At this past weekend's Policy Expo (which was a great success thanks to the hard work of Roosevelt staff), an attendant asked me a great question after I presented on strategies for asset-building in low-income communities.
I had just discussed how Individual Development Accounts (IDAs)--matched savings accounts for low-income individuals and families dedicated to long-term productive goods--could be a great mechanism for helping working families save their Earned Income Tax Credit (EITC). Afterwards I was asked: "don't low-income working families need to channel all of their available funds to immediate, day-to-day survival? Can we really expect them to have the luxury of putting aside money for savings?"
This actually wasn't the first time I'd heard this question. Intuitively, it seems like a valid point of skepticism: how can you save what you don't have? Indeed, the 2007 edition of the Bureau of Labor Statistics Consumer Expenditure Survey (CES) tells us that lowest quintile of households in terms of income spend 70% of their expenditures on food, housing, and transportation, while the top quintile of income-earners spends 59% on these must-haves.
But a closer look at the CES data set reveals some interesting trends in the remaining 30% that low-income households are not spending on the essentials. Despite having less money to spend—in both absolute and relative terms—on non-essentials, the bottom quintile of Americans spends at a similar proportion to the top quintile when it comes to some of the ‘nice-to-haves’ in life.
Both the bottom and top quintiles of Americans spend 5% of their annual expenditures on entertainment and 1% on alcohol; they spend 1.3 and 1.1% on personal care products respectively. Troublingly, the bottom quintile spends 1.4 % of expenditures on tobacco, while the top only spends .03 %. Generally though, the poor spend more than the rich on the essentials, but spend similar proportional amounts for some other things.
The idea behind IDAs is not to suck money from the essential costs of life, but to channel some of this income that is diverted to recreation, fashion, electronics, etc, for long-term productivity. Yes, low-income households will have to curb spending in some non-essential categories in order to put aside savings. The idea is to encourage a sort ‘compensatory spending’: a proportional reduction in consumer activity in those categories that are expendable in the quest for long-term social mobility.
Is it fair to ask that IDA accountholders sacrifice certain consumption patterns in order to accumulate savings? Some might say that doing so is tantamount to asking impoverished households to give up (1) status goods, which might be the only marks of distinction they can manage to acquire, or (2) recreational respites from their day-to-day struggles.
The compassion in these objections is admirable, but their logic is not. Saving demands discipline; it always has, and it always will. We can’t change the essential chemistry of saving: consumptions and savings are in a zero-sum tug of war. Of course, as importantly, it would be wrong to encourage working families to put aside income for IDAs without addressing socio-structural factors that make it difficult for them to do so. IDAs can’t do it alone. But there is a small window of wiggle-room to intervene at the household level and help working families achieve through IDAs that we shouldn’t overlook.
References
Bureau of Labor Statistics. (2007). ‘Consumer expenditures in 2005.’ U.S. Department of Labor. http://www.bls.gov/cex/csxann05.pdf
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