Spotlight Exclusives

The American Dream and Moving Up

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The American dream the idea that with hard work people can improve their economic and social standing has powerful allure. Unfortunately, many Americans consider any failure to overcome poverty to be the result of personal weakness. This isn۪t the case: decades of research show that poverty is a widespread, systemic phenomenonand today, it۪s as hard to move up as ever before.

As a society, we ignore the full scope of poverty in the United States, and how difficult it is to escape. Research by Dr. Mark Rank of Washington University in St. Louis reveals that nearly 60 percent of Americans will be poor at some point between ages 20 and 75. And children born poor stay poor: about half of children born into poverty remain poor as adults. Similarly, two-thirds of children born into families with the least wealth, measured by net worth, will remain there.

Like poverty itself, a strong racial component underlies disparities in wealth accumulation. In a remarkable study, Thomas Shapiro of Brandeis University tracked 1,700 working-age families over 25 years, finding that the total wealth gap between white and African American families nearly tripled over that time, rising from $85,000 in 1984 to $236,500 in 2009. This parallels national gaps in wealth: the average white household has nearly ten times the wealth of the average black household.

It۪s worth examining differences in homeownership, which Shapiro found was the largest driver of wealth inequality. Homes are usually the most valuable asset owned by a family, and homeownership illustrates the way that wealth gaps work across generations.

Black families in Shapiro۪s dataset bought homes eight years later on average than white families, largely because they were much less likely to benefit from family financial contributions toward down payments. When they did buy homes, they were likely to make low down payments or take out subprime mortgages, leading to higher payments or interest costssignificantly depressing their ability to save as they built equity. Moreover, their homes were likely to be in largely black neighborhoods where home values tend to be much lower.

Unfortunately, our tax code and safety-net programs do little to ameliorate this divide. Peculiar incentives discourage the poor from saving while helping those already well-off. Welfare recipients in most states face limits on the value of assets they may accumulate to remain eligible for cash assistance. In most states, low-income individuals with assets over $2,000, even college or retirement savings, are deemed ineligible. This encourages the poor to try to live on the subsistence-level cash benefits offered by the program, rather than building the savings that would facilitate economic mobility. While needed, these safety-net programs are insufficient to support movement by the poor into the middle class.

On the other hand, the tax code extends numerous benefits for asset accumulation to middle- and upper-class Americans: the mortgage deduction for homeownership, 529 plans for college savings, and IRAs for retirement. The catch is that these deductions are not refundable, so they do not help those who are too poor to owe federal income taxes. This aligns with my latest research, out March 11, which connects the creation of wealth primarily to asset development. For each $1 increase in initial household net worth, net worth 22 years later increases by $0.35 at the 25th percentile income level, $1.20 at the 50th percentile, and $1.81 at the 75th percentile (see Figure 1).

Figure 1: Return to $1 increase in 2011 Net Worth by Percentile of 1989 Net Worth
Source: Panel Study of Income Dynamics and author۪s calculations

Our policies should empower the poor to save and make saving worth their while. We۪ve been encouraging the right actions buying a home, preparing for college, saving for retirement but we need to extend incentives to save to all individuals and families.

One simple and elegant solution, individual development accounts, was proposed over 20 years ago by Michael Sherraden, also of Washington University in St. Louis. Ideally these accounts would be opened automatically for children, contain a small amount of public seed money, and provide progressive matching contributions. Savings could be spent in areas that further human and financial capital development: education expenses, a down payment on a first home, and retirement.

In creating ladders of true economic mobility, even small amounts of savings can make a huge difference. My own research on the impact of savings for college has found that savings of $1-to-$499 make low- and moderate-income students four times more likely to attend college, and three times more likely to graduate, than similar students without savings.

Several cities and counties Cuyahoga County, Ohio and San Francisco, for example have embraced this idea and started helping families set up children۪s savings accounts. But only one state, Maine, has taken statewide action to help students save for college.

Research on why the poor remain poor affirms the critical importance of helping individuals build wealth. As long as the poor encounter welfare policies that discourage savings, expensive student loans that cloud their financial futures, transfer programs incapable of supporting upward mobility, and differential access to effective savings vehicles, we cannot say in good conscience that the American dream is delivering on its promise.

To print a PDF version of this document, click here.

Dr. William Elliott III is the director of Kansas University۪s Assets and Education Initiative, which is organizing a speaker series ( on issues of poverty and mobility throughout the 2013-14 academic year. Dr. Michael Sherraden will keynote the final event, on March 28, speaking about the two welfare systems in the United States and the potential for assets to reduce injustices that this bifurcated welfare system creates.

The views expressed in this commentary are those of the author or authors alone, and not those of Spotlight. Spotlight is a non-partisan initiative, and Spotlight۪s commentary section includes diverse perspectives on poverty. If you have a question about a commentary, please don۪t hesitate to contact us at

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