Asset Building in the US: Context, Findings, and Future Directions Building Family and Personal Financial Capability Iowa State University March 31, 2010 Ray Boshara New America Foundation Washington, DC

Economic Context Family incomes & economic growth : Rising tide lifted all boats : 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 expenseshousing, health care, education, child care, and transportationup 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, cont 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 Double digit unemployment U.S. fiscal challenges Social Security, Medicare, and Medicaidtogether with defense and interest on the debtwill 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 American consumer as the engine of economic growth? What replaces the over-leveraged American consumer as the engine of economic growth? Whats the Next Social Contract? Whats the Next Social Contract? In light of the massive declines in the value of homes, stocks, and net worth, is asset building still a good idea? In light of the massive declines in the value of homes, stocks, and net worth, is asset building still a good idea?

Overall Research Findings Low-income persons can save and build assets Individual characteristics – education, employment, welfare receipt, and even income – matter little in predicting savings and asset accumulation by low-income persons Program or institutional characteristics matter a lot in predicting saving and asset accumulation by low-income persons (convergence with behavioral economics) Holding assets appears to lead to positive social, behavioral, psychological, civic and other outcomes for children and adults

IDA Monitoring Research: Can the Poor Save in IDAs? Number of Accountholders: 2,364. Mean participation: 24.5 months Schreiner 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: Whats the Effect of IDAs on Savings and Asset Accumulation? Sample size: 840 (412 treatment, 428 control). Time: 48 months Mills et al., 2004 HomeownershipSignificant positive effect, esp. for African Americans Real assets and total assetsPositive effect for subgroups that experienced increases in homeownership Retirement savingsPositive for African Americans Liquid assetsNegative (due to acquiring other assets) LiabilitiesNegative (due to acquiring other assets) Net worthNo measured effect (but this finding is disputed) Educational attainmentSignificant positive effect (whether one had taken a non-degree course)

Research on Asset Effects Summarized 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 childrens 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? By many measures, children who grow up in households do better than those that dont. 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 Childrens College Degree AttainmentAssets and Liabilities, Educational Expectations, and Childrens 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 childrens 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 AttendanceThe 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 factorsincluding household income and childrens academic achievementchildren 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 necessity Obama Administration committed to financial sector reform, goals of asset building field Dont under-estimate the impact of behavioral economics on this Administration and the assets field Think big: Major opportunities for reform – tax bill, SS reform, broader savings agenda Think small: Small changes to existing systems and products can leverage billions in new savings and assets – even for the poor

Thoughts on Financial Capability Findings from IDA and SEED experiments From knowledge to behavior change, financial education to financial capability CFSI Findings – effective interventions must be (1) Relevant (2) Timely (3) Actionable, and (4) Ongoing Must solve the un-banked problem – sine qua non 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? Two big ideas: 1. Child Savings Accounts –ASPIRE Act experience in the U.S.; UK Child Trust Fund experience. 2. Impact of behavioral economics – from disclosures to defaults; reduce the need for financial education?