Asset Building in the US: Asset Building in the US: Context, Findings, and Future DirectionsContext, Findings, and Future Directions

Building Family and Personal Financial Capability Building Family and Personal Financial Capability Iowa State UniversityIowa State University

March 31, 2010March 31, 2010

Ray BosharaRay BosharaNew America FoundationNew America Foundation

Washington, DCWashington, DCwww.newamerica.net

Economic Context

Family incomes & economic growth• 1947-1973: Rising tide lifted all boats• 1973-2005: Rising tide lifted some boats

Inequality• Wealth inequality dwarfs income inequality• Wealth inequality contributes significantly to income inequality• Non-whites own 10% the wealth of whites, 25% if otherwise equal• Median and mean net worth for the lowest 25 percent of the distribution of net

worth plunged 36.8 percent and 43.8 percent, respectively

Costs of basic middle class life• Family incomes up, due to second earner• But basic expenses—housing, health care, education, child care, and

transportation—up even more

Economic risk• Chance of losing half of family income more than doubled from 1970s to today

(one in 14 to one in 6)• Chance of spending at least a year in poverty up significantly since 1960s, even

for workers in peak years

Economic Context, con’t

Savings, debt, and net worth• Personal savings rate declined steadily since 1982, hit zero for two years, now

3.1%• 1 in 8 Americans have a debt problem, 1 in 4 if poor• Proliferation of “bad debt” and “anti-thrifts” in last 30 years• 1 in 3 have net worth < $10,000; 1 in 6 have negative net worth

Economic mobility• Two out of three Americans today have higher incomes than their parents, while

one-third have fallen behind• Economic mobility stagnant or declining since the 1970s

Job creation, unemployment• Zero net job creation 1999-2009• Double digit unemployment

U.S. fiscal challenges• Social Security, Medicare, and Medicaid—together with defense and interest on

the debt—will absorb all likely revenue by 2017, if not sooner• At least $1 trillion dollar deficits predicted for at least the next 10 years. • Fiscal challenge exacerbated by retirement of baby boomers, increased

longevity and, especially, growing health care costs• Significantly fewer funds remaining to combat poverty or anything else

Key Questions

What replaces the over-leveraged What replaces the over-leveraged American consumer as the engine of American consumer as the engine of economic growth?economic growth?

What’s the Next Social Contract?What’s the Next Social Contract?

In light of the massive declines in the In light of the massive declines in the value of homes, stocks, and net worth, is value of homes, stocks, and net worth, is asset building still a good idea?asset building still a good idea?

Overall Research FindingsOverall Research Findings

Low-income persons can save and build assetsLow-income persons can save and build assets

Individual characteristics – education, employment, welfare Individual characteristics – education, employment, welfare receipt, and even income – matter little in predicting receipt, and even income – matter little in predicting savings and asset accumulation by low-income personssavings and asset accumulation by low-income persons

Program or “institutional” characteristics matter a lot in Program or “institutional” characteristics matter a lot in predicting saving and asset accumulation by low-income predicting saving and asset accumulation by low-income persons (convergence with behavioral economics)persons (convergence with behavioral economics)

Holding assets appears to lead to positive social, Holding assets appears to lead to positive social, behavioral, psychological, civic and other outcomes for behavioral, psychological, civic and other outcomes for children and adultschildren and adults

IDA Monitoring Research:Can the Poor Save in IDAs?

Number of Accountholders: 2,364. Mean participation: 24.5 monthsSchreiner et al., 2002

Savings Performance

Average monthly deposit: $19 net, $40 gross

With average match of 2:1, total savings was $700 per year

Withdrawals:• 46% home purchase/repair• 23% microenterprise• 18% small business

64% made unmatched withdrawals

51 cents was saved for every dollar that could have been matched

Regression Results

Income not correlated with saving

Each dollar increase in monthly savings match cap is associated with a 40-50% increase in average savings

Total amount matched (match cap) matters more than match rate (e.g., 1-1 vs. 2-1)

Financial education is correlated with greater savings, but only up to 10 hours

Participant characteristics matter little

IDA Experimental Research: What’s the Effect of IDAs on Savings and Asset Accumulation?

Sample size: 840 (412 treatment, 428 control). Time: 48 months Mills et al., 2004

Homeownership Significant positive effect, esp. for African Americans

Real assets and total assets Positive effect for subgroups that experienced increases in homeownership

Retirement savings Positive for African Americans

Liquid assets Negative (due to acquiring other assets)

Liabilities Negative (due to acquiring other assets)

Net worth No measured effect (but this finding is disputed)

Educational attainment Significant positive effect (whether one had taken a non-degree course)

Research on Asset EffectsSummarized by Sherraden, 2005

Holding assets at 23 is associated with later positive outcomes such as better labor market experience, marriages, health and political interest. (Bynner & Paxton, 2001)

The presence of the asset appears to matter more than the monetary value of the asset. (Bynner & Paxton, 2001)

The presence of small wealth at critical times can have “transformative” effects on the life course. (Shapiro, 2004)

Parental wealth is positively associated with cognitive development, physical health, and socio-emotional behavior of children – even in very poor families. (Williams, 2003)

Wealth seems to be a better predictor of well-being as children grow older, while income is a better predictor when they are younger. (Williams, 2003)

Low-income, single mothers’ assets are positively associated with children’s educational attainment. (Zahn and Sherraden, 2003)

Income is associated with educational achievement when assets are not in the model. However, income becomes non-significant when assets are included. (Zahn and Sherraden, 2003)

Assets lead to positive attitudes and behaviors, and positive attitudes and behaviors lead to assets may be a glimpse of a “virtuous cycle” wherein household development is a reinforcing feedback loop. (Yadama and Sherraden, 1996)

Why Assets Early in Life?Why Assets Early in Life?

By many measures, children who grow up in households do better than By many measures, children who grow up in households do better than those that don’t.those that don’t.

The presence of small wealth at critical times can have “transformative” effects on the life course.

The presence of the asset appears to matter more than the monetary value of the asset.

Even small amounts of assets – sometimes just modest levels of savings, sometimes only modest levels of assets – can have a huge asset effect.

Assets and Higher Education

Assets and Liabilities, Educational Expectations, and Children’s College Degree Attainment, Zhan & Sherraden (2009)

Controlling for family income and other characteristics, financial assets (savings and financial investments) are associated with both parents’ and children’s expectations for college graduation.

Controlling for family income and other characteristics, both financial and nonfinancial assets are positively related to college completion.

Similarly, unsecured debt (consumer debt, student loans, etc.) is negatively related to college completion.

When financial and non-financial assets are included in regression models, income is no longer a significant predictor of college completion. In other words, it is assets and not income that is associated with college completion.

The Role of Savings and Wealth in Reducing “Wilt” between Expectations and College Attendance, Elliott & Beverly (2010)

Almost one-third of youth who expect to attend a four-year college experience “wilt”.

The presence of household savings is strongly associated with college attendance. In fact, when savings are included in regression models, academic achievement is no longer a significant predictor of college attendance.

Controlling for other factors—including household income and children’s academic achievement—children in households with savings dedicated for college education are four times more likely to attend college and avoid “wilt”.

In addition, when children have a savings account in their name, they are seven times more likely to attend college and avoid “wilt”.

Future Directions

““Save and invest” economy a necessitySave and invest” economy a necessity

Obama Administration committed to financial sector reform, goals of Obama Administration committed to financial sector reform, goals of asset building fieldasset building field

Don’t under-estimate the impact of behavioral economics on this Don’t under-estimate the impact of behavioral economics on this Administration and the assets fieldAdministration and the assets field

Think big: Major opportunities for reform – tax bill, SS reform, broader Think big: Major opportunities for reform – tax bill, SS reform, broader savings agendasavings agenda

Think small: Small changes to existing systems and products can Think small: Small changes to existing systems and products can leverage billions in new savings and assets – even for the poorleverage billions in new savings and assets – even for the poor

Thoughts on Financial CapabilityThoughts on Financial Capability

Findings from IDA and SEED experimentsFindings from IDA and SEED experiments

From knowledge to behavior change, financial education to financial capabilityFrom knowledge to behavior change, financial education to financial capability

CFSI Findings – effective interventions must be (1) Relevant (2) Timely CFSI Findings – effective interventions must be (1) Relevant (2) Timely

(3) Actionable, and (4) Ongoing(3) Actionable, and (4) Ongoing

Must solve the un-banked problem – Must solve the un-banked problem – sine qua nonsine qua non of building assets of building assets• 8% un-banked8% un-banked• 18% under-banked18% under-banked• 25% weak attachment to financial mainstream25% weak attachment to financial mainstream

Relationship between account ownership and financial education?Relationship between account ownership and financial education?

Two big ideas:Two big ideas:

1. Child Savings Accounts –ASPIRE Act experience in the U.S.; UK Child Trust Fund 1. Child Savings Accounts –ASPIRE Act experience in the U.S.; UK Child Trust Fund experience. experience.

2. Impact of behavioral economics – from “disclosures to defaults”; reduce the need for 2. Impact of behavioral economics – from “disclosures to defaults”; reduce the need for financial education?financial education?