Rethinking Mobility

Monday, January 12, 2015

Conventional wisdom about the relationship between income and assets assumes that people must have adequate income before they can be expected to save. By that logic, asset poverty is a symptom of insufficient income. Similarly, discussion of inequality largely centers on income, despite evidence that wealth is far more unequally distributed, with the median net worth of those in the top income quintile 68 times that of households in the bottom quintile. These widening wealth inequities are what pose the greatest threat to the American Dream. Recent analysis, including by AEDI, casts doubt on assumptions about why people succeed or fail and points to new approaches for helping families get ahead.

Americans’ struggle to advance economically may stem as much from the vicious cycle perpetuated by their lack of assets as from their inadequate incomes. Breaking out of this trap may require finding new ways to help households build assets, not just increase their incomes. As evidence, at the onset of the Great Recession, in 2007, for each dollar increase in capital income (earned on investments, rather than labor), total household income increased by $1.22 for households at the 25th percentile of capital income, but by $5.26 for those at the 75th percentile. So households at the 75th percentile of asset holdings enjoy over five times the return on wealth as those at the 25th percentile. Particularly in today’s economy, as labor income is less able to lead to economic mobility—given the growing divide between productivity and wages—assets are perhaps a key reason why few Americans can work their way up the ladder. Moreover, among families earning less than $50,000 annually, net worth predicts income but income does not predict net worth, contrary to popular assumptions about how people ‘move up’.

These findings make clear that wealth accumulation is not solely about the people’s hard work, ability, personal thrift, or smart planning. Instead, U.S. policy may intensify inequity. For example, while low-income individuals are funneled into a welfare system that subsidizes consumption while hindering asset accumulation—in part through asset limits that explicitly prevent savings—the U.S. spends billions on tax benefits for wealth-building (e.g. mortgage interest deduction, lower tax rates on capital income), with the vast majority going to those already positioned to invest. In 2009, CFED analysis illustrated that the top fifth of taxpayers received 84% of asset-building benefits, while the lowest 60% received only 4%. For millions of other Americans, U.S. policy has yet to craft asset-building opportunities robust enough to redeem the legitimacy of the American Dream. Instead, policy discourse largely continues to pretend that individual failings—in effort or ability or both—are responsible for poverty and that labor effort alone can overcome it. Instead of helping all households build a strong economic foundation, we set up two distinct systems—one explicitly wealth-building and one intentionally not—and then wonder why people end up in such different places.

Confronting this bleak reality will require constructing a new approach to anti-poverty policy, rooted in the values that underlie the American Dream. Children’s Savings Accounts are particularly promising here. Giving all children an account—ideally at birth—would provide them with a tangible stock in their own futures and a reserve they could draw from to move up the economic ladder. Encouraging families to save by matching their contributions, eliminating asset limits in means-tested programs, helping students finance their post-secondary educations through savings rather than assumption of large debts, and equipping low-income households with financial information would represent a fundamentally different approach to shoring up families’ precarious finances.

A growing body of evidence confirms what hard-working but still struggling Americans have long known: it’s hard to work one’s way out of poverty. Instead, low-income households should have equitable access to financial institutions, tax-based and direct savings subsidies, and other structures that facilitate lifelong asset development. If initial assets are powerful forces helping to shape the economic fortunes of Americans, and current welfare policy may exacerbate inequality, it is time for a new accounting and a new vision of anti-poverty policy.

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New Book Released

Today’s student loan system is in place because of a political compromise, and growing discontent with student debt may signal that this arrangement has run its course. While there are resources and organizations in place to help those struggling with debt, the time has come to consider a new direction for financial aid, William Elliott III and Melinda Lewis argue in “Student Debt: A Reference Handbook.”

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