New Report: Advancing Economic Mobility through Savings

Posted by on November 30, 2009

Pew: Children of low-income parents who save do better

Children born to low-income parents with savings above the median level are more likely to move up the income ladder as adults (71 percent do) than those whose parents are low-income and low-saving (only 50 percent move up from the bottom rung), according to a new report released by Pew’s Economic Mobility Project.

A Penny Saved is Mobility Earned: Advancing Economic Mobility through Savings similarly shows that within an individual’s lifetime, savings increases one’s chances of being upwardly mobile – 34 percent of the adults who had low-savings and were in the bottom income quartile from 1984-1989 had moved up from the bottom by 2003-2005, whereas 55 percent of those who had high-savings moved up by the same time period.

The report argued that federal policy can and should be better designed to ensure that it does not deter individuals from saving, and to enable more Americans to access the significant incentives the government currently makes available to people to save.

The report also found that states often apply differing eligibility rules for access to public assistance programs, such as Medicaid and food stamps. These conflicting standards can create powerful disincentives for low-income populations to save money.

The report’s authors suggest that by making asset limits across public assistance programs more consistent, many barriers to savings for low-income populations can be removed. Ultimately the report’s evidence suggests that with greater savings, low-income Americans will have an easier time moving beyond public assistance programs.

The federal government is estimated to spend $130 billion in fiscal year 2010 on tax incentives that encourage Americans to save for retirement, education, and health needs. These benefits flow largely to higher income households. For example, tax filers in the top income quintile in 2004 received 70 percent ($1,838 per tax filer) of the total federal tax benefits associated with 401(k)-like plans and IRAs, while those in the lowest income quintile received only 0.2 percent ($6 per tax filer) of the benefits.

“There are numerous options the government could explore to help those at the bottom of the income ladder begin a culture of savings, including creating savings incentives, simplifying tax rules and special accounts, and providing broader access to retirement plans. These adjustments could make a significant difference in the lives of those who need it most,” said Reid Cramer, Director of the Asset Building Program of the New America Foundation.

Click here for the full report.

http://www.pewtrusts.org/our_work_report_detail.aspx?id=56172

The Campaign for Working Families helps people in the region make sure they get the full benefit of the Earned Income Tax Credit and other federal programs that encourage low-income people to save and build their assets.  For more information or to volunteer, click here.

http://phillyfreetaxes.org/