Statement of New America Foundation

Thank you for the opportunity to submit written testimony in reference to the subcommittee’s hearing on proposals to reduce poverty in the United States. Below we outline an anti-poverty policy agenda that seeks to move beyond traditional income supports in helping families achieve true economic self-sufficiency through personal asset ownership. A comprehensive listing of policy options to promote savings and asset ownership by low- and moderate-income Americans is available in The Assets Agenda 2007, available upon request and accessible at www.newamerica.net and www.assetbuilding.org.

American families who subsist at or below the federal poverty line face lives characterized by tremendous volatility.  A steady stream of earned income can be instantly disrupted by illness or personal injury, leaving many families at the brink of complete destitution.  Savings and asset ownership can provide low-income families with the financial cushion they need to weather unexpected income shocks, especially as they work to move from public assistance to self-sufficiency. Assets and savings can also be leveraged to provide access to quality forms of credit that is otherwise unavailable.  While an asset-based approach to poverty alleviation is meant to compliment-and not replace- traditional forms of income support, it is personal asset ownership that has the potential to provide low-income families with a new path out of poverty in 21^st century economy.

Ownership of Assets

To understand the inherent challenge in creating an inclusive ownership society, it is useful to consider what ownership in America looks like today. Recent data from the Federal Reserve’s Survey of Consumer Finances estimates that the median family net worth in 2004 was $93,100, and the mean value was $448,200.[1] Between 2001 and 2004, the median family net worth rose 1.5 percent, while the mean value grew 6.3 percent, indicating larger increases in net worth for higher-wealth households.[2] Over an extended period of time, there has been a faster increase in average wealth relative to median wealth, indicating that those at the top of the wealth distribution have increased their share. This is reflected in the ratio of median-to-average wealth, which sunk to 0.18 in 2004, down from 0.27 in 1962.[3]

The average wealth of the top 1% of wealth holders grew from $13.5 million in 2001 to $14.8 million in 2004, a 3 percent annual increase.[4]  During this same period, the average wealth for households between the 40 percent and 60 percent of wealth holders increased by 0.8 percent annually, from $80,000 to $81,900.[5] Meanwhile, the bottom fifth of U.S. households sunk further into debt; the average debt of this cohort increased to $11,400 in 2004.[6]    

Aided by policy incentives, Americans build wealth in both financial and non-financial assets. Between 2001 and 2004, financial assets as a share of total assets fell 6.3 percentage points, to 35.7 percent. This is the lowest share recorded by the survey since 1995.

Of the non-financial assets, the primary residence continues to account for the largest share. The median value of the home was estimated to be $246,800 in 2004 for those families that were homeowners; a figure that had increased from 2001 by well over 20 percent[7] This demonstrates that home equity continues to play a central role in asset holdings, and for lower-income and minority families that are homeowners, homeownership makes up a large share of their asset holdings. While their homeownership rates are lower, home equity makes up 77 percent of total assets for lower-income families and 55 percent of total assets for minority families.[8]

However, this past year the state of the U.S. housing market began turning away from its recent record setting pace. The homeownership rate ended 2006 at 68.8 percent, down from its historic high of 69.0 percent, set in 2004. The minority homeownership rate, which historically has lagged the overall population, remains just under 50 percent, although the Hispanic homeownership has increased steadily over the past few years—2005 marked the first time that Hispanics were more likely to own their own homes than Blacks.[9] Increased volatility in housing markets in the past year is expected to lower these rates in the year to come and may undermine the asset holding of many families.

Unfortunately, many families have spent down the home equity they have accumulated in recent years by taking out heavily marketed low-interest home equity loans. The sharp increase in household debt held in home equity loans since 2000 presents a potentially troubling scenario if the housing market slowdown of late 2006 continues to cool, and home prices begin to stagnate or fall in 2007.  Data from HUD’s U.S. Housing Market Conditions report reveal that over the last year mortgage interest rates have increased, along with mortgage delinquencies and foreclosures; home sales are down; and the recent increases in home prices have slowed dramatically.[10]

While home equity represents the single largest component of household wealth, families store resources in a variety of other assets, such as bank accounts, stock investments, and retirement accounts. The percentage of families holding assets varies considerably. It is estimated that in 2004 over 91 percent of families had money stored in checking or savings accounts, while only 20.7 percent owned stock directly in a company. Furthermore, 15 percent owned shares of a mutual fund, 17.6 percent owned savings bonds, and 24.2 percent had assets held in a life insurance policy. Meanwhile, slightly less than half of all families (49.7 percent) had a personal retirement account, such as an IRA or a 401(k).[11]  This figure represents a decline from three years earlier when the percentage of families owning a retirement account exceeded 52 percent.

The percentage of families holding assets is strongly correlated with their incomes. Compared to those households in the top 10 percent of income, households in the bottom forty percent of income were far less likely to own stock, retirement accounts, and transaction accounts. The differences in retirement asset holdings are especially revealing. The percentage of families owning a retirement plan drops to 10.1 percent for families making $18,900 or less, while well over 70 percent of those making more than $53,600 have a retirement savings account. In 2004, 27.2 percent of households headed by someone aged 47 to 64 did not have enough retirement savings, including social security benefits, to replace half their current income.[12] For Black and Hispanic households, this figure jumps to 39 percent.

Beyond differences in the type of assets households own, there are also differences in how much they own. The mean net worth is over $448,000 but the top 20 percent of families by income own over 80 percent of the nation’s wealth.[13] Families in the bottom 40 percent by income own approximately 5 percent of the nation’s wealth. Another dimension with which to examine wealth holdings is race. In general, minority households own less than ten cents for every dollar of wealth owned by a typical non-Hispanic White family.[14] Even though their income is roughly two-thirds of that of White families, their wealth is only 10 percent as much.

The promise of an ownership society will dissipate if it is used only to further concentrate the wealth of those already financially secure. The challenge remains to significantly broaden access to asset ownership by those who own little or nothing. The current proposals in the administration’s 2008 budget that focus on Social Security, health savings, and retirement accounts fail to get us all the way there.[15] The following ideas represent a set of proposals that would.

1. Establish Children’s Savings Accounts

One of the most novel and promising ways to achieve a universal, progressive asset building system over time would be to provide each generation of children a restricted, start-in-life asset account at birth, an idea first proposed by Michael Sherraden and, separately, by former IRS Commissioner Fred Goldberg.[16] These accounts would establish a universal platform and infrastructure to facilitate future savings and lifelong asset accumulation. While every child would have an account, it would especially benefit the 26 percent of White children, 52 percent of Black children, and 54 percent of Hispanic children who start life in households without any significant asset holdings.[17]

Different versions of children’s savings accounts have been proposed over the last several years by members of Congress; most, however, are not progressive and are focused on building only retirement assets (most notably former Sen. Bob Kerrey’s “KidSave” proposal). However, in the last couple of years, proposals have emerged from both Democrats and Republicans for progressively funded children’s savings accounts that could be used for buying a home and going to college, in addition to retirement. Outside the U.S., the U.K.’s Child Trust Fund is providing every newborn with a children’s savings account and has already established well over 2 million accounts, and there are comparable programs emerging in Korea, Singapore, and Canada. Additionally, the privately-funded SEED Initiative is operating in 12 sites across the U.S., and is providing highly valuable insights into policy design. 

Below are existing congressional proposals to establish Children’s Savings Accounts, including three that were introduced in the 109^th Congress (2005-2006); similar bills have been or are expected to be introduced in 2007.

America Saving for Personal Investment, Retirement, and Education (ASPIRE) Act Every child born after December 31, 2006 issued a Social Security number would have a KIDS Account opened for them automatically. Each account would be endowed with a one-time $500 contribution, and children in households earning below national median income would be eligible for a supplemental contribution of up to $500. Additional savings incentives include tax-free earnings, matched savings for eligible families, and financial education. Senate bill 868 is authored by Senators Santorum (R-PA), Corzine (D-NJ), Schumer (D-NY), and DeMint (R-SC); House bill 1767 is authored by Reps. Ford (D-TN), Kennedy (D-RI), and English (R-PA). ASPIRE Act will be reintroduced both in the House and the Senate.

Young Saver’s Accounts Roth IRAs for kids – called “Young Saver’s Accounts” – would allow parents, for the first time, to direct contributions to Roth IRA accounts for their children, not just for themselves. YSAs were introduced by Senator Max Baucus (D-MT) in March as part of the Savings Competitiveness Act of 2006, and a similar provision was introduced in July 2005 in the House by Rep. Connie Mack (R-FL) as part of the Lifetime Prosperity Act. YSAs are anticipated to be included in savings bills in this Congress.

401Kids Introduced as HR 5314 by Rep. Clay Shaw Jr. (R-FL) and other House Republicans, this proposal would convert Coverdell Education Savings Accounts into "401Kids Savings Accounts" which would have expanded uses and the ability to be rolled over into a Roth IRA. This proposal would make it possible for a restricted, tax-advantaged savings account to be opened in a child's name as early as birth, with up to $2,000 of after tax contributions permitted a year. The funds could be used for the K-12 and post-secondary education expenses currently allowed under Coverdell Education Savings Account rules. Additionally, the accounts could also be used for a first home purchase, or rolled over into a Roth IRA for retirement. The bill has been reintroduced in the 110th Congress as H.R. 87 by Rep. Biggert (R-IL).

PLUS Accounts As proposed by Senator Jeff Sessions (R-AL), every U.S. citizen born after December 31, 2007 would have a PLUS Account opened for them automatically by the federal government endowed with a one-time $1,000 contribution. Beginning January 1, 2009 individual PLUS accounts would be established for all working U.S. citizens under the age of 65 with a mandatory 1% of each worker’s paycheck withheld pre-tax and automatically deposited into their account (workers could voluntarily contribute up to 10%).  Employers would also be required to contribute at least 1% (and up to 10%) of earnings. No withdrawals from PLUS accounts could be made until accountholder reaches the age of 65, although there would be a loan program for pre-retirement uses. Sen. Sessions plans to introduce legislation to establish “PLUS Accounts” by the end of March.

2. Create Savings and Asset Accumulation Incentives for the Working Poor

Enact an “EITC Savers Bonus” Linked to Existing Tax Credits

Anyone eligible for the EITC would be eligible for a larger refund if they deposited a portion of their refund into an existing savings product, such as an IRA or 529 College Savings Plan. The savings would be matched on a 1-1 basis, up to $500, for the amount contributed. The match would be delivered as a higher EITC refund—an “EITC Savers Bonus”—and would be deposited directly into the savings product. This may be more politically acceptable than creating a new refundable tax credit, and would ensure that the government match is saved directly into the account. Alternatively, taxpayers could report contributions they have made to their savings accounts during the year—including contributions to company-sponsored defined contribution plans, IRAs, 529 plans, or U.S. Savings Bonds—on their tax returns and this could trigger a higher EITC amount. The larger refund could then be received by the taxpayer or, ideally, it would be re-directed to the specified savings product. The cost of this proposal would depend on the size of the bonus and the number of people eligible. Eligibility could be linked to the EITC or the Child Tax Credit.

Improve the Saver’s Credit

The 2001 tax bill created a new voluntary individual tax credit—the Saver’s Credit—to encourage low-income workers to contribute to existing retirement products (IRAs, 401(k)s, etc). The 2006 Pension Protection Act followed through on the administration’s proposal to make the Saver’s Credit permanent and also indexed the contribution limits to inflation. However, the credit remains flawed in several important ways. It is not refundable, and it offers only a modest matching contribution. Consequently, it benefits only a small proportion of those technically eligible. For example, only about 20 percent of filers get any benefit, while only one in one-thousand persons receive the full benefit. Mark Iwry of the Brookings Institution, who helped design the Saver’s Credit, suggests three ways to improve the credit: (1) make it refundable; (2) expand eligibility— instead of a 50 percent credit that phases down to 20 percent for joint filers with AGI over $30,000, the 50 percent Saver’s Credit should be expanded to cover joint filers with significantly higher incomes within the middle-income range, for example, up to $60,000, phasing out at about $70,000 to $75,000; (3) smooth the phase-down of the credit to resemble IRA income eligibility, instead of the “cliffs” now in effect. These would offer a meaningful retirement incentive for families currently left out.

 Expand the List of Products Eligible for the Saver’s Credit

If the goal is to promote savings for low-income workers in general, and not just retirement savings, a range of existing savings products—529s, Coverdells, Health Savings Accounts, U.S. Savings Bonds and Individual Development Accounts—could be added to the list of products that would trigger the Saver’s Credit. One could certainly argue that one’s health and pre-retirement assets—especially a first home and post-secondary education—are critical elements of retirement security. It also should be noted that IRAs already permit penalty-free withdrawals for buying a first home and post-secondary education.  And among low-income savers, data presented in this paper (page 4) shows U.S. Savings Bonds—which are long-term in nature and must be held for at least five years to avoid a penalty at redemption—are a more likely choice for saving than stocks or mutual funds.  This change, however, would represent a significant philosophical shift in the purpose of the credit. The president proposed to make contributions to section 529 college savings plans eligible for the Saver’s Credit in the FY 2008 budget.

3. Establish Savings Products with Default Features that Promote Savings

Create an Automatic, Accessible, and Flexible National Savings Plan

Congress could create a national savings plan structure that would be accessible to all current workers. Proposed by Reid Cramer of the New America Foundation, this saving plan, called AutoSave, could be available to facilitate flexible, pre-retirement savings.[18] Under this plan, employers that make payroll deductions will make deposits to the AutoSave system on behalf of their employees; the self-employed would be able to make deposits at their discretion. Employers will facilitate automatic deposits. AutoSave will offer a limited set of low-cost investment options, such as money market funds or index funds, administered by professional money managers. Money deposited in this system belongs to the individuals, and since deposits will be from after-tax dollars, normal tax rules apply. Individuals will have the flexibility to opt-out of the system or withdraw funds at any time. But workers will not have to elect to participate. The AutoSave system will assume you are in unless you state a preference to get out. A default contribution rate can be set at 2 percent of pay. At this rate, someone earning $50,000 a year would have $1,000 diverted directly into savings, which could grow with responsible stewardship. Additional targeted incentives could be applied to encourage longer-term savings, but AutoSave would be designed to take advantage of one of the most tried and true savings techniques—inertia.

Enact, and Possibly Match, “Automatic IRAs”

“Automatic IRAs,” developed by the Brookings Institution and Heritage Foundation and supported by AARP, is aimed at the 71 million workers employed by small businesses that do not offer a pension plan to their workers. Firms not offering 401(k)s, 403(b)s, and the like could instead offer automatic payroll deductions into IRAs. Employers would inform employees of this savings option and would have the choice to either obtain from each employee a decision to participate or not, or automatically enroll employees (and then allow the employee to opt-out). While low-income workers would likely be reached through this proposal, there are no matching funds involved. Under the Auto IRA proposal, introduced in the 109^th Congress as HR 6210, firms that do set-up Auto-IRAs would qualify for a one-time, small tax credit to offset their administrative costs; one could propose that this tax credit could be expanded to cover matching funds provided to lower-income employees.

Make Retirement Savings Plans Universal and Accessible

Universal 401(k)s, proposed separately by Michael Calabrese of the New America Foundation and Gene Sperling of the Center for American Progress, would offer all Americans, regardless of their employment status, generous savings incentives and automatic savings opportunities that employer-provided 401(k)s now offer their employees. The components of a citizen-based, Universal 401(k) include: (1) $2-to-$1 government matching contributions for initial savings of low-income families and $1-to-$1 matches for middle-income families; (2) a new flat refundable tax credit of 30 percent for savings done by all workers; and (3) a single, portable account that benefits families by continuing to provide strong savings incentives for parents who take time off to raise children or who are between jobs. To facilitate deposits into Universal 401(k)s, automatic payroll deductions would be offered by employers. For very low-income workers who might initially have very small account balances, or who are otherwise unable to navigate the process of setting up and managing a private account, a “clearinghouse” (modeled after the federal TSP) could be set up and empowered to create “default” accounts for such workers.

4. Connect Tax Refunds to Savings Products

Promote the Split Refund Option

For the first time in 2007, individuals have the opportunity to split their tax refund across three accounts right when they file, using form 8888. Tax time presents a unique opportunity for all families, especially low-income households, to grow their personal savings account or invest in savings vehicles such as an IRA or 529 College Savings Plans. Splitting refunds across multiple accounts is a new and exciting opportunity to save at tax time. The IRS should work to educate both individual filers and tax preparers on the split refunds option, encourage tax-payers to take advantage of this simple savings mechanism and encourage the financial services industry to make certain products – 529 plans and IRAs, especially – more easily funded through direct deposit.

Allow Tax Filers to Open Accounts Directly from their Tax Forms

Building on the opportunities presented by split refunds to use tax refunds to jump-start both a relationship with a financial institution and savings, tax filers should be able to open a transaction, saving, or investment (including IRA) account directly on their tax forms. Especially for low income families who receive refunds and may not have an account—and a savings or investment account in particular—with a financial institution, being able to open such an account directly on a tax form could make a major difference in the savings take-up rate. The IRS could achieve this goal in several ways. For instance, the IRS could solicit proposals for private financial institutions to provide low-cost quality accounts nationwide. Or, the IRS could create and maintain a web-based directory of financial institutions that open low-or no-cost accounts online for tax filers. The directory’s URL address would be printed on all tax forms and it would be searchable by zip code.

Expand the Earned Income Tax Credit (EITC)

An expansion of the EITC, in addition to enabling more low-income Americans to save, would provide tax relief to lower-income working families. Previous expansions of the EITC have proven to be effective at providing work incentives and lifting families out of poverty. A well-crafted expansion would increase the maximum credit for working families with three or more children, expand the credit for married, two-earner couples, and expand the credit for families with two or more children. An expanded EITC program will create larger tax refunds, which in turn can be linked to savings products. An EITC saver’s bonus, described above, would also serve to expand the reach of the EITC while at the same time promoting saving and investment.

Increase Funds to Low-Income Tax Preparation Sites to Support Financial Education and Counseling

Congress should increase federal funding by $50 million to support the expansion of important IRS initiatives aimed at low-income families, such as outreach regarding the EITC and the Child Credit. The receipt of tax returns presents an opportunity for low-income families to connect to financial services and products and learn about investments and savings. Linking tax preparation with savings and/or investment tools, such as 529 college saving plans, would increase asset-building knowledge. To meet these goals, tax preparers need resources to (1) hire and train counselors and (2) develop software to maintain client information. Policy-makers must more adequately fund and support the development of tax preparation sites and education efforts to identify families who qualify for such assistance and maximize potential income tax return benefits.  In line with these goals, in March 2007 Sen. Jeff Bingaman (D-NM) requested $10 million in appropriations for community-based Volunteer Income Tax Assistance Centers for Fiscal Year 2008.

 5. Make 529 College Savings Plans More Inclusive

Create a State Innovation Fund

A variety of state and private sector actors have enacted innovative programs within their 529 plans to primarily help low-income children pay for college. For example, a few non-profit organizations have offered matches to families saving for college through parallel 529 scholarship accounts. In SEED for Oklahoma Kids, 1,000 newborns will receive a 529 plan with a starter deposit of $1,000. Financial information and matching deposits will be provided as incentives for families to continue to save for a post-secondary education. Coalitions are being formed in states such as Kentucky and Michigan to look into the possibilities of universal 529s for every child in the state with progressive savings incentives incorporated to help low-income families. The federal government could encourage these types of innovative activities by sponsoring a competitive grant process where states could receive awards to help seed these initiatives

Add 529s to the List of Products Eligible for the Saver’s Credit

The Saver’s Credit currently provides a 50 percent match—in the form of a non-refundable tax credit—to low-and moderate-income people who contribute to a retirement account such as a 401(k) or IRA. To further promote savings in general, a range of savings products, including 529s, could be added to the list of products that trigger this credit; the administration proposed such a change as part of the FY 2008 Budget. Certainly one could argue that pre-retirement assets—especially a post-secondary education—is a critical element of retirement security, and it should be noted that all IRAs already permit tax-and penalty-free withdrawals for post-secondary education.

Support Matching Grants to Low-Income Savers

Currently 529 plans are largely underutilized by low and middle-income families. A number of states have dedicated funds to match savings in 529 plans as an additional incentive for low-income families. These incentives appear to be successful in encouraging families to contribute to 529 plans. Seven states—Colorado, Louisiana, Maine, Michigan, Minnesota, Rhode Island, and Utah—already provide matching funds to low-income savers, and Arkansas will begin providing targeted matches in 2008.

6. Foster Access to Wealth Building Financial Services

Fix the Electronic Transfer Account (ETA) and Expand Its Availability

Currently, the ETA is available only to those Americans who receive a recurring federal payment, like Social Security. Approximately 2 percent of federal benefits recipients have opened an ETA. Yet it is estimated that at least 4.5 million federal benefit recipients still do not have bank accounts. The take-up rate is low because the ETA is not attractive to either consumers or banks. For consumers, the account lacks functionality. For banks, there is an insufficient volume of small accounts. The Treasury Department should give banks greater flexibility to offer customers a range of options with different fee structures, as long as the bank continues to offer at least one low-cost option that is available to any federal benefit recipient regardless of past banking history. The need for a basic bank account is high and the ETA continues to represent a potentially useful infrastructure for providing access to financial services—particularly if account eligibility guidelines are expanded and banks are given greater flexibility to better tailor the product to meet consumers’ needs. Further, the ETA should be made available to a broader segment of unbanked consumers, especially those who receive tax refunds.

Strengthen the Community Reinvestment Act and Improve the Service Test

The Community Reinvestment Act (CRA) has been successful in encouraging banks and thrifts to provide credit and make investments in communities in which they have branches. It has been less successful in ensuring that CRA-regulated institutions are actually serving the transactional, savings and investment needs of residents of low-income communities, and in encouraging those institutions, and their credit-providing affiliates, to provide products with appropriately risk-based prices and terms in all communities in which they do business. To score well on the service tests, banks and thrifts should be required to demonstrate that they not only provide, but also effectively market, fairly priced products and services that meet the needs of lower-income consumers. And it is time to consider how to both encourage banks and thrifts to extend their best lending beyond their assessment areas and to make certain that non-prime lending within the holding company family is well-priced and on fair terms.

Increase Accountability and Responsibility for Financial Institutions

While the Community Reinvestment Act has been quite successful in increasing responsibility and accountability of banks and thrifts to low- and moderate-income communities in which they have branches, the financial services world has changed dramatically since CRA was enacted in 1977, and those subject to CRA have a smaller and smaller portion of the consumer's financial "wallet."  Credit unions, mortgage bankers and brokers, insurance companies, securities firms and providers of all sorts of alternative financial services from check cashing through pawn broking all compete for the consumer's financial business. While each industry is subject to, for example, laws relating to unfair trade practices, as well as its own distinct laws and regulations (with highly variable levels of supervision and enforcement), there is no uniform obligation to serve low- and moderate-income consumers and communities and to do it in a manner that is fair to the consumer while profitable, and thus sustainable, to the provider. The on-going debacle in the sub-prime lending industry suggests the need to revisit this situation and open the debate on corporate responsibility in all parts of the U.S. financial services sector.

Capitalize an Innovation Fund to Facilitate R&D Focused on Under-Banked Consumers

The Treasury Department should create an Innovation Fund to spur systemic change throughout the financial services industry by providing seed funding for financial services companies to develop products and services for under-banked consumers. These R&D funds would encourage banks—and other financial services firms—to engage in the kind of intensive research and planning that they perform to develop products and services for higher income consumers. The fund would seek to increase the reach of mainstream financial institutions into the under-banked market by encouraging innovation both in how products are structured and in how they are marketed and delivered. Ideally, products would bundle multiple functions, include a savings feature where feasible, use incentives creatively, and be competitively and responsibly priced.

Encourage TANF Recipients to Open Bank Accounts

Having a bank account is often one of the first steps towards building savings and assets. One way to assist TANF recipients—many of whom are “unbanked”—in this regard, while potentially curtailing costs of delivering benefits to recipients, is to have benefits electronically transferred to an account. Federal law does not require or prohibit electronic delivery of TANF cash assistance. Many states distribute TANF cash assistance via electronic benefit transfer (EBT) to a debit or stored-value card with access to funds via ATMs. Some states also offer recipients the option to have cash benefits directly deposited into a bank account. States that do not have a direct deposit option already in place could be encouraged to do so by offering bonus awards for states that reach a particular direct deposit threshold and by requiring states to specify in their state plans how they will encourage direct deposit of TANF benefits, and partner with financial education programs, free tax counseling programs, and mainstream financial institutions (banks and credit unions) to encourage unbanked recipients to open free or low-cost accounts.

7. Revise Asset Limit Rules in Public Assistance Programs

Eliminate Asset Limits from Eligibility Considerations

Eliminating asset limits entirely from certain programs should be considered and adopted where appropriate. Because states set the asset limits for TANF and Medicaid, the federal government has limited control over asset limits, with discretion primarily in the SSI and Food Stamp programs. However, the federal government could support states that choose to eliminate asset limits and commission research on the effects of this reform.

Reform Existing Asset Limits

Raise the limit. Asset limits could be raised to a more realistic level in public assistance programs, so that families could save more without being penalized, and then indexed to inflation to keep pace with rising costs. The raising of asset limits will encourage families to save in a variety of saving products, including Savings Bonds. Unlike income limits, which are adjusted upwards on a regular basis, asset limits in some programs have remained the same for several decades. In effect, asset limits have caused eligibility to become more and more restrictive over time. Program funding levels may benefit from the recent change to a more temporary focus on administering assistance, but families will benefit more from a long-term plan of savings and asset-accumulation

 Index limits to inflation. The asset limits currently used in determining eligibility for major income support programs such as Food Stamps and SSI have, in some cases, not been updated in more than two decades. Over time, these limits become increasingly restrictive as they are not updated to reflect the effects of inflation. Indexing asset limits to inflation will work to ensure that the limits retain their original purchasing power and spare Congress and state legislatures from the need to continually legislate an increase.

Exclude certain asset holdings, such as savings for education and retirement; a car; and EITC refunds. Currently, employer sponsored 401(k) plans as well as IRAs generally are counted towards asset limits. Families needing to go on temporary public assistance therefore may have to spend down these retirement accounts even if they face a penalty in doing so. These families, who likely already lack sufficient retirement savings, will have even less—making it more likely that they will have to rely even more on public assistance once again when they are seniors. In line with excluding retirement accounts, contributions to 529s and other restricted education savings plans should also be excluded from eligibility consideration.

Cars are often overlooked as “assets” because they quickly depreciate in value. However, the value of a car should not be measured only by its resale value, but by the utility it provides in giving families access to job opportunities across their region. This is particularly important for families in areas lacking a convenient public transportation system.

Finally, low-income workers who receive an EITC refund should be allowed to save their refund for up to a year after receipt to pay for unexpected expenses, debts, and other purposes. This would help families pay for both expected and unexpected expenses throughout the year and offer greater protection from financial emergencies that could cause them to return to public assistance. This one-year time period has already been set in the Food Stamp program and the SSI program allows the EITC to be disregarded for nine months, so these precedents could be expanded to other programs which receive federal funding.

Reform Asset Limits in the Supplemental Social Security (SSI) and Medicare Programs

Asset limits in the SSI and Medicare programs currently impose an implicit tax of 100 percent on all retirement savings – for every dollar withdrawn for use in retirement, an individual’s benefit is reduced by a one-for-one ratio. Under these program rules, individuals who saved for retirement during their working years are no better off than if they had not saved at all. SSI and Medicare asset limits must be reformed to restore the incentive for low-income workers to save for retirement by removing, or reducing, the penalty for withdrawals from retirement accounts.[19]  Additionally, asset limits in SSI and Medicare present a tangible disincentive to save for pre-retirement uses, such as skills training, homeownership, or home improvement. SSI recipients, who may be capable or working for short periods, are prohibited from saving more than $2,000; when their disability results in an inability to work, these individuals must spend down their savings in order to re-qualify for SSI assistance. Not only do asset limits prevent SSI recipients from saving for skills training or homeownership these rules also prevent individuals from building a personal safety net through precautionary savings for use in a personal or medical emergency. The above recommendations to raise and index asset limits in addition to excluding all restricted savings vehicles, could make a tremendous impact on the financial security of this population.

8. Expand Responsible Homeownership Opportunities

Enact a Refundable First-Time Homebuyers’ Tax Credit

The years immediately following a home purchase can be ones of financial hardship. Family income is devoted to mortgage payments and many auxiliary expenses accrue related to the maintenance and operating of a home. There is often a need to help sustain homeownership after the initial purchase. In addition to giving new homeowners access to information and services to prevent foreclosure, many homeowners would benefit from getting some financial relief in the years immediately after home purchase. A Homebuyers Tax Credit should be available to qualifying households for the three years after purchasing their first home, helping families sustain homeownership after trying so hard to achieve it. Qualifying households would apply for the tax credit directly on their tax returns. The credit would be refundable so it benefits families even with low or no tax liabilities. The benefits would appear as a lower tax liability or as a tax refund.

Increase Use of the Family Self-Sufficiency Program

The FSS program is one of the nation’s largest programs designed to help working poor families increase their savings. When earnings increase for Section 8 or public housing program participants, their rising rent payments are diverted into an escrow account which they can access after achieving self-sufficiency goals. While public housing authorities have the ability to open escrow accounts, they are required to identify designated case managers. In recent years, the funding to support case managers has been restricted and plagued by bureaucratic complexity.

The Department of Housing and Urban Development (HUD) should stabilize these funding streams, increase their capacity to hire case managers and more effectively seek partnership with agencies already in the case management business. FSS has proven to be a successful model, and HUD should expand it by encouraging local partnerships between organizations with complimentary skill sets. Developing and publicizing FSS partnership arrangements will provide support for FSS practitioners by sharing best practices and entrepreneurial approaches to program growth. Beyond these reforms, the FSS approach should be dramatically expanded upon. The number of participants should double within the next four years. Furthermore, policymakers should consider making the link between increased earnings and savings accounts a central feature of the provision of housing assistance.

Expand Viability of Homeownership Uses from Restricted Accounts

In recent years the number of tax-preferred savings products which are defined by rules that govern contributions and withdrawals has continued to grow. While many of these accounts are associated with retirement, they have many pre-retirement allowable uses, including first-time homeownership. Though some have described these uses as “leakages,” accrued savings can be used productively to help build a bridge to retirement. Policymakers should consider make these uses more robust and valuable, especially by updating the provisions related to first-time homeownership. First, policymakers should amend the rules for IRAs and Roth IRAs to raise the one time homeownership use allowance from IRAs from $10,000 to $20,000, which would bring this level up to a more contemporary downpayment standard. Second, rules which govern 401(k) and 403(b) plans should be amended to permit savers to use their funds for first-time homeownership and make the rules consistent with those for IRAs.

 9. Strengthen Laws to Protect Assets Increase the Oversight of the Homebuying and Refinancing Market, Especially in the Sub-Prime Sector

The existing protections for high-cost and other potentially dangerous home loans must be improved. This would include prohibiting equity stripping practices, such as excessive prepayment penalties and fees for payoff information, modification, or late payment; requiring a borrower receive counseling before entering into a high-cost loan; and prohibiting mandatory arbitration clauses on high-cost loans.  Consumers must also be far more effectively informed of all the terms of a loan—especially likely changes in payments arising from expiration of “teaser” rates—and lenders required to underwrite to ensure customers can pay after teaser rates expire and full amortization begins.  More effective state oversight of mortgage brokers and others under their jurisdiction is also required.

Reduce the Cost of Tax Preparation and Restrict the Marketing of Refund Anticipation Loans

The IRS should continue to expand the provision of free electronic filing. Further, it should ensure that 1) the free services are easier for eligible tax filers to access and navigate; 2) the marketing of Refund Anticipation Loans is limited; and 3) options to open IRAs online are included.

Promote Strategies to Avoid Foreclosure

Overall foreclosure levels, and in particular foreclosure levels for sub-prime loans have hit record levels, and are expected to continue to increase, damaging not only families but also whole communities.  Borrowers in trouble need access to both information to enable them to understand the potential for trouble while they still have the ability to refinance or to otherwise avoid foreclosure; and to non-predatory alternative mortgage products. In neighborhoods at risk of large numbers of foreclosures, lenders should be encouraged to make available homes vacated by borrowers who must move at no or low cost to community-based organizations that can resell the homes to borrowers who can afford the home, using an affordable mortgage product.  Modifications to loan contracts (especially those that use pre-payment penalties to lock borrowers into loans they cannot pay), securities terms or laws (to allow modification of securities to allow loan prepayment or payment at less than par), or the Bankruptcy Code (to allow the secured part of a mortgage obligation to be reduced to no more than the value of the house) may also be required.

Increase Scrutiny of Payday Loans

Payday loans—which are short-term, low-dollar loans secured by a post-dated check—have become a serious asset-depleting type of lending, especially in moderate-income, working communities.  Auto title lenders and pawn shops serve similar functions.  While some states have been able to enact laws that limit or reduce payday lending, others have enacted more permissive statutes.  Following revelations about the damage this type of lending was having upon the military, in 2006 Congress enacted the Talent Amendment to the Defense Appropriations bill, which establishes strict standards for consumer lending to members of the military and their dependents. While the Department of Defense must write implementing regulations before the law goes into effect in October 2007, the statute has focused attention more broadly on why there is a growing demand for such credit, why the demand is not being met by traditional financial institutions such as banks and credit unions and how consumers can be better served. The Federal Deposit Insurance Corporation (FDIC) has issued proposed guidelines to encourage banks to provide both payday loan alternatives and savings products to reduce the need, and is considering a pilot program to explore how banks could get back into this business in a sustainable manner while helping customers move toward more constructive forms of credit. It is important that the FDIC's efforts are encouraged, that other bank and credit union regulators take similar steps, and that efforts to restrict payday and similar lending continue in the states.

Prevent Credit Card Abuses

The terms under which most credit cards are issued are virtually impossible to understand and present a substantial trap for the unwary and, especially, those who are financially stressed. Congress has recently held a series of hearings that have highlighted some of the worst abuses, such as double-interest and universal default clauses, and some financial institutions have begun to change the most egregious terms. But there is need for additional action, both to help card issuers who are willing to improve terms not be undercut by competitors, and to ensure that credit cards are offered on terms that are fully, accurately, and timely disclosed in a manner that is easily understood; make sense to consumers (e.g., a credit limit is a limit on credit granted, not an opportunity to charge an over-limit fee); and fairly enforced. 

[1] Bucks, Kennickell, and Moore (2006).

[2]Bucks, Kennickell, and Moore (2006).

[3] Analysis by Ed Wolff in Mishel, Bernstein, and Allegretto (2006), page 251.

[4] Analysis by Ed Wolff in Mishel, Bernstein, and Allegretto (2006), page 253.

[5] Analysis by Ed Wolff in Mishel, Bernstein, and Allegretto (2006), page 253.

[6]Analysis by Ed Wolff in Mishel, Bernstein, and Allegretto (2006), page 253.

[7] Bucks, Kennickell, and Moore (2006).

[8] Di (2003).

[9] U.S. Department of Housing and Urban Development (2007).

[10] U.S. Housing Market Conditions, 4^th Quarter 2006 (2007).

[11] Bucks, Kennickell, and Moore (2006). Includes only all employment-based defined contribution plans plus IRAs and Keogh plans, but not defined benefit plans.

[12] Mishel, Bernstein, and Allegretto (2006), page 268.

[13] Bucks, Kennickell, and Moore (2006).

[14] Wolff (2004); Kochar (2004).

[15] For an analysis of the President’s 2008 budget proposals, see The Assets Report 2007: A Review, Assessment, and Forecast of Federal Assets Policy, available at AssetBuilding.org.

[16] Sherraden (1991).

[17] Shapiro (2004).

[18] Cramer (2006).

[19] Center on Budget and Policy Priorities (2007).