For the poorest Americans, expenditures exceed income. Check out this graph to the left I slapped together form the Consumer Expenditure Survey (CES). You'll note that it's not until you get into the middle quintile of income earners that income exceeds expenditures. For the bottom 40 percent of America, spendings outstrip income.
On its face, this suggests that poor Americans really don't have room to save. But, as I've noted, these expenditure measures include everything from shelter to cigarettes, meaning that there is some wiggle room to work with. Here I want to address the relationship between this wiggle room (i.e. non-essential expenditures that can be cut back to induce saving) and the graph above.
Let's take a collection of categories from the CES as our 'expendables': alcohol, smoking/tobacco, entertainment, and personal care products. We'll treat alcohol and smoking/tobacco as completely expendable, and the other two as only partially so (no one can reasonably go without entertainment or personal care). So let's say the average household in the bottom two quintiles cuts its spending in these areas by half. Over one year, eliminating booze/smokes and 50 percent of entertainment/personal care would save the lowest quintile $1,006; the second lowest would save $1,441.50 with the same cutbacks.
Of course, there are some significant caveats that dilute this scheme. Firstly, at least some of the households in CES were families (the average number of people in households for the bottom two quintiles hovered around two), meaning that expenditure cutbacks aren't always so easy, particularly with regards to personal care and entertainment (i.e. stuff kids need/want). Second, the $1,006 and $1,441.50 in savings do not make up the difference between income and expenditures represented in the graph above for the average household in these income brackets.
But before we close the book we need to look at two variables: the Earned Income Tax Credit (EITC) and Individual Development Accounts (IDAs). A qualified head of household with one qualifying child who brought in the reported CES income of the lowest quintile ($9,626) would be $2,740 in 2006. For the second quintile ($25,546) it would be $1,030. If this same individual had two kids, (s)he would bring in $3,870 (lowest income quintile) or $2,270 (second lowest quintile) from the EITC.
So as it stands, a head of household who cuts spending in the ways discussed here and qualifies for the EITC already has somewhere between $3,746 and $4,876 (if in lowest quintile) or $2,471.50 and $3,276 (if in second lowest). Now, what if this earner was to put this amount of savings in an IDA?
The usual match rates for IDAs are 2:1. meaning that for every dollar deposited by the account-holder, 2 are deposited by the matching bodies. Most IDA programs are built to last from 1 to 3 years, and some often are only matched up to a certain amount (e.g. $500). If we play it safe and take a 1 year IDA program with a 2:1 match rate and a max matching scheme of $500, this means that over the course of a year, we can in essence tack on an extra $1,000.
So now we have between $4,746 and $5,876 (if in lowest quintile) or $3,471.50 and $4,276 (if in second lowest) in saved funds. These amounts don't help the poorest quintile break even, but they do in fact make it possible for the second quintile to bridge the gap between income and expenditures in the graph above.
The message should be clear: helping working families is a patchwork pursuit that needs to be fought on multiple fronts. There's an important role for individual decision-making and personal responsibility as well as for creative social policies that feed into one another and help 'snowball' assets and well-being. The more we view poverty as a one-dimensional social condition, the more we tie our hands; the more we focus on viewing low-income individuals as active participants in their own life--in addition to being a policy-relevant population--the more we can get some novel ideas to surface.
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