KU News Service

Professors call for fix to welfare system by helping poor accumulate assets

Tue, 04/01/2014

LAWRENCE — Fifty years after the war on poverty began, the United States needs to focus on building assets and fixing a bifurcated welfare system to truly help people rise out of poverty, according to a new report from the Assets and Education Initiative at the University of Kansas School of Social Welfare.

William Elliott III, associate professor of social welfare and director of AEDI, and Melinda Lewis, associate professor of the practice, wrote “Harnessing Assets to Build an Economic Mobility System: Reimagining the American Welfare System.” They presented it at the New America Foundation’s event 50 Years Since the War on Poverty in March in Washington, D.C.

Many Americans assume that wealth is generated by income, and income is generated by hard work and ability. The report argues, however, that labor income alone is not sufficient to help people rise out of poverty. Building assets and moving out of poverty may require an initial level of assets to begin with. Elliott and Lewis posit that the United States’ bifurcated welfare system, which focuses primarily on income for low-income Americans but encourages asset accumulation and investment via the tax code for high-income families, only helps perpetuate cycles of poverty.

“It not only creates inequalities during one's lifetime, it allows them to pass them on to the next generation,” Elliott said. “Under the current bifurcated welfare system, high-income families are able to pass on assets while the poor are not. The amount of assets you have initially makes a difference in how much you’ll have later on in life and how much you’ll be able to accumulate in the future.”

Elliott and Lewis used longitudinal data from the Panel Study of Income Dynamics and followed families from 1989 when the heads of the household were 18-44 to 2011 when they were 40-66. The data showed an inequality in the amount of return on assets based on an individual’s wealth. Families at the 25th wealth percentile experienced a 35-cent return for every dollar increase in net worth compared with $1.81 for those in the 75th percentile. With regard to income, they find that families at the 25th wealth percentile experienced a 58-cent return for every dollar increase in capital income compared with $1.29 for those at the 75th percentile.

The authors point out that while the returns are not equal, poor families do benefit from having more initial assets. The data suggests that policies supporting asset building are necessary to help families at all economic levels prosper.

“In order to actually move up the economic ladder, people need to get education,” Elliott said. "Either college, or on-the-job training or any sort of higher education to improve their skills so they can reach the next rung on that ladder. Assets are key in attaining that education.”

Elliott and Lewis suggest to combat poverty economic mobility, U.S. households’ income should be thought of as a “three-legged stool": labor, capital and transfers. Only this integrated approach is likely to provide real economic well-being for Americans. However, as it stands now, transfer income is often at odds with the creation of capital income among lower-income families. The consumption-based arm of the welfare system has meant tests that ensure that once households have a modicum of assets, they are no longer eligible for the program. The income threshold for determining eligibility is similarly low, ensuring that most households lose access to these consumption supports soon after they have enough income to be barely “not poor.”

“By definition, structure and objective, then, these programs are not designed to help Americans build these assets — human or financial — needed to assure that all Americans have equal opportunity for moving up the economic ladder,” Elliott said.

A number of economic factors — a 40-year productivity/wage gap, rising global competition, increased automation and rising higher education costs — means that the new normal is a society in which a job alone is not enough to move people into the middle class, the report states. In order to address the problem Elliott and Lewis call for the establishment of Economic Mobility Accounts. Unlike the current welfare system that merely helps people move from abject poverty to near poverty — often only to fall back — the accounts would help low-income individuals and families save and build assets throughout the life cycle. By supporting a three-legged stool approach for all Americans, such policy would be more equitable and effective in helping people move out of poverty through a combination of work and asset accumulation.

“The United States needs a policy intervention capable of transforming our bifurcated welfare system into a unified economic mobility structure,” Elliott said in a speech at the New America Foundation event. “EMAs are a tangible way to implement a rethinking of the U.S. welfare system, moving from a bifurcated approach that delivers disparate effects to a unified commitment to economic mobility opportunities for all.”

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