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Public policy reforms can help close wealth gap

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Today, middle class households feel the same financial stress that low- and moderate income families have borne for years, says new research by the Corp. for Enterprise Development (CFED), a national nonprofit organization working to alleviate poverty and create economic opportunity.

In its report, “Treading Water in the Deep End,” CFED analyzes the financial security of American households and public policy responses to the financial crisis.

Liquid asset poverty is defined in the report as a household budget that is so tight, any unforeseen expenditure such as a car repair or medical expense cannot be managed without incurring debt. The financial insecurity of America’s liquid asset poor is CFED’s focus of findings.

The report found that the majority of the nation’s liquid asset poor are employed (89 percent), are white (59 percent) and have at least some college education (48 percent). Even among middle-income households – those earning $56,113-$91,356 – 25 percent of these consumers do not have enough savings to cover living expenses for three months.

As CFED analyzed state and local policy responses in the wake of the nation’s financial crisis and recession, it created a policy scorecard that measured state responses to 67 policy areas. State and local concerns with growing economic inequality launched programs to raise the minimum wage, encourage long-term college savings plans and courted unbanked consumers to become a part of the financial mainstream.

For lifting 9.4 million people out of poverty in 2011, the report praised the Earned Income Tax Credit (EITC). In addition to this federal program, 25 states and the District of Columbia enacted their own versions of EITC that ranged from 3.5 to 40 percent.

“The data shows that policies aimed at decreasing poverty and creating more opportunities for low-income families can make a real difference,” said the report.

Even with these public initiatives, growing costs of higher education continue to lead to even high levels of student debt. Additionally, both employer-sponsored retirement plans and homeownership levels respectively dropped a percentage point from 2010 to 2012.

For consumers of color, CFED’s report reads much like the familiar financial refrain of earlier research:

  • Two out of three households of color are liquid asset poor.
  • Only 42 percent of consumers of color were homeowners; white homeownership is 72 percent.
  • The median net worth for consumers of color amounted to $12,377 – one-tenth of the median net worth of white consumers – $110,637.

The Center for Responsible Lending (CRL) advocates that homeownership remains the best investment vehicle to help low-wealth families to build wealth and grow into the middle class. Research by the University of North Carolina Center for Capital found that families who received responsible, low-down payment mortgages are successfully repaying their loans and amassed an average $21,000 in home equity even during the financial crisis.

“Without improved policies at all levels of government that help families earn more, save more, and build more assets, the yawning income and wealth inequality gap in the United States will widen, rather than narrow,” CFED concluded.

Charlene Crowell is a communications manager with the Center for Responsible Lending.

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