The Real Reason People Don't Save

Why low-income people can't save -- and it's not just because they're poor.

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We're always hearing about the importance of financial literacy: Kids need to learn how to budget, the importance of saving, and the power of compound interest. But for low-income individuals at least, lessons about saving aren't likely to help much. They already know how important it is. But they still can't do it.

If they're earning enough to support themselves, then they're probably being asked to support family and friends, as well. "Resource sharing," the technical term for such generosity, is common among lower-income social groups. That means the only way to get people to save is to essentially force them to do so through vehicles that can't be easily accessed by others, such as pensions or 401(k)s.

I recently spoke with Helen Levy, researcher at University of Michigan's Institute for Social Research, and expert on such matters. (Levy was also my professor at the University of Chicago's Harris School of Public Policy.) Excerpts:

How important is saving to one's financial well-being?

It's important for all kinds of reasons. People save for retirement, so they can buy something big, like a dishwasher or college education. And, in case something bad happens, so you have a pot money if your car breaks down. Saving gives you peace of mind and independence.

The people that you interviewed -- low-income women -- seemed to realize that saving was important, despite all the public discussions about the need for people to be taught the importance of saving.

They may not be able to act on this, but just about everybody says, 'I wish I could save. I know I should be saving.' Some younger people said, 'My mom or boss has sat me down and said, 'You've got to save.' Older people recognize [the importance of saving] from life experience. They know that if you don't, you won't achieve what you want, or if something bad happens, you're completely exposed.

Is it possible for lower-income people to save?

We do have people in our sample who have pretty significant retirement savings -- people who have pensions and 401(k)s. Almost without exception, these are people with a job where that came automatically, and people who've had jobs for a long time, like for the federal government or a union position. To the extent that people in this population are saving, that's where it's possible for them.

What stops them from saving, for most of them, is very low-income. As one respondent said, 'I'd be great at saving if I had any money.' They're just worried about meeting basic needs.

The other thing overlaid on that is that people, especially low-income people, live in complicated resource sharing networks of extended family and friends. If you have resources, people are asking you for help. Resources other people can't access, like a pension, is the only way people can save. Some respondents fall into the stereotype of very hardworking, thrifty people with tremendous demands on their resources. Because they're identified as relatively well off, a lot of people ask them for stuff.

What public policy changes would make it easier for people to save more?

The main thing is, thank god for Social Security. It's done a lot to reduce poverty among the elderly. For this population, that's why they'll have income in retirement. I can't imagine if people had access to that income earlier. If they are liquid assets, then [there will likely be resource-sharing among friends and family]. I don't know if you'd want to systemically undermine those relationships.

You wouldn't want rules that prohibited people giving money to friends and family?

Right -- it's important. Friends and family are helping people on the edge. I don't know if you'd want to systemically undermine those relationships. So programs focused on helping people open savings accounts and asset building seems like maybe not the first thing you'd want to do. To the extent that people have a choice of illiquid savings vehicles, such as a house that will appreciate or a 401(k) or a pension, that will be a better path to a secure retirement.

Would more financial literacy help?

[The people we spoke with] kind of know the basics, and that's not why they're [not saving]. Financial literacy may have a great impact higher up the income scale. You need to exhaust the 401(k) match, put money into a bank account, or diversification strategy -- that's not what we're talking about here. We asked people in the survey, what piece of advice would you give to younger people, and everybody says the same thing: 'Stay in school.' It's a cliché but true. The ones that stayed in school or got a union job, when they still existed, are more stable and have retirement savings. The ones that don't have that think, 'I'm going back to school to get a degree in nursing.' That would be a great thing to do. Nurses are among the most stable financially in this population.

So I think if you gave me a choice between including financial literacy in high school curriculums versus a lesson on what jobs are open to you if you finish high school versus if you don't, the latter is better.