Living on the Edge: Financial Insecurity and Policies to Rebuild Prosperity in America
Asset and Opportunity Scorecard
Although the post-recession economy is showing signs of recovery millions of Americans are still scraping by. As policymakers make decisions over the next few months about whether to fund programs that provide a lifeline to a better future for millions of Americans, they should take a hard look at the reality facing nearly half the nation’s families. For the second year in a row, the Assets & Opportunity Scorecard, finds that nearly half (43.9%) of households—equivalent to 132.1 million people—do not have a basic personal safety net to prepare for emergencies or future needs, such as a child’s college education or homeownership. These families are considered “liquid asset poor,” meaning they lack the savings to cover basic expenses for three months if unemployment, a medical emergency or other crisis leads to a loss of stable income.
This group includes a majority of the 42.2 million people who live below the official income poverty line of $23,050 for a family of four, as well as many who would consider themselves in the middle class. One quarter (25.7%) of households earning $55,465-$90,000 annually have less than three months of savings.
In addition, 26% of households are “net worth asset poor,” meaning that the few assets they have, such as a savings account or durable assets like a home, business or car, are overwhelmed by their debts. These asset poor families, whether they lack emergency savings, durable assets or both, are forced to prioritize today’s expenses over tomorrow’s goals. These families have made pragmatic choices, in part, to cope with the recession’s continued impact. However, many also lack even the basic tools to save for a rainy day. Nearly a third (30.8%) of households do not have a savings account and many (8.2%) have no mainstream financial account at all.
With little or no savings to make their household budgets work, families continue to take on debt. The average borrower is carrying $10,736 in credit card debt. Unfortunately, more than half (56.4%) of consumers do not qualify for short-term credit at “prime” rates, leaving them to turn to high-cost payday, auto-title or installment loans to make it through another week. One out of five households who have a mainstream bank account still uses predatory or high cost financial services.
Faced with limited savings, high debt and bad credit, families’ ability to invest in long-term assets—such as a home, business or college education—is largely out of reach. Median net worth declined by over $27,000 from its peak in 2006 to $68,948 in 2010 (the latest year for which data are available). Homeownership, an important driver of net worth, also continued to decline from its peak of 67.3% of Americans who owned a home in 2006 to 64.6% in 2011.
The drop in homeownership was fueled by both a continued high rate of foreclosures and tightening of the mortgage market. By the second quarter of 2012 the foreclosure rate had dropped to 4.27%—a decrease from a 2010 high of 4.6% but still above the pre-housing crash rate of 0.99% in 2006. The move by financial institutions to stop offering high-cost mortgage loans—another factor contributing to the drop in homeownership rates—has been a mixed blessing for asset poor families. On the up side, they are no longer prey for abusive and unscrupulous lenders. On the down side, they are largely shut out of the mortgage market.
Small business ownership—the second largest source of household wealth after homeownership—also declined slightly, moving in tandem with a decrease in the availability of business capital. Private loans to small businesses declined 13.2% between 2009 and 2010. Interestingly, microenterprise ownership—businesses with fewer than five employees—increased slightly. This increase may have been a pragmatic response by laid off workers who, in the absence of wage-labor alternatives, turned to self-employment as a job creation strategy to help make ends meet.
As troubling as these numbers are, they are dwarfed by the financial insecurity facing households of color. Although the majority (58.3%) of liquid asset poor households are white, nearly two-thirds (62.6%) of households of color fall into that category, making them one job loss or medical emergency away from financial collapse. There is also a chasm between the assets owned by white households and households of color. White households have 10 times the median net worth as households of color ($110,973 and $10,824, respectively), and are considerably more likely to own a home. The homeownership rate for white households is more than 25 percentage points higher than the rate for households of color (72% and 46.2%, respectively).
Financial insecurity and limited opportunities to invest are also substantially greater in certain parts of the country. Across all of the outcome indicators in the Scorecard—which include Financial Assets and Income, Businesses and Jobs, Housing and Homeownership, Education and Health Care—states in the southeast and southwest fare the worst. Rustbelt states, the mid-south and California also come in below average. Many of these states were hit hard by the recession. However, additional factors contribute to their poor outcomes including how the state’s policies responded to the recession, as well as its demographics and natural resources. Historical legacies, such as racism or investment (or disinvestment) in residents, in some states can also set up entire generations to succeed or fail.
As the economy recovers from the worst economic collapse since the Great Depression, our country has a chance to invest in programs and policies that create financial security and economic opportunity for families, while strengthening our ability to compete in the global economy. Doing so will not only produce a fairer and more inclusive society, but a more prosperous, resilient and sustainable one.