Thursday, December 3, 2009

Families Benefit When Low-Income Parents Save for a Rainy Day

Flickr - NewsPhoto! - paraplu'sAs Pew's Economic Mobility Project points out, the concept of the American Dream, where anyone can rise above their background with hard work, is not as strong as many would like it to be. While 2/3rds of Americans have higher incomes than their parents, many children still end up in the same economic category as the one they were born in. 42 percent of children born in the bottom income quintile and 39 percent born in the top income quintile stay there throughout their lives. Yet as a recent study from the Project shows, high parental and personal savings can improve the likelihood of a child's economic mobility.

According to the report, "A Penny Saved is Mobility Earned,"50 percent of Americans born to low-saving parents in the bottom income bracket remained there as adults. But if their low-income parents were "high savers," only 29 percent remained in the lowest income bracket. Since 25 percent are estimated to remain in the bottom bracket even with "perfect income mobility," the change correlated with savings is large. In other words, very low-income families saving more than the median amount had a higher likelihood of their children moving up the income ladder. Personal savings also increased the chances of economic mobility.

These results should encourage savings among all income brackets, especially very low-income families, but those trying to save may run in to roadblocks. In order to qualify for most public benefits programs, low-income households are limited in the amount of savings they can have. While asset limits are designed to ensure that families only apply for benefits when they really need them, they have the unintended effect of encouraging families not to save. While some changes have been made in recent years, asset limits in many programs continue to discourage savings.

Savings should not be luxury that only higher-income families can afford. Programs designed to allow families to keep their savings for a rainy day (and the accompanying roof leaks and car accidents) ensure that low-income families don't have to lose everything for the short-term gain of public benefits. When savings benefit families across generations, our whole country loses by denying families the opportunity to save.

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