Breaking the Cycle: From Poverty to Financial Security for All PolicyLink would like to acknowledge and thank Heather Acknowledgments McCulloch, Joe Brooks, and Alexandra Bastien for their contributions to this document. We would also like to thank Citi Community Development and the Ford Foundation for their generous funding support. © 2016, 2015 PolicyLink. All rights reserved. PolicyLink is a national research and action institute advancing economic and social equity by Lifting Up What Works®. http://www.policylink.org Breaking the Cycle: From Poverty to Financial Security for All Christopher Brown Lisa Robinson Contents 1 Executive Summary 2 Introduction 6 The Challenge: Systems that Prolong Inequality and Financial Insecurity 7 The financial system perpetuates poverty and financial insecurity 9 Disparities in education hinder financial security 10 The justice system deepens poverty for many low-income communities 12 Financial barriers to health and well-being 13 An “upside down” tax code 14 The Case for Hope: How Systems Can Be Reformed to Enhance Financial Security 15 Reforming the Financial System through More Just and Fair Practices 18 Reforming the Education System through Cradle-to-Career Supports and Financial Empowerment 21 Reforming the Justice System through More Equitable Approaches to Fees, Penalties, Debt, and Child Support 23 Reforming the Health-Care System to Support Financial Literacy 24 Reforming the Tax System to Be More Equitable 27 Policy Recommendations 30 Conclusion 37 Author Biographies Executive Summary Building financial security involves harnessing the array of • A financial system that enables all families to have access resources, capabilities, and institutional supports that enable to the basic financial products and services—such as bank vulnerable families to sustain themselves, thrive, and move accounts, home mortgages, business loans, and retirement up the economic ladder. It also requires reform of the systems— accounts—that are critical to building a secure future. finance, education, justice, health, and tax—that impact • An educational system that provides high-quality academic family financial well-being. preparation—beginning with universal pre-school— integrated with school-based and community-based Today, pervasive financial insecurity among American financial education programs that put all students on the households threatens the future of our families, road to career success and prosperity. communities, and the nation’s economic prosperity. Almost half of all American • A justice system that eliminates practices that households and two out of three households of Two out of three result in debt and incarceration of lower- color do not possess enough savings to sustain households of color do income people due to their inability to pay themselves for three months if their income not possess enough fines, fees, and court-ordered child support. were disrupted. One-third of African savings to sustain • A health system that strengthens and Americans and Latinos have no financial themselves for three safeguards the financial security of vulnerable assets at all. months if their income families through the integration of financial were disrupted. education into health services delivery, and The ability to earn and accumulate assets the enhanced regulation of medical debt determines whether families can leave poverty collectors. behind and achieve economic security. Assets include both tangible and intangible resources such as cash • A national tax system that would improve the ability of savings, a college education, stocks and bonds, or a home. lower-income individuals and families to build savings, Without assets, families may be able to subsist day-to-day, invest in the future, and send their children to college by but will not be able to cope with a financial emergency, save making tax benefits more equitable and accessible. for their children, or invest in a better future.1 This paper describes innovative approaches that integrate a The larger, interconnected systems and institutions that focus on building financial security across programs, while weave through our lives can support or inhibit a family’s reforming the systems that most affect the balance sheets of ability to improve their financial security. In fact, specific lower-income families and families of color. The featured features of some systems actually strip assets and wealth approaches run the gamut from small local programs to state from the most vulnerable families and communities, increasing and federal policy reforms and initiatives. These innovations their financial insecurity and deepening poverty. and the changes that they represent to key systems may be adapted and expanded to strengthen the financial security of This paper explores and provides examples of how key vulnerable people and communities nationwide. changes to components of the financial, education, justice, health, and tax systems can strengthen—rather than As our nation becomes increasingly multiracial and undermine—households’ financial security, and increase multicultural—by 2044, people of color will be the majority— economic inclusion. Reformed policies and practices within the principles of just and fair inclusion must be embedded these systems would embody the following features: in our systems and institutions so that we can build a future in which all can participate, prosper, and reach their full potential. Breaking the Cycle: From Poverty to Financial Security for All 1 Introduction Breaking the Cycle: From Poverty to Financial Security for All 2 Persistent poverty has complex roots and defies easy In short, income allows families to get out of poverty, assets solutions. Approximately 46 million people in the United are how they stay out.4 States live in poverty; of those, close to a quarter are in the labor force.2 They, and the additional 54 million who earn The persistence of poverty is intimately connected to the just enough to subsist above the poverty line, demonstrate enormous wealth gap that divides our nation. The top 10 that employment alone is insufficient to achieve economic percent of households possesses three-quarters of all stability or prosperity. Anti-poverty experts and advocates the wealth in America. The vast majority of all people in the have long understood that a variety of systems, policies, United States, the bottom 80 percent, account for only and practices exacerbate poverty. Even individuals working 13 percent of the nation’s wealth.5 The racial wealth gap—the one or multiple jobs, as many do, are often unable to difference in net worth between households of color and that permanently change their economic status. of their White counterparts—is even more acute. White households own 13 times the wealth of Black households and 10 times the wealth of Hispanic households. The loss of wealth that occurred during the Great Recession compounded the wealth gap. While wealthier families are recovering, many lower–income households and households of color continue to experience decreasing net worth.6 The impacts of wealth inequality are far reaching and contradict the core American values of equal opportunity, hard work, and upward mobility. While the wealthiest families accumulate disproportionate benefits from the expanding economy, millions of families at the middle and Flickr/Mike Juliano bottom of the economic ladder are living in a state of perpetual financial insecurity. In fact, specific features of the larger systems that we interact with daily actually deepen poverty by stripping These families are surviving on a day-to-day level, but they assets away from our nation’s most vulnerable families cannot cope with a financial emergency or save for the and communities. These impacts are no doubt at the center future.7 In fact, almost half of all American households, and of the popular saying that “the system” is rigged against two out of three households of color, do not possess the poor. The key to effectively addressing poverty is sufficient savings to sustain themselves for a minimum of dismantling systemic barriers to economic mobility and three months if their income were disrupted; and one-third financial security. This integrated “systems” approach of African Americans and Latinos do not own any financial requires a focus on increasing assets for low-income assets.8 households, not just income. Building financial security for all Assets are economic resources such as cash savings, a college 3 education, emergency savings, or a home. A household’s At PolicyLink, we use the phrase “building financial security” assets (what they own), minus what they owe, constitutes its rather than “building assets” in order to convey the array of wealth. Wealth is different from income in that wealth is the resources, capabilities, and institutional supports that enable stock of items of economic value in a household, and income vulnerable families to sustain themselves, thrive, and move refers to the inflow of economic resources. up the economic ladder. Achieving financial security involves harnessing the full set of systems that impact a family’s While the notion of building “wealth” may seem irrelevant finances. to the circumstances of those at the bottom of the economic ladder, acquiring a basic level of savings (wealth) is a crucial Empowering struggling families to contribute to and benefit first step for families to break the cycle of poverty. Without a from the economy requires a simultaneous commitment to savings