Wealth Inequity, Debt and Savings

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1 Wealth Inequity, Debt and Savings Implications for Policy and Financial Services Sandra Venner FDIC Alliance for Economic Inclusion May 21, 2008

2 Today, government wealth building policy is primarily in the tax code $367 billion annually in tax code for individual wealth building 45% of this accrues to the wealthiest 1% Bottom 60% of Americans receive 3% of the tax benefit Poor families continue to be penalized through asset limits that restrict eligibility and cap assistance benefits For decades, government policy has created opportunity platforms for many Homestead Acts of mid-1800 s offered property and livelihood New Deal policies supported changes in home mortgage structure opening up homeownership GI Bill greatly expanded homeownership, small business and educational opportunities

3 But past policies largely excluded segments of population contributing to the racial wealth gap Median income of Hispanic and African American households is 2/3 that of White households, but their median wealth in only 1/10 For homeowners, wealth of Latinos and Blacks increases to one-half that of Whites Net worth of immigrant households of all racial and ethnic groups is only 37% of native households net worth But for many Americans of all groups net worth is zero or negative 32% of African American households, 26% of Hispanic and 13% of White

4 Community Engagement Findings MASSCAP Asset Formation Initiative Results of 2007 survey of EITC recipients at ten Community Action Agencies (CAAs) VITA centers and three-month follow-up survey (2008 survey in process) Results of survey of participants entering financial education classes at eight CAAs in Spring and Fall of 2007 (Six-eight month follow-up survey results available soon) IASP Massachusetts Asset Policy Initiative Focus groups in Boston, Dorchester and Chelsea, Nov. 07 March 08

5 Debt as Reported by EITC Recipients 81% of respondents owe money; 20% report owing $10,000 or more 80% report problems meeting routine expenses, but only half that number report having serious financial problems Source of Debt Percent Credit card bills 58.0 Utility bills 43.0 Borrowed money from others 30.0 Medical bills 21.0 School loans 17.0 Focus Groups: Reasons for Debt My car was vandalized and I had to pay to get it fixed. My husband was abusive so I had to use credit cards to escape my situation. My job at the airport was terminated after 9/11, we lost our home, my husband divorced me, and for four months I used credit cards to pay rent, food, gas everything.

6 Focus Groups: Incurring and Managing Debt People have general lack of knowledge about managing money; if it is not taught in school, you only know what you learned at home. Public schools should provide financial education for youth Many people feel hopeless about debt; lack of control of their personal financial situation; just can t deal with it. Some people know credit score is available, but do not want to know what can t do anything about. Some have been proactive to get credit card companies to lower interest rate and set up payment plan. They found you can get a reasonable arrangement if you keep to payment plan, but most people do not know how to advocate for this. Support of peers does more to reinforce good financial decision making than what a financial educator says.

7 Planned Uses for Tax Refund in 2007 Regardless of size of tax refund, everyday expenses high priority For those with refunds more than $500, paying off debt takes on greater importance Intent to put money in savings goes up with the size of refund Half of those anticipating refund over $4,000 plan to save Planned Use vs Expected Amount 70.0% 60.0% 50.0% 40.0% 30.0% ,999 2,000-3,999 more than 4, % 10.0% 0.0% everyday expense other debt credit card debt other savings car education household purchase home repair retirement IDA

8 Actual Uses of Tax Refund and Savings Significantly more used tax refund for everyday expenses (68%) than planned (48%) Paying off bills and personal loans and needed vehicle purchase also interfered with planned savings goals Yet, almost 40% put money into a savings account Many anticipate that money put into savings will be used to pay off bills, thus avoiding future debt Most common planned uses of savings are buying or repairing car and child s education

9 EITC Recipients: Reaching Savings Goal What interfered with planned savings goal Gave daughter money for security deposit so she could move into a subsidized apartment Get rid of bill collectors, instead of going on shopping spree Had to pay bills and people's loans back. More went to car purchase than anticipated and less for children s educational expenses Paid more of bills than expected Wanted to pay off bills but had to buy a car instead 87% respondents said they would like to save more next year >>> What help to reach savings goal? Financial education classes ahead of time to help plan Percent 47 A savings club for support and encouragement 32 Debt counseling to manage debt payments 32 Help opening a savings account 15

10 Focus Groups: Experience with Saving Need opportunity to breathe and feel no longer on the brink, before can save. Fear that savings will trigger asset limits imposed for TAFDC and other public assistance programs and make ineligible for assistance in an emergency. Force people to save in non-traditional, risky ways For almost everyone financial goals do not include saving for retirement, many expect that Social Security will have to do. There is not enough discussion at work about importance of saving for retirement. Opt out retirement plans are a good idea where employers offer savings options

11 Banked vs Unbanked Of those surveyed EITC respondents (15%) who do not have a bank account: 42% are male vs 18% of banked respondents Less education Poorer 29% did not graduate for high school vs 12% 39% have no more than a high school degree vs 30% 38% have income of $5,000 or less Another 28% have income of $10-15,000 Less than 15% of those who did not have a checking or savings account opened one since receiving their tax refund

12 Focus Groups: Bank Accounts and Services There is general awareness of higher fees for use of check cashing services, but a belief many lack knowledge of the full benefits of being banked. Some report not trusting banks, being intimidated by financial institutions, or using the check cashier because that is where their mother went. Banks are not open convenient hours and it is not safe to use ATMs in their neighborhood. Others have a history of overdrawn accounts and defaulting on payments that prohibit them from opening a new account. But the nature of formal banking services also presents obstacles: Delay in funds being recorded in bank account is an issue for those who need to immediately use revenue from check to pay overdue bills That Friday, Saturday and Sunday together count as one bank day is problematic

13 Participants in Financial Education Classes 92% are banked, but 25% do not have a savings account Amount of Debt 87% have non-mortgage debt 33% owe $1-5,000 40% owe $10,000 or more Saving 43% save regularly Of those who save, over 70% save $ per month Barriers to Saving Daily expenses (utility bills, housing costs, transportation) Debt and loaning money to friends and family Low income or job instability

14 FLE Participants: Money Management Almost half seek financial advice from community organizations Three quarters turn to family and friends for financial advice Why people want financial education: Save for home: I want to learn how to better manage my finances so I can someday be a homeowner and better provide for my family. Business: Help with building my business and it sounded so good. Matched Savings: The matched savings program is a wonderful opportunity and unheard of to me. I am hoping to better manage my income to become more financially stable. Manage debt: I need to know more about keeping myself out of debt, and more about money and making something out of it.

15 Policy and Financial Services Implications Increase state Earned Income Tax Credit From 15% to 30% of Federal; Increase likelihood of saving Support free tax preparation services and connect to opportunities to: Enroll in public assistance benefits Open savings account Check accuracy of credit record and link to resources to help repair Access possible ways to better manage debt Sign-up for further financial education Incorporate financial education in: K-12 curriculum along with in-school banks Learning exercises for ABE and ESOL Workplace sponsored luncheon sessions Training for human service case managers and community workers

16 More Policy and Financial Services Implications Increase support for Individual Development Accounts (IDAs) and expand allowable uses to include auto purchase and repair, child s education and retirement savings Encourage more progressive 529 college savings plan Create match for low income depositors and users Lower cap for amount of annual contribution deductible from state taxable income Identify avenues to better invest in immigrant and minority business start-ups and growth Revise or eliminate assets limits in public assistance programs In Massachusetts substantially raise asset limits for TAFDC and index for inflation Federally, promote raising of SSDI and SSI asset limits; exclude savings in retirement plans and education plans from all federal program asset limits; and index all limits for inflation

17 References Carasso, Adam et al, How Much Does the Federal Government Spend to Promote Economic Mobility and for Whom?, Economic Mobility Project, The Pew Charitable Trust, Kochhar, Rakesh, The Wealth of Hispanic Households: 1996 to 2002, Pew Hispanic Center, Washington, DC, October 18, Parker, Jonas, Financial Literacy Education: Baseline Survey of Clients*, Presentation for MASSCAP, November 1, 2007, Institute on Assets and Social Policy, Brandeis University. Shapiro, Thomas, Remarks to the Massachusetts Asset Development Commission, March 13, 2008, Institute on Assets and Social Policy, Brandeis University. Venner, Sandra, Follow-up Survey of EITC Recipients: June-September 2007*, Presentation for MASSCAP, November 1, 2007, Institute on Assets and Social Policy, Brandeis University. Venner, Sandra, Preliminary Report of Community Engagement, Institute on Assets and Social Policy, Brandeis University, Waltham, MA, April 11, Venner, Sandra, Survey of EITC Filers at Tax Preparation Sites: February- April 2007*, Presentation for MASSCAP, November 1, 2007, Institute on Assets and Social Policy, Brandeis University. * Available soon at Institute on Assets and Social Policy web site Sandra Venner, Fellow and Program Director ph# venner@brandeis.edu