Discovering the Potholes in the Road
Michael Collins, Mae Watson Grote, Signe-Mary McKernan, and Daniel Schneider
In the first portion of the convening, we learned that lower-income families have rather small amounts of precautionary savings, and many struggle to come up with a small amount of money in a pinch. Given that they are already financially fragile, unexpected events can be especially debilitating. A lot of lower-income families ride out these unexpected events by strategically using multiple sources of supports, such as doubling up in housing, doing without, exchanging goods for services (i.e., a metro card for babysitting), or using informal savings mechanisms like susu accounts. According to research presented by Daniel Schneider, lower-income families lack confidence in their ability to come up with money when unexpected events occur, and that those who use multiple strategies feel more financially fragile. However, Signe-Mary McKernan pointed out that assets help lower-income families cope with these unexpected events. Assets cushion lower-income families in an event of involuntary job loss, death or divorce, or food insecurity, and having assets at the equivalent of three months’ worth of living expenses can even move them into the next highest income bracket. According to Mae Watson Grote, helping lower-income families accumulate assets starts by giving them the tools to make better decisions so they don’t have to worry about identity theft, living beyond their means, predatory products, and employers who want to use credit reports as job screening tools. In essence, “we shouldn’t expect poor families to budget themselves out of poverty.” Importantly, policy and regulation can bring transparency and protection, helping lower-income families to feel protected rather than vulnerable.
Repairing the Road
Ray Boshara, Ellen Lazar, David John, and Lauren Saunders
In the second portion, Ray Boshara summed it by saying, “Its…hard for me to imagine any kind of solution that doesn’t involve public policy.” The panelists took this to heart and focused on the roles that policy and regulation could play in repairing the road to financial stability for lower-income families. For instance, Ellen Lazar began by summarizing the mission of the FDIC – to maintain economic stability and public confidence, the latter part of the mission that perhaps is easily forgotten. One strategy the FDIC has been working on is to encourage FDIC-insured banks to compete with payday and other predatory lenders by offering small dollar loans that have quick turn-around times, low interest rates, and reasonable repayment terms. To this point, Lauren Saunders reported that financial products often do not work in the favor of lower-income families, and that lending repayments often take the first cut of income, coming as a priority over food, rent and utilities, and other expenses. Truly safe alternatives, like small dollar loans, should not tie repayments to the first cut of income. David John of the Heritage Foundation offered up other solutions, like the Automatic IRA and R-bonds. Towing the long line of behavioral economists and their supporting research, John said “A few financial decisions we have learned the hard way…[families] don’t feel like they have adequate information and so they take the natural human element and do nothing.” Automatic enrollment into savings plans may be a productive strategy, so that the “do nothing” behavior automatically gives lower-income families savings and works in their favor rather than the other way around.
Maintaining the Road
Governor Sarah Bloom Raskin
Once we have a system that works in lower-income families’ favor to build assets and gain financial stability, we’ve got to maintain that system. Governor Sarah Bloom Raskin spoke to this point in the third and final portion of the convening. She called for a strong regulatory framework, active market regulation, public financial literacy, and financial inclusion as key components of financial stability. All families, and especially those with lower incomes, need safe and affordable means to withdraw and deposit money and access credit. Governor Raskin pointed to how the recent economic crisis has undermined financial inclusion, and families have fewer strategies to cope with unexpected events. She concluded with a call to lower the barriers for financial inclusion which are often set higher for lower-income families and reminded us that the strength of the U.S. economy depends on their financial inclusion. In essence, and as echoed by our own Justin King, there really is a symbiotic relationship between lower-income families’ financial inclusion and the U.S. economy. Policy and regulation that promotes active consumer protection can be the supporting links that put lower-income families on the road to financial stability.
The Asset Building Program of the New America Foundation was pleased to sponsor this event in partnership with the Congressional Savings and Ownership Caucus and the Center for Financial Security at the University of Wisconsin-Madison.