California First Lady Maria Shriver, John Edwards and other political
luminaries converge on Los Angeles today for a summit on California poverty.
The organizers want speakers to present ways to help California’s poor that
are “innovative, practical, and achievable.”
That’s a tall order, but it’s a timely one. California is at a crossroads in
how it assist its less fortunate residents. We can limit ourselves to the
old tools and policies. Or California can lead the country in the
democratization of financial assets–which could prove to be the Homestead
Act of the 21st Century.
In the former, the focus is on familiar strategies–early childhood
education, job training, and youth programs. These services are crucial for
struggling families, but they’ll only get them so far. To permanently exit
poverty, families need opportunities to build their savings so they can make
key investments like sending their kids to college or buying a home.
Too many poverty analysts also low-ball the number of Californians who are
struggling economically. They use the federal government’s measure that
states 12 percent of Californians live in poverty. According to these
guidelines, a family of four is officially poor if it earns less than
$18,400 a year. But this definition, which looks only at household income,
just tells part of the story. For a more complete picture–and a more
discouraging one–it is necessary to measure the assets of the poor.
Whereas 12 percent of Californians are income poor, about 29 percent are
asset poor. These greater numbers of Californians would only last three
months at the poverty level if they were forced to deplete all of their
assets. That’s the fourth worst “asset poverty” rate in the nation. When
families don’t have enough assets, they may be one medical emergency or one
layoff away from government dependence. They also cannot buy a home, send
their kids to college, start a business, reduce or manage their debts, or
make long-term investments. And pass on opportunities to future generations?
When you ignore this expanded definition of poverty–that considers a
family’s income and assets– you put forward solutions that only solve part
of the problem.
Incentives to save and invest have long been available to upper income
Americans. Twenty-five percent of American adults have a legacy of asset
ownership from the Homestead Act. Today, the Federal Government provides
over $300 billion a year in investment opportunities through the tax code
for mortgage deductions, college and retirement savings, and to spur stock
ownership and business investment. Great policies, without a doubt–except
that more than 90 percent of these tax benefits accrue to households earning
more than $50,000 a year or roughly the upper-half of America.
Fortunately, similar policies for the working poor are being piloted in
California. These community programs don’t rely on the old tools. Instead,
they’ve worked with 5,000 families to cut an innovative deal: if you put
aside savings to buy a home, go back to school, or pursue some type of self
employment, we’ll match your savings $2 for every $1 you put in an account.
We’ll help you create a budget to meet your savings goals and build your
credit. And we’ll help you open a bank account, IRA, and use other types of
The deal is working. The state’s largest pilot program is the Assets for All
Alliance in Silicon Valley. Almost 700 low-income families have reached
their goals to buy houses, go back to school, and start businesses.
Together, they’ve saved $1.5 million. About 80 percent are meeting their
monthly savings goals. Their median household income is $24,000 a year.
These programs are proving that poor Californians can save, if they have the
incentives and tools.
But the biggest “asset building” idea would help Californians build savings
from the day they are born. A California Kids Account could be started for
every Californian at birth. The state could make an initial deposit,
matching deposits could be available for lower income children, and
financial education could be provided to both parents and children. All
California kids would grow up knowing they had a growing next egg to use for
college, a home, or a business. The accounts would be hope in concrete
form. Great Britain recently enacted a Children’s Trust Fund, its own
version of this idea. And a similar proposal has attracted bi-partisan
support in the U.S. Congress.
The obvious critique of asset building policies is that they’d break the
bank. But Gov. Schwarzenegger just proposed an infrastructure initiative
with a $222 billion price tag. California could pay for five years of KIDS
accounts for less than one percent of that cost. Surely we can find that
much to help California children and parents invest in themselves?