Amidst great discussion about the macroeconomic condition of the United States, a group of practitioners, researchers, and policymakers gathered on Capitol Hill to discuss the micro-economic reality for many lower-income Americans.  The focus stayed on savings and credit for this group, convened by the Congressional Savings and Ownership Caucus, the Asset Building Program of the New American Foundation, and the Center for Financial Security at the University of Wisconsin.  At an event framed as seeking ways to “Rebuild the Road to Financial Stability,” the panelists sought to identify “potholes” in the road, as well as consider various tools to remove those “potholes.”

The importance of liquid assets dominated the conversation during the first of two panels. Daniel Schneider, of Princeton University, presented new survey data showing that U.S. households have very little confidence in their ability to meet an unexpected, emergency expense of $2,000. Further, the survey asked where people would turn in order to come up with $2,000. Amongst the responses, savings accounts stood out as the main method used to cope with an emergency. In addition, those respondents who expressed the most confidence in their ability to find the needed money, more frequently indicated that they would utilize savings as a the primary method of coping than those who had less confidence in their ability to cope.  Schneider pointed to this as evidence of the vital importance of liquid savings not only as a foundation of financial stability, but also of the perception of financial stability.

Signe-Mary McKernan, a Senior Fellow at the Urban Institute, also presented evidence showing that having short-term liquid assets, i.e., funds in a savings account, made a significant difference in a family’s ability to cope with a negative economic event. For example, given an involuntary job loss, 44% of liquid-asset poor families experienced general deprivation, as compared to 16% of not liquid-asset poor families. The first panel generally concluded that while various savings and credit products exist for lower-income Americans, more focus should be put on the need for highly liquid assets that are accessible in the short-term. Pursuing this focus could potentially impact longer-term savings programs like IDAs as well as asset limit policies for many government services and benefits.

During the second half of the event, panelists discussed several different ideas for removing the “potholes” from the road to financial stability. David John, of the Heritage Foundation, discussed the advantages of automatic enrollment in retirement savings accounts, such as 401(k)s, as well as automatic enrollment into non-retirement savings products, which resonated with the earlier panel’s emphasis on short-term savings. Ellen Lazar, of the FDIC, described two pilot projects the FDIC is conducting with various banks. One program, the Small-Dollar Loan Pilot, aimed to demonstrate the possibility for banks to offer affordable small loans, while still making a profit, effectively creating a safer alternative to very costly, and often predatory, payday lending products. The other program, the Model Safe Accounts Pilot program, works with banks to develop a model and template for safe and low-cost transactional and savings accounts. Access to these types of accounts helps customers avoid using check cashing services, which can often be quite costly as well.

Throughout the discussion, one theme continued to echo in each presentation, question, and discussion: lower-income Americans need access to the same wide range of financial services and products as the rest of the nation.  The road to financial stability requires a diverse set of tools to navigate its “potholes.” Part of the challenge for policymakers is to ensure that every American has the complete set of tools they need.

For more information about the event, visit: http://newamerica.net/events/2011/road_to_financial_stability. For more information about the FDIC pilot projects, visit: http://economicinclusion.gov/initiatives.html. For more information about automatic 401(k)s, visit: http://www.retirementmadesimpler.org/.

by Eric Stam