Trends in Savings, Debt, and Net Worth

Transcription

1 New America Foundation Asset Building Program Trends in Savings, Debt, and Net Worth Testimony to FDIC Advisory Committee on Economic Inclusion (ComE-IN) Reid Cramer, Director, Asset Building Program December 13, 2012 It is a pleasure to be with you today. My name is Reid Cramer and I direct the Asset Building Program at the New America Foundation. New America is a multi-issue, nonpartisan policy institute based here in Washington, D.C. My program is focused on incubating policy ideas that increase saving opportunities for low- and middle-income. A growing body of evidence suggests that savings and asset ownership promote both long-term economic security and social development for individuals, families, and communities. While the financial sector provides a range of services demanded by the market that also promote financial security, I see an additional and complementary role for the public sector. The federal government maintains a broad objective to help people increase their economic well-being. As a regulator, the FDIC is well-positioned to play an important role in the financial lives of millions of Americans. Thus, the work of this advisory committee is particularly valuable. I applaud your efforts and the efforts of FDIC s leaders who have asked you to dig into some hard questions. In my remarks today, I want to help you in your deliberations as an advisory body by offering some insight into what is happening in the U.S. with respect to trends in savings, personal debt, and household net worth. We are living in a consequential time, characterized by the lingering effects of the Great Recession, rapid technological changes, and evolving consumer preferences. We know that the ability to manage personal finances effectively is a major determinant of an individual s economic well-being. Prior to the Great Recession, we were in the midst of a multi-decade decline in the personal savings rate. The personal savings rate is calculated by the U.S. Department of Commerce as the percentage of disposable income that is not spent. We see dips and gains but since the early 1980s, the aggregate trend has been downward.

2 1/1/2000 7/1/2000 1/1/2001 7/1/2001 1/1/2002 7/1/2002 1/1/2003 7/1/2003 1/1/2004 7/1/2004 1/1/2005 7/1/2005 1/1/2006 7/1/2006 1/1/2007 7/1/2007 1/1/2008 7/1/2008 1/1/2009 7/1/2009 1/1/2010 7/1/2010 1/1/2011 7/1/2011 1/1/2012 7/1/2012 Personal Saving as a Percentage of Disposable Income 1/1/1980 5/1/1981 9/1/1982 1/1/1984 5/1/1985 9/1/1986 1/1/1988 5/1/1989 9/1/1990 1/1/1992 5/1/1993 9/1/1994 1/1/1996 5/1/1997 9/1/1998 1/1/2000 5/1/2001 9/1/2002 1/1/2004 5/1/2005 9/1/2006 1/1/2008 5/1/2009 9/1/2010 1/1/2012 Personal Saving as a Percentage of Disposable Income Figure Personal Savings Rate, Source: U.S. Department of Commerce: Bureau of Economic Analysis (2012). The personal savings rate is influenced by many factors. Economists have argued in turn that this trend was driven by a wealth effect, the decisions of the very wealthy, or perhaps global trade imbalances. Whatever the causes, before the Recession hit the rate of saving declined to historic levels at the same time as consumer and mortgage debt grew. In late 2008, we see an abrupt stop to this decline. The graph below shows the personal savings rate over just the last 12 years. It gives a sense of how people have responded to the recession and may offer some insight into changing behaviors and attitudes. Figure Personal Savings Rate, new america foundation page 2

3 The first arrow points to the personal savings rate bottoming out between 2005 and The second arrow shows the jolt of the financial crisis in The low levels of savings meant many families had limited resources to draw upon to deal with the impact of the crisis, which for many families led to income loss or mortgage payments that suddenly exceeded the value of their homes. The hardship and uncertainty created a saving spike. But government action, with TARP and the Recovery Act, stabilized the economy and mitigated the recession s impact. Even though the recovery has been modest, the saving rate is waning once again. Today, we remain at levels below historic norms. This means is that predictions that the Great Recession might prompt large-scale changes in consumer behavior are not reflected in current trends. While we may see attitudinal changes occurring, the personal saving rate in the aggregate does not reflect any meaningful change from conditions before the recession took hold. The flip side of savings of course, is debt. The graph below shows a long-term look at America s ratio of private debt compared to GDP over the past 90 years. We can see two massive spikes in the ratio of debt held, both occurring on the lead up to a financial crisis: first the Great Depression, then leading into the Great Recession. These two spikes represent the only two periods in our history where the ratio grew by 40% in a decade or less and where the amount of private debt exceeded 150% of GDP. Figure 3. Source: Clemons, Steve and Richard Vague (2012). new america foundation page 3

4 Median Net Worth in $ Increased debt coupled with low saving levels led to asset bubbles. When these bubbles popped, they hurt families and had an impact on the broader financial system. While the economy was fundamentally different in the 1930s, the pace of adjustment in the wake of the Great Depression was much more rapid than the adjustment we saw post-great Recession. If the overleveraging of the economy was one of the factors bringing on the Great Recession, it seems as though we have a ways to go in our deleveraging process both at the household and macro-economic level. The damage done to household balance sheets was extensive and needs to be addressed by policymakers. In particular, the wealth of average American families was decimated by the Great Recession. According to data from the Survey of Consumer Finances, between 2007 and 2010, American families median net worth fell 38.8 percent. The housing crisis was a key driver of this decline, as declining home values stripped wealth away. However, even excluding the value of homes and mortgage debt, overall median net worth declined from $42,300 in 2007 to $29,800 in 2010, a 30 percent decline. Figure 4. Median Household Net Worth, 2007 and , , ,000 80,000 60,000 $126, ,000 $77,300 20,000 0 $42,300 $29,800 Source: Bricker, et. al. (2012). The gaps in wealth by race remain severe and have widened with the Great Recession. For every dollar white people had in the year 2010, people of color had just 15 cents. The very modest gains made during the earlier part of the decade were effectively erased by the Great Recession. While white Americans lost more wealth in dollar terms, Americans of color lost a greater percentage of their wealth and ended the decade worse off than they had started. White families lost 36 percent of their net worth from 2007 to Black families lost 50 percent. These dramatic disparities require greater attention from researchers and policymakers. new america foundation page 4

5 Figure 5. Median Wealth by Race: , , , ,000 80,000 60,000 Black Hispanic White 40,000 20, Source: Economic Policy Institute (2012). We care about savings and wealth because we know that assets have tangible and immediate benefits for individuals and families. However, we also care about the connection between savings and economic mobility. Pew s Economic Mobility Project has demonstrated that children of low-income, but high-saving parents are more likely to experience upward mobility. In their study, they organized parents in order of their personal savings rates between 1984 and 1989 and then divided them into high and low savers (above or below the median). A generation later, there were striking differences in their children s mobility outcomes according to whether their parents were high or low savers. For children raised in the bottom 25 percent of the income distribution, 71 percent of those with high-saving parents moved up from the bottom over a generation. In contrast, roughly half (50 percent) of children raised by low-saving parents moved up from the bottom a generation later. This research supports the hypothesis that savings is a foundation for economic mobility and other asset building activities that can unfold across the life course. new america foundation page 5

6 Figure 6. Personal Savings Promotes Upward Mobility from the Bottom 10% 16% 16% 22% 24% 33% 50% Parents Had Low Savings 29% Parents Had High Savings Source: Cramer et al. (2009). This hypothesis on the relationship between savings and economic mobility has been put to the test in a series of pilot and demonstration programs which offered matches for savings, Individual Development Accounts, interventions at tax-time, automatic enrollment in workplace savings programs, and default payroll deductions into savings accounts. All of these programs were designed to assess if people could save even when they had low incomes. These pilots have taught us about the savings process for lower-income people. We know that people can save if they can access the right kinds of incentives, supportive savings infrastructure, and consumer protections, even if they start out with few economic resources. We also have data on how and why people save. In 2010, when asked by the Federal Reserve s Survey of Consumer Finances whether they saved during the past year, only 52 percent of Americans said they did, the lowest percentage since this question was first asked in FDIC s own survey indicates that the percentage of unbanked American rose between their most surveys: in 2011, 8.2 percent of Americans did not have a checking or savings account compared with 7.7 percent in The percentage of Americans who are underbanked (that is, Americans who have transactional accounts but still rely on alternative financial services) rose to 20.1 percent in 2011 from 18.2 percent in Americans have complex and diverse reasons for saving but have consistently identified the need for liquidity (that is, flexible savings) and retirement as their two top priorities. Since the Great Recession, the need for liquidity inched out retirement as the top savings reason. People across the income spectrum have struggled to maintain adequate asset levels to whether unexpected dips in income. This challenge might explain the rise in liquidity as a top priority. new america foundation page 6

7 Figure 7. Source: Bricker, et. al. Table 4. (2012). Liquid assets are just one component of the household balance sheet, which is comprised of both assets and debts. Forthcoming analysis by Clinton Key examines the Survey of Consumer Finances to develop a moment-in-time snapshot of a typical family in 2010 (that is family situated between the 25th and 75th percentile with an annual income of about $50,000). Figure 8. The Typical Household 2010 Balance Sheet Assets Debts Liquid $3,142 Credit $440 Physical $121,427 Housing $16,306 Financial $42 Other Physical $891 Retirement $2,807 Education $0 Miscellaneous $25,655 Miscellaneous $0 Total $241,067 Total $43,576 Net Worth $164,647 Note: Total assets and debt do not add to 100 percent. They are calculated as the mean value between the 25th and 75th percentile for each of these categories. Source: Analysis by Clinton Key (forthcoming). new america foundation page 7

8 The balance sheet is comprised primarily of physical assets (such as housing) and small amounts of retirement savings. Debts are also mostly made up of housing. Liquid asset holdings are around $3,100, representing funds in both savings and checking accounts. These are funds are of particular interest to people in the asset building field because they are the funds that can be accessed quickly in the state of emergency. Even when there are debt holdings, there is a great deal of value in having access to liquid asset holdings to handle an emergency. Levels of liquid assets vary tremendously across income categories. Unsurprisingly, people do save more as they move up the economic ladder. People living in poverty, on average, have a modest $520, but this includes some families with very low incomes. Figure Liquid Assets (Savings and Checking Accounts) By Income Below Poverty $520 Poverty to median income $1,995 Median to 80 th percentile $5,325 By Race White $5,797 African-American $1,041 Latino $989 Source: Analysis by Clinton Key (forthcoming). Higher up the income ladder households have substantially higher liquid assets. Families with incomes between the poverty threshold and the median have almost $2,000, while those with incomes from the median to the 80th percentile have over $5,000. These families have about $64,000 in annual income. Racial disparities in liquid asset holdings are significant. The typical white family has almost $5,800, while families of color hold just $1,000 in liquid assets. These figures depict a divergent experience with personal finance and have implications for policy design. However, there may be a silver lining when we look at the recent trends in holdings on the balance sheet. Between 2007 and 2010, we see the typical family increasing their liquid asset holdings (savings and checking) even as their overall wealth declines. new america foundation page 8

9 Figure 10. Household Trends Typical Household Liquid Assets $2,979 $2,831 $3,142 (6%) Net Worth $172,555 $159,332 $164,647 (-5%) Poverty to Median Liquid Assets $2,059 $2,339 $1,995 (-3%) Net Worth $114,186 $113,759 $104,827 (-8%) Source: Analysis by Clinton Key (forthcoming) Even as net worth declined by five percent during and since the Great Recession, liquid asset holdings rose slightly by six percent to $3,100. Families living between the poverty line and median income saw less of a relative decline in their liquid assets than net worth overall. Families are also showing interest in building up liquid assets. When asked, people affirm a desire to set aside more of their incomes precautionary purposes. The proverbial rainy day fund is an important asset for families who need to have access to flexible funds in an emergency. The desire for flexible and accessible funds cuts across income levels. In fact, families in the lowest income quintile actually aspire to save a greater percentage of their income than higher income families. Figure 11. Desired Precautionary Saving (by Income Quintile) Family Income Desired Savings Share of Income $0-$20,599 $2,000 14% $20,600-$36,499 $3, % $36,500-$59,599 $5, % $59,600-$98,199 $5, % $98,200-$140,899 $10, % Source: Bucks et al (2009). Families in the lowest income quintile aspired to save $2,000 or about 14 percent of their income. Higher income quintiles desire great dollar amounts of savings but a smaller percentage of their income. Importantly, these families identify aspirations above their current holdings. As such, they reflect a possible opening to behavior change under the right conditions. new america foundation page 9

10 One key challenge for policymakers then is to translate these desires into policies that support families desires and savings behavior. The financial services industry must consider what product features can make savings accounts attractive to people at different income levels. Research conducted by Michael Barr in Detroit offers insights into the preferences of unbanked residents. Figure 12. Desired Account Changes to Induce the Unbanked to Open a Bank Account Lower Fees 29% Convenience 20% Less Confusing Fees 16% Lower Minimum Balance 14% Volunteered, None or Nothing 11% Get Money if Faster 10% Source: Barr (2009). Unbanked study participants identified low fees and less confusing fee structures as top changes that might lead them to open a bank account. These findings were echoed by preferences we identified in a pilot we ran, called AutoSave. AutoSave was a feasibility study focused on using payroll deductions to open flexible savings accounts. Participants identified low costs, convenience, and consumer protection as must-have features for savings accounts. Interestingly, building in incentives to save was seen as an added bonus, a feature that would be nice to have but was not see as foundational or inherently necessary. These findings affirm FDIC s recent Safe Accounts pilot, which other speakers elaborated on. These accounts performed at the same level or better than other transaction accounts. There is a policy opportunity here for FDIC. Currently, banks are assessed under CRA for the degree to which their credit products reach underserved consumers and communities. Banks should get credit when they provide safe accounts. As we consider how to update and modernize CRA, FDIC should weigh in on the side of elevating the importance of opening accounts to previous unbanked and underbanked as a metric of accountability. Banks should also be evaluated on their provision of innovative financial inclusion initiatives, such as children savings accounts, another promising intervention. We are learning a great deal from a number of children saving initiatives across the country, including in San Francisco where committee member Jose Cisneros is leading the charge to offer every public school student a savings account to be used for their post-secondary education. In closing, there remain persistent barriers to savings, particularly for lower income Americans, but we also see many opportunities for improvement. The Great Recession may have influenced behavior in the short term, but it also raised the stakes as we see families are still coping with low asset levels. The financial services marketplace is changing, along with technological innovations and consumer preferences. new america foundation page 10

11 We know that the ability to manage finances effectively and participate in the saving process is a major determinant of economic security and opportunity. Access to safe and affordable financial products remains an obstacle for many Americans, making it more difficult and more expensive to for them to manage their personal finances. Policymakers should continue to elevate the importance of responsibly connecting families to high-quality and low-cost products and accounts. Encouragingly, we have strong evidence that families, even with low incomes, have both the capacity and interest to increase their precautionary savings. There is a case to be made for policies that support and incentivize savings in a range of products, including ones with fewer restrictions that can be accessed flexibly to meet precautionary needs. In the short term, I encourage policymakers and industry leaders to acknowledge and learn more about consumer preferences which can be used to design effective products that can be marketed responsibly. In particular, we should be looking at how innovations in the prepaid card market can be connected to higher standards (such as low-cost and transparent fees) and consumer protections, such as FDIC insurance. Meeting lower-income peoples financial needs will require an expanded research agenda and engaged listening to what targeted market segments are looking for in financial products. There is much more to learn in this changing marketplace. References Barr, M. S. (2009). Financial Services, Saving, and Borrowing among Low- and Moderate-Income Households: Evidence from the Detroit Area Household Financial Services Study. In R. M. Blank, & M. S. Barr (Eds.), Insufficient Funds (pp ). New York, NY: The Russell Sage Foundation. Bricker, et. al. (2012). Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances. Federal Reserve Bulletin, Vol 98, No. 2. June Bucks, B. K., Kennickell, A. B., Mach, T. L., & Moore, K. B. (2009). Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances. Washington, DC: Federal Reserve Board. Clemons, S. and R. Vague. (2012). How to Predict the Next Financial Crisis. Accessible at: Cramer, et. al. (2009). A Penny Saved is Mobility Earned: Advancing Economic Mobility Through Savings. Washington, D.C.: The Pew Charitable Trusts. Key, C. (forthcoming). The Balance Sheet of the Typical Household: Analysis of Survey of Consumer Finances. Washington DC: New America Foundation. Mishel, L., J. Bivens, E. Gould, and H. Shierholz. (2012). The State of Working America, 12th Edition. An Economic Policy Institute book. Ithaca, N.Y.: Cornell University Press. Personal Income and Outlays. (2012). Washington, D.C.: U.S. Department of Commerce: Bureau of Economic Analysis. new america foundation page 11

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