development of greater financial stability for low-income Americans.
The administration is also working to promote access to basic financial services, through their Bank On USA proposal, which would connect low-income Americans to low-cost financial services. Steps like this that help to separate low-income families from wealth-stripping products and services are critical to the success of an asset building framework.
Finally, Congress can and should take steps to promote savings for low-income Americans by developing proposals that promote access to and adequacy of savings.
Existing proposals to expand the Saver’s Credit, or better yet an alternative proposal called the “Saver’s Bonus” would be a strong step in the right direction.
The Auto-IRA proposal put forward by the Administration would expand retirement security to nearly tens of millions of Americans who are not included in the current system. Most of all, a universal, progressive system of Children’s Savings Accounts would create a new incentive for all families to save, develop financial stability and begin to be able to make life-changing investments in their own futures.
Thank you for this opportunity and I look forward to any questions.