Today, middle class households feel the same financial stress that low- and moderate-income families have borne for years, says new research by the Corporation for Enterprise Development (CFED), a national nonprofit organization working to alleviate poverty and create economic opportunity. In its report, Treading Water in the Deep End, CFED analyzes the financial security of American households and public policy responses to the financial crisis.
“As millions of Americans struggle to save for emergencies, investing in their futures is increasingly out of reach,” the report notes.
Liquid asset poverty is defined in the report as a household budget that is so tight that any unforeseen expenditure such as a car repair or medical expense cannot be managed without incurring debt. The financial insecurity of America’s liquid asset poor is CFED’s focus of findings.
The report found that the majority of the nation’s liquid asset poor are employed (89 percent), White (59 percent) and have at least some college education (48 percent). Even among middle-income households, defined as- those earning $56,113 to $91,356, 25 percent of these consumers do not have enough savings to cover living expenses for three months.
Further, the majority of consumers in 37 states and the District of Columbia do not have credit scores high enough to be eligible for the lowest available lending rates for short-term credit. In Mississippi, more than 69 percent of consumers have subprime credit scores, making it the worst state in the nation.
The highest levels of liquid asset poverty are concentrated in nine Southern states: Alabama, Arkansas, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Tennessee and Texas. In Alabama, more than 62 percent – almost two out of three consumers – do not have a personal financial safety net. Nevada is the only state outside of the Deep South among the 10 worst rankings for liquid asset poverty.
As CFED analyzed state and local policy responses in the wake of the nation’s financial crisis and recession, it created a policy scorecard that measured state responses to 67 policy areas. State and local concerns with growing economic inequality launched programs to raise the minimum wage, encourage long-term college savings plans and courted unbanked consumers to become a part of the financial mainstream.
For lifting 9.4 million people out of poverty in 2011, the report praised the Earned Income Tax Credit (EITC). In addition to this federal program, 25 states and the District of Columbia enacted their own versions of EITC that ranged from 3.5 percent to as high as 40 percent of the federal credit.
“For the first time, these rankings allow us to draw a line in many states between the strength of policies and outcomes for family economic security,” the report notes. The data shows that policies aimed at decreasing poverty and creating more opportunities for low-income families can make a real difference.
Even with these public initiatives, growing costs of higher education continue to lead to even higher levels of student debt. According to the report, the average student debt for college graduates grew from $27,150 in 2011 to $29,400 in 2012.
Additionally, both employer-sponsored retirement plans and homeownership levels respectively dropped a percentage point from 2010 to 2012. Nationwide in 2012, retirement plans slipped to 44 percent.
For consumers of color, CFED’s report reads much like the familiar financial refrain of earlier research:
- Two out of three households of color are liquid asset poor, lacking a financial cushion to respond to financial emergencies;
- Only 42 percent of consumers of color were homeowners; while White homeownership now stands at 72 percent; and
- The median net worth for consumers of color amounted to $12,377 – only one-tenth of the median net worth of White consumers – $110,637.
The Center for Responsible Lending (CRL) advocates that homeownership remains the best investment vehicle to help low-wealth families to build wealth and grow into the middle class. Research by the University of North Carolina Center for Capital found that families who received responsible, low-down payment mortgages are successfully repaying their loans and amassed an average $21,000 in home equity even during the financial crisis.
“Without improved policies at all levels of government that help families earn more, save more and build more assets, the yawning income and wealth inequality gap in the United States will widen, rather than narrow,” CFED concluded. “Inaction consigns millions to persistent financial insecurity, diminishing their economic future and the future of the nation as a whole.”
Charlene Crowell is a communications manager with the Center for Responsible Lending.