For almost five decades, America’s anti-poverty policies have focused on helping the chronically poor. This overlooks the growing number of working families who face extreme ups and downs in income and expenses.
In the last two decades, income volatility has increased by more than 30 percent overall and even higher for lower-income households. Low-wage work can be uneven and unstable and layoffs common. Cars can break down, or a child can become ill. This makes financial security hard to achieve, even for those who work hard and have a decent paying, but sometimes irregular, job.
Now Congress has an opportunity to find ways to prevent that slide.
In January, the Obama administration proposed a $2 billion, five-year initiative of Emergency Aid and Service Connection Grants to assist state and local agencies in piloting new ways to help families address financial emergencies.
Both sides of the political aisle should give this careful consideration. I’ve worked with researchers and policy advocates from a range of backgrounds who have innovative, practical strategies to keep financial emergencies from turning into major setbacks for families. These ideas need a combination of regulatory relief and financial support to be put into action.
Let’s take the example of Maria (pseudonym), a working mom of two school-age kids in New York. Some weeks her job as a waitress provides 40 or more hours of work, including extra tips if the stars align and the restaurant she works in is busy. Other weeks, she is barely offered 20 hours of work and her customers are less generous. This translates into a more than 150 percent swing in her income from week to week-- from $1,250 in a good week to $500 in a bad week. Some weeks she is begging her boss for more hours and asking her landlord to let the rent slide. If this goes on for too many weeks, or an unexpected expense crops up, Maria and her kids are at risk of becoming homeless.
Ideally, Maria can save up an emergency fund to bridge the shortfalls. But small balance savings accounts without fees are hard to come by. It is not unusual for an account to charge $10 a month for balances below $500, and $30 or more in the event of an accidental overdraft on a checking account. If Maria has $200 in emergency savings, she could see her savings vanish just from paying fees. Worse yet, having a more substantial savings account, equivalent to the three months expenses many experts recommend, could hurt Maria’s ability to qualify for public benefits if she really needs them.
When the emergency fund is tapped out or the shortfall is too much, Maria can turn to credit. But even payday lenders and credit cards have limits. And that cycle of borrowing to pay for rent and food puts Maria’s long term financial security at risk, since a growing share of her income will be required to pay off the amount borrowed, in addition to interest and fees.
What kinds of innovations are possible? Low-cost, low balance savings accounts with automated deposits from paychecks are one idea—like a 401(k) to smooth short-term income and expenses. Other ideas tie savings to housing payments or tax refunds. New forms of micro-insurance might allow people to buy coverage to cover an emergency car repair or other standardized expense.
But without regulatory waivers and pilot funding, policymakers will not know if these ideas will prevent economic hardships and reduce reliance on chronic public assistance. This is where a federal pilot for research and development can make a powerful impact.
Regardless of political ideology, federal, state and local public officials all benefit from better evidence on ways to prevent homelessness, hunger and other harm to families and children. Families today face more income and expense volatility. Congress should provide the funding and flexibility needed to test innovative, community-based solutions to help these families avoid poverty – and maybe even escape from it.
Collins is a professor of Public Affairs and faculty director of the Center for Financial Security, University of Wisconsin—Madison and editor of the book A Fragile Balance: Emergency Savings and Liquid Resources for Low-Income Consumers, Palgrave Macmillan. http://emergencysavings.org/