Savings Is Key to Economic Mobility, Report Finds

Children born to low-income parents with savings above the median level are more likely to ascend the income ladder as adults than are those whose parents are low-income and low-saving, a new report from the Pew Charitable Trusts' Economic Mobility Project finds.

Using data from the Panel Study of Income Dynamics, the report, A Penny Saved Is Mobility Earned: Advancing Economic Mobility Through Savings (70 pages, PDF), found that within an individual's lifetime, savings increases one's chances of being upwardly mobile. Indeed, 55 percent of adults who had high savings from 1984 to 1989 had moved up from the bottom of the income ladder by 2003 to 2005, compared to 34 percent of those who had low savings.

The report also found that the conflicting eligibility standards that states often apply to public assistance programs such as Medicaid and food stamps can create powerful disincentives for low-income individuals to save money. While the federal government will spend an estimated $130 billion in fiscal year 2010 on tax incentives to encourage Americans to save for retirement, education, and health needs, such benefits flow primarily to higher-income households. According to the study, tax filers in the top income quintile in 2004 received 70 percent ($1,838 per tax filer) of the total tax benefits associated with 401(k)-like plans and IRAs, while those in the lowest income quintile received only 0.2 percent ($6 per filer) of the benefits.

By making asset limits across public assistance programs more consistent, many barriers to savings for low-income individuals could be removed. And with greater savings, the report concludes, low-income Americans may have an easier time moving beyond public assistance programs. "It is clear that having savings is important to Americans' ability to realize the dream of upward mobility, particularly for those who start at the bottom of the income ladder," said Economic Mobility Project manager Ianna Kachoris. "Federal policy can and should be better designed to ensure that it does not deter individuals from saving, and to enable more Americans to access the significant incentives the government currently makes available to people to save."