Systems that Drive Inequality

Pervasive financial insecurity among American households threatens the future of our families, communities, and the nation’s economic prosperity. The ability to earn and accumulate assets determines whether families can leave poverty behind and achieve economic security. Assets include both tangible and intangible resources such as cash savings, a college education, stocks and bonds, or a home. Without assets, families may be able to subsist day-to-day, but will not be able to cope with a financial emergency, save for their children, or invest in a better future.

The larger, interconnected systems and institutions that weave throughout our lives can support or inhibit a family’s ability to improve their financial security. In fact, specific features of some systems actually strip assets and wealth from the most vulnerable families and communities, increasing their financial insecurity and deepening poverty.

The persistence of poverty is intimately connected to the enormous wealth gap that divides our nation. The top 10 percent of households possesses three-quarters of all the wealth in America. The vast majority of all people in the United States, the bottom 80 percent, account for only 13 percent of the nation’s wealth. The racial wealth gap—the difference in net worth between households of color and that 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.

By 2042, America will be a people-of-color nation; yet, historically, people of color have faced barriers to saving, investing, and preserving financial assets. 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 bottom of the economic ladder are living in a state of perpetual financial insecurity. These families are surviving on a day-to-day level, but they cannot cope with a financial emergency or save for the future. In fact, almost half of all American households, and two out of three households of color, do not possess sufficient savings to sustain themselves for a minimum of three months if their income is disrupted; and one-third of African Americans and Latinos do not own any financial assets.

Our solution to the problem of wealth inequality and the racial wealth gap is equity. Equity is the antidote to inequality because it embraces our diversity and works to reverse trends so that everyone can more fully participate in our economy. Diversity is our greatest asset, our competitive edge in a world without boundaries. That vision informs a policy agenda driven by equity, fairness, and inclusion.

Our prosperity depends on an equitable economy rooted in communities of opportunity. Achieving this goal requires a new set of policies and strategies at community, regional, state, and national levels. These policies and strategies must ensure that, over their lifetimes, all Americans have access to higher education; livable-wage jobs; health resources; and opportunities to save, invest, and preserve financial assets.

In communities across the country, public, private, philanthropic, and nonprofit sector leaders are designing policies to expand and protect financial opportunities for families to save and invest in themselves and in their communities. They are working on all fronts of a continuum of financial capability that includes learning about options, accumulating resources, investing to make money go farther, and preserving against losses and predatory practices.

This section highlights key policy recommendations detailed in the PolicyLink report, Breaking the Cycle: From Poverty to Economic Security for All. Please see the full report for background and detail, including footnotes, for each of the proposals.

 

Financial System Policy Reforms:

Localities, states and the federal governments should support and replicate promising local innovations that do the following:

 

Expand access to financial capability supports

A financial system built on improving financial security would help families build the skills to do a household budget, establish long-term goals, and effectively navigate choices among financial products and services. Access to these skills would be woven into education, social service and workforce programs. Early childhood programs, for example, would help parents learn how to budget, build or improve their credit score, access appropriate products and services, manage their debt and begin a college savings plan for their child. School curricula, starting at the elementary level, would include financial education to help youth develop financial skills relevant to their lives.  


Help build credit scores 

A financial system built on improving financial security would offer creative and innovative ways for lower-income families to establish and repair credit, a key access point to the financial mainstream. For example, the national Credit Builders Alliance (CBA) recently completed a pilot project that uses rental payments to support low-income renters to build credit and financial capability. Rent reporting involves monthly reporting of rental payments to at least one of the major consumer credit bureaus for inclusion on traditional consumer credit reports. CBA supported eight affordable housing providers in becoming credentialed with Experian Rent Bureau to begin and sustain rental payment reporting on behalf of 1,255 low-income residents. Pilot project sites included affordable housing developments in Boston, Baltimore, Cleveland, Houston, Oakland, the Chicago suburbs, and communities in central Oregon and rural New Hampshire.


Increase access to affordable financial products for vulnerable households 

Community Development Credit Unions (CDCUs) embody elements of an equitable financial system.  They were specifically designed to serve low- and moderate-income communities and have pioneered efforts to deliver financial products and services to constituencies marginalized from the mainstream banking system. In addition, a variety of initiatives are working to support and encourage mainstream banks to offer appropriate products and services to lower-income households and households of color.  One such initiative, “Bank on San Francisco” was started by the Treasurer of the City/County of San Francisco in 2006 and then replicated in cities across the country.  The initiative partnered with both credit unions and local and national banks to increase access to bank accounts for people left out of the banking system. 


Congress should maintain the integrity of the Dodd-Frank consumer protections that regulate lenders and reject legislative attempts to weaken or dilute its provisions. 

The federal Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 enhances financial security by creating new oversight authority and setting rules that prevent lenders from peddling deceptive and high-cost mortgages to unsuspecting borrowers. Industry lobbyists and lawmakers are continuously challenging the law, resulting in weakened rules and delays. 


State and local governments should expand efforts to regulate and limit predatory lending. 

Robust consumer protection and enhanced regulation of predatory lending can help vulnerable consumers avoid high-cost loans and the cycle of debt they often generate. The federal Consumer Financial Protection Bureau (CFPB) and many states are seeking ways to curb predatory lending.  Some local governments are also acting to limit the proliferation of payday lenders and check cashers by using their licensing and zoning powers. San Francisco, for example, enacted permanent zoning restrictions prohibiting high-cost lenders from locating in neighborhoods where they are already concentrated.

Education System Policy Reforms:

Localities, states and the federal government should support and expand local innovations that do the following:

 

Automatically enroll kindergartners in college savings programs

Municipalities, state and the federal government are advancing programs to provide every child with a savings account and help boost savings for lower-income children. For example, in Maine the Harold Alfond College Challenge automatically opens and seeds a college savings account with $500 for every newborn born in the state.  At the federal level, the American Dream Accounts Act, recently reintroduced in Congress, authorizes the creation of online college savings accounts combined with resources and supports to help students, particularly low-income children, access a college education that leads to a career.
 

Integrate financial education and financial capability training into school curricula and youth summer employment.

Starting in the early grades a comprehensive curriculum helps students and families envision and prepare—academically and financially—for post-secondary education. In Wisconsin and Texas provision of financial education and access to bank accounts improved students’ attitudes toward saving and increased their understanding of personal finance, leading to the passage of statewide legislation to include financial education in school curricula.  Some jurisdictions are using the platform of local government-funded summer employment programs to build financial security skills among low-income teens. In San Francisco, MyPath works with low-income teens already participating in the Mayor’s Youth Employment and Education Program, providing peer-to-peer coaching on savings skills and access to mainstream financial products. 

 

Provide students and parents access to high-quality information about college and career options. 

Starting in the early grades, a comprehensive curriculum would help students and families envision and prepare—academically and financially—for post-secondary education. The Los Angeles Promise Neighborhood operates the Families Save program to address the intergenerational cycle of poverty and help students and parents build financial capability. Families Save is based in 19 schools and dozens of community centers throughout the Promise area and provides both curriculum-based and community-based financial education. Middle school and high school students acquire first-hand personal finance experience by engaging in real-life purchasing choices like buying a car or applying for a credit card. Families receive coaching on banking products and services, budgeting, and college financial aid options and can access matching monetary incentives to support their savings goals. 

 

Make high-quality preschool available to all children.

An education system built on improving financial security would establish universally available public preschool.  Making high-quality preschool available to all has the potential to reduce the racial wealth gap by helping students of color enter school better prepared to learn. One study indicated that African American children provided with quality preschool from infancy through five years of age completed more years of education, were more likely to attend a four-year college or university, and were less likely to become parents in their teenage years than similar students in a control group. More than 30 states have increased funding for preschool programs, since 2013.  President Obama has consistently called on Congress and the private sector to invest in high-quality preschool. 

 

Make tuition-free community college available to all students.

An equitable education system would enable students to embark on a post-secondary course of study without going into debt. Making tuition-free community college available to all students would remove barriers for lower-income students to pursue an associate degree and/or complete requirements towards a bachelor’s degree from a four-year college. The Tennessee Promise program, initiated in 2014, provides two years of free community college tuition to Tennessee students.  At the national level, the Obama administration has proposed making two years of community college tuition free. In 2015, several members of Congress authored a resolution calling for a debt-free higher education for all Americans, a theme that’s been picked up by presidential campaigns. 

 

Justice System Policy Reforms:

States should mandate reductions in court fines and fees that disproportionately impact low-income people and communities of color.

Debt from mounting fines and fees mandated by courts keeps individuals in a state of perpetual instability and prevents then from accessing the resources they need—such as identification, employment or housing—to be financially secure. Some state governments are taking steps toward reduce criminal justice fines and fees and to institute more just and successful child support enforcement policies.  At the state level, the Colorado state legislature is leading the way in granting reductions in fines and fees and eliminating them altogether for defendants who cannot pay.

 

Localities and states should eliminate the practice of jailing defendants for inability to pay debt and offer opportunities for nonviolent offenders to reduce their debt from court-ordered fines.

Efforts are underway, at the state and national level, to eliminate the practice of jailing defendants due to their inability to pay fines and fees.  In April 2014, the state of Colorado passed a bill to ban debtor’s imprisonment by establishing a process to determine which defendants cannot pay court-imposed fines. The federal Fugitive Safe Surrender, a national initiative of the U.S. Marshals Service, encourages persons wanted for non-violent felony or misdemeanor crimes to voluntarily surrender to the law and have their case adjudicated; those who turn themselves in receive favorable consideration from judges on reduction of their debt.  The State of New Jersey’s program has enabled almost 18,000 individuals to settle nonviolent warrants and court fines to date.  During a Safe Surrender event at a New Jersey church, 63 percent of those who surrendered did so for outstanding traffic warrants, one-third for misdemeanor charges, and four percent for child support debt, family court or probation warrants.

 

States should reform child support payment structures to reflect the ability to pay.

A system built on improving financial security would implement child support policies that take into account a non-custodial parent’s ability to pay, thereby increasing their capacity to support their children in an effective way. Delaware, Hawaii and Montana use the “Melson Formula” method, which helps ensure that child support orders reflect a non-custodial father’s real income.  The Melson Formula recognizes that supporting others is impossible until one's own basic support needs are met.

 

States and the federal governments should repeal any existing requirements for low-income parents to reimburse the state or federal government beyond the actual amount needed to support the child.

Current law requires custodial parents who receive Temporary Assistance for Needy Families (TANF) to assign their right to child support payments over to the state. However, states can and should use their option, established by federal law in 2005, to “pass through” all child support payments to families, rather than retaining payments intended for children. As of July 2013, 22 states passed through at least some of the child support collected, reflecting broad concern about the harmful impact on children when the state redirects child support payments to the government. Forty-four states have policies that forgive at least a portion of child support debt that is owed to the state as reimbursement for welfare benefits.

 

Any collected reimbursements to the state and/or federal programs should be used for purposes that enhance financial security for the children such as savings accounts, universal pre-K and financial capability programs.

If state policy requires the collection of past due debt, innovative approaches can ensure that children directly benefit.  For example, Kansas Child Support Services, working in collaboration with the state treasurer, established the Child Support Savings Incentive Program to allow noncustodial parents to open a 529 college savings account for their children. Every dollar deposited into the 529 account for the child results in Child Support Services reducing the noncustodial parent’s state-assigned arrears by two dollars.

Health System Policy Reforms:

Healthcare providers should integrate financial capability services and support into existing health care services and interactions with clients.

An example of health care services integrating financial capability services and support, the National Association of Community Health Centers, Community HealthCorps, trained its 500 AmeriCorps members in a financial literacy curriculum during 2014-2015.  AmeriCorps members were deployed in 200 medically underserved communities in partnership with 36 community health centers. Members helped patients develop a spending/saving plan, understand debt and debt resolution, and set and track money-related goals. As of March 2015, 18,193 patients had received financial education assistance from AmeriCorp members.

 

The federal government should improve federal regulation of medical debt collectors and for-profit hospitals to protect vulnerable consumers.

Recent federal action is helping to mitigate some of the negative impacts of medical debt on vulnerable families. The U.S. Treasury Department and Internal Revenue Service issued new rules in 2014 regulating debt collection practices of non-profit, tax-exempt hospitals (applying to about two-thirds of hospitals nationwide). The new rules mandate that tax-exempt hospitals evaluate a patient’s need for financial assistance before they refer a case to a debt collector, report debt to a credit agency, place a lien on a patient’s home, or move to garnish a patient’s wages.  In addition, the rules prohibit hospitals from charging patients eligible for financial assistance more than the amounts generally billed to people who have insurance. These regulations are an important step forward, but practices of for-profit medical providers are not affected (approximately 40 percent of the hospital market) and should be included.

Tax System Policy Reforms (Federal):

Make tax-code based benefits more accessible to low-income households by turning deductions into credits, preferably refundable credits that are accessible to lower-income families with little or no tax liability. 

A tax system built on improving financial security would make tax-code based savings and investment incentives more equitable by restructuring certain tax benefits from deductions to credits, preferably refundable credits.  Tax credits are accessible to the two-thirds of households who do not itemize their deductions.  Refundable credits are the most progressive form of tax benefit, as even the lowest income families – those who pay payroll taxes but have little or no income tax liability – can benefit from them. The Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) are examples of existing tax benefits that are refundable and directly benefit lower-income working families. In the 2013 tax year, the most recent year for which data is available, over 27 million working families and individuals received the EITC. The CTC offsets the cost of raising children through a partially refundable credit worth up to $1,000 per child. An estimated 38 million people received the CTC in 2013.

 

Make the temporary improvements to the Earned Income Tax Credit and Child Tax Credit expansions permanent, and extend the benefits of the EITC to lower-income workers without children and younger workers, who are currently excluded.

Critical provisions of the EITC and CTC will expire in 2017, affecting 50 million Americans –including 25 million children – unless Congress takes action to make them permanent. An equitable tax system would make the improvements permanent and extend the benefits to low-income workers not raising children. Low-income adults without children and non-custodial parents currently receive little or no benefit from the EITC and as a result, are being pushed deeper into poverty. Furthermore, the EITC should be extended to low-income workers not raising children starting at age 21, as proposed by Republican and Democratic leaders and the Obama administration.

 

Provide low-income households with tax incentives to encourage flexible savings.

In addition to accessible tax incentives, an equitable tax system would offer matching funds to help low- and middle-income families to save. For example, the Financial Security Credit Act was introduced in the 113th Congress, based on New York City’s SaveUSA model, which offers low-income families a mechanism and an incentive to start a savings account at tax time. In the process of filing their taxes, low-income New Yorkers open a bank account for the deposit of their tax refunds. If they leave their initial deposit untouched for a year, they receive a 50 percent match (up to $500). During the 2011 and 2012 tax seasons, over 3,300 individuals opened accounts and pledged to save an average of about $550 each. Approximately 70 percent of individuals fulfilled their commitment each year, saving nearly $2.5 million total.

 

Make tax benefits of homeownership more accessible and equitable.

The mortgage interest deduction (MID) allows taxpayers to deduct mortgage interest from their tax bill, but it is not accessible to households that don’t itemize or don’t own a home.  The MID should be converted into a refundable credit so that lower-income homeowners can access the benefits.  In recent years, several bipartisan committees in Congress have proposed changes to the MID to make it more accessible.

 

Establish a refundable tax credit for renters

Currently, the tax code subsidizes homeowners, but not renters, to build wealth through the mortgage interest deduction. A tax credit for renters would make the tax system more equitable by helping lower-income non-homeowners to offset housing costs and save for homeownership. The State of California offers a minimal, non-refundable renters credit of $60 for single or $120 for married taxpayers. 

 

Make the American Opportunity Tax Credit 100 percent refundable and permanent to better assist low-income students in obtaining a post-secondary degree.

An equitable tax system would expand higher education tax subsidies that are accessible to lower-income families. Currently 40% of the American Opportunity Tax Credit (AOTC) is refundable, meaning lower-income households will benefit even if they have no tax liability. The AOTC should be expanded to be 100 percent refundable to increase benefits for lower-income students and their families. In addition, the AOTC, which is set to expire in 2017, should be made a permanent feature of the tax code. 

 

Make the Savers Credit refundable so that it can support retirement savings by more lower-income working families.

The Savers Credit is intended to help low- and moderate-income households save for retirement by providing a tax credit for contributions made to eligible retirement accounts. However, because the credit is not refundable, it does not benefit low-income households that have little or no liability for federal income tax, exactly those who need it most. The Savers Credit should be made refundable or provided in the form of a grant that matches the savings of lower-income households. 

 

Make savings incentives simple and automatic:

  • Create a child savings account at birth for every child in the country. 

    ​Children’s Savings Accounts (CSAs) would help put every child in the country on the path to financial security. Automatically created at birth, the accounts would help families save for higher education, homeownership, retirement and other mobility-enhancing purposes. CSAs have been proposed for over a decade at the federal level—the America Saving for Personal Investment, Retirement, and Education (ASPIRE) Act has been introduced in Congress, with bipartisan support, since 2005. The ASPIRE Act creates an account for all children at birth, seeded with $500 and an additional deposit for children of low-income parents. Similar proposed legislation, USAccounts, establishes an account for every child at birth, seeded with an initial deposit of $500 from the federal government. Children of lower-income households are eligible for an additional match to their family’s savings through an increase in their refundable Child Tax Credit.

 

  • Provide all workers access to an employer-based, portable, individual retirement savings account into which they contribute savings through automatic deductions from their paychecks.

    An equitable tax system would make retirement savings simple and automatic for everyone, including low and moderate-income workers who do not have access to employer-based, retirement savings plans.  In recent years, “automatic IRA” (auto IRA) policies have been proposed at the federal and state levels.  These policies require employers, above a certain level of employees, to provide workers with the means of savings through tax-benefited retirement savings accounts. Employers would enable employees to make automatic, direct deposit contributions into an Individual Retirement Account (IRA) unless they decide to opt out and not participate. Because contributions would be automatic, these accounts would function as an ongoing retirement savings plan, thereby giving all workers access to tax-benefitted retirement savings. In 2012, the California legislature passed legislation creating the California Secure Choice Retirement Savings Trust. The legislation required a market feasibility study, which should be completed in December 2015. The Illinois Secure Choice Savings Program passed by the Illinois Legislature in 2014, gives workers at Illinois firms with more than 25 employees access to an employer-based, portable, individual retirement savings account, into which they contribute savings through automatic deductions from their paychecks. 

 

  • Continue to expand and strengthen the federal “myRA” program, which gives workers access to a retirement account and supports them to save through automatic payroll deductions.

    In early 2014, the U.S. Treasury Department began to pilot “myRA” (my retirement account), a simple and safe retirement account meant to incentive retirement savings. Initially offered through employers who volunteered to participate, individuals may now set up accounts directly through the Treasury Department website. The myRA program allows individuals to save up to $15,000 in a government bond as a “starter” account for retirement savings.  Once the account reaches the $15,000 limit, savings will be rolled into a private sector retirement account.  

 

  • Simplify existing savings incentives and make them more equitable by turning all existing deductions into a Universal Savings Credit.

    The Center for American Progress has proposed a Universal Savings Credit that simplifies existing tax incentives by turning all existing deductions into one credit. Taxpayers would receive the credit as a percentage of their contribution to an eligible savings account, regardless of income or tax liability, with federal matching funds offered for lower-income households. Savings could be used for a wide range of purposes, such as paying for healthcare, education, buying a first home, starting or expanding a business, or simply emerging from an income disruption such as unemployment or retirement.