ALABAMA A&M and AUBURN UNIVERSITIES

THIS IS THE FIRST IN A SERIES OF TWO ARTICLES THAT HELP EXPLAIN WHY THE POOR STAY POOR. The second article in the series will discuss why many Americans don't save and it will offer some low-cost steps that could raise the savings rate for lower income households.
 
 

WHY THE POOR STAY POOR

AUBURN, FEB. 14, 2000---One major reason why the rich get richer and the poor stay poor is that some poor people fail to take advantage of free or low-cost services and money-saving opportunities that are available to them.

A survey by the Center for Studying Health System Changes found that almost 20 percent of Americans -- 35.4 million people without health insurance -- are offered coverage but turn it down. High cost is the reason given by two-thirds of those workers who forgo employer insurance; many which are low-income workers. The rest said they didn't need it or didn't want it.

The report concluded that getting those workers to sign up could cut the uninsured rate more effectively than the ongoing children's health insurance program or proposals such as President Clinton's plan to allow the near elderly to buy into Medicare.

The Center's survey said of those workers who turned down health insurance, 5 percent remain uninsured and the rest received coverage through another family member, a government program or private purchase. African-Americans and Hispanics were more likely to forgo insurance than whites. Nineteen percent of workers below the poverty line refused insurance.

The study also showed that lower income workers pay more toward insurance than higher paid workers. For workers earning more than $15 an hour, their share of a family plan is $84 or 3.2 percent of their income. At firms where the typical wage is less than $7 an hour, workers pay $130 a month toward family insurance. That's nearly 11 percent of their pretax income. The reason for this is that lower paying firms tend to be smaller and the employers pass a bigger share of premium costs on to employees, says Waddell.

Health insurance isn't the only example of people not taking advantage of free or low-cost financial opportunities. Sixty percent of people eligible for food stamps don't apply for them because they either don't know they're eligible, don't know how to apply; are too embarrassed to apply, or don't want to bother with applying.

In organizations offering 401k or 403b retirement plans, 57 percent of eligible workers don't participate, says Waddell. Those who don't tend be younger workers and lower-income workers. Those lower income workers who do participate usually contribute only up to the level of the employer's matching contribution. Higher income workers are more apt to make the maximum contributions allowed, and thereby receive a tax deduction each year.

A study by International Communications Research for Merrill Lynch found that 41 percent of employers say their employees don't participate because they can't afford it; 16 percent don't because of a lack of understanding about such plans; and 14 percent don't take part because of a perceived lack of need. Another 12 percent of employees said they don't participate because they prefer investing elsewhere and 25 percent don't know why they don't take advantage of these offerings.

Many employers also offer medical flex plans which pay for all or a major portion of out-of-pocket expenses for prescription medicine, dental care, eye care and other medical expenses not covered by insurance. Some plans also cover child-care expenses for their employees. Under such plans, employees are reimbursed for expenses from pretax income, thus lowering their income taxes.

There are contradictions in the claims of people who say they can't afford to save or take advantage of money-saving opportunities. More than 2 million people seek financial counseling each year through one of the Consumer Credit Counseling Services or through other financial counselors throughout the country. These clients are typically mired in debt, pay thousands of dollars in interest on their debts each year and have no savings, says Waddell.

In addition, there are millions of people with limited resources who claim they are unable to save but who spend up to $2,000 a year on cigarettes, or $2,000-$3,000 a year on lottery tickets.

A Census-based economic analysis found that about 40 percent of Americans earning $35,000 or less believe they are more likely to accumulate a $500,000 nest egg by winning a lottery or sweepstakes. For Americans earning $15,000-$25,000, 45 percent thought a lottery was the best way to acquire a half million dollars. Only 30 percent felt they could accumulate such money by saving and investing.

These attitudes show many Americans with limited resources are poorly informed and are desperately in need of information and education in money management, adds Waddell.

"Education can help give people the confidence they need to save money and show them how consistent savings of even small amounts of money can make a huge difference in their financial security."

Most families can build assets of several hundred thousand dollars during their lifetime simply by saving monthly, taking advantage of employer's retirement options and building equity through home ownership. This can be accomplished without depriving oneself or one's family of anything, says Waddell.

SOURCE: DR. FRED WADDELL, Family Resource Management Specialist, Alabama Cooperative Extension System, (334) 844-3244
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

This is the second article in the series. It will discuss why many Americans don't save and offers some low-cost steps that could raise the savings rate for lower-income households.
 
 

AUBURN, FEB. 14, 2000---Why aren't people with limited resources taking advantage of free or low-cost financial services and programs? Some people don't know about or understand the programs, but the majority of people don't take part because they say they can't afford it.

Some of these "can't-afford-it" individuals and families are below the poverty line, while others are marginal, says Dr. Fred Waddell, a family resource management specialist with the Alabama Cooperative Extension System.

The U.S. Census Bureau is revising the definition of what constitutes poverty. The new definition raises the income threshold for living above poverty from $16,600 to $19,500 for a family of four. This is a 4.3 percent increase. The change means that 46 million Americans (17 percent of the population) are officially living below the poverty line. This figure contradicts the 12.7 percent announced in Sept. 1999, which was the lowest level of the decade.

Sociologists and economists who study what people must earn to escape poverty in the United States, put the line higher than what the Census Bureau is considering. They put the threshold for a family of four at between $21,000 and $28,000, partly because the Census Bureau's figures don't allow for extra cash for emergencies, such as fixing a car. A higher threshold means that government spending for benefits for the poor, such as food stamps and Head Start programs, would have to rise.

The need for a redefinition of what constitutes poverty doesn't entirely support the belief of poor and near poor people who say they can't afford to save money or take advantage of money-saving opportunities. A 1997 study found that most low and moderate-income households who don't save don't do so because of a perceived inability to save.

Here are some of the reasons they give for not saving.

• Saving would make them ineligible for government transfer payments, and

savings.

• Family members or others in their community would insist that they share their savings.
• There's no point in saving because it would inevitably be wiped out in the next family financial crisis.
• They might be able to save $20-$30 a month without creating hardship, but that this was too little money to make the effort worthwhile.

• Increase the resources devoted to household budgeting education and to conduct research measuring the effectiveness of budgeting education initiatives.
• Publicize asset limits for eligibility for government transfer programs. Many low-income persons believe the limits to be much more restrictive than they actually are.
• Encourage banks to offer low-cost savings accounts combined with convenient, low-cost money orders for long-distance payments to reduce the bounced-check fees paid by many households with small-balance accounts.