NCPA - National Center for Policy Analysis

Improving Economic Mobility through Increased Savings

January 17, 2013

Since the recession began, Americans' rate of savings has been on the rise. Yet too many still do not have savings to buffer them against an emergency. This is especially true for low-income Americans, far too many of whom are just a medical bill or broken-down car away from financial ruin. Fortunately, our better understanding of the role of savings in mobility, together with interesting experiments and programs to foster savings, could enable us to make a significant difference in the accumulation of financial capital in poorer households, says Diane R. Calmus, a research assistant in the Center for Policy Innovation at the Heritage Foundation.

Several factors help to explain why some individuals and households move up the economic ladder and some do not. We can think of them as three forms of "capital."

  • Human capital means skills and knowledge that comes from education and such things as good health that improve one's productivity. It also means traits and attitudes, such as perseverance, grit and farsightedness, which could be called character.
  • Social capital refers to institutions like a stable family and a closely knit community, which nurture and reinforce the personal characteristics needed for upward mobility.
  • Financial capital refers to savings, wealth and investments.

Financial capital is critical for economic mobility in several ways. As tough economic times have struck American families, the importance of emergency savings has become more obvious. Savings help to cushion a family against the potentially catastrophic impact of large unexpected expenses.

Savings, however, is more than simply money to pay unexpected bills. Savings -- and, even more important, the culture of saving -- are critical to long-term and consistent movement up the economic ladder. Studies have found a strong connection between family savings and increased future earnings. This connection is found both within the individual's lifetime and for the saver's child.

But a propensity to save is also associated with character traits like grit, determination, perseverance and the ability to delay gratification. The problem for many individuals is that weaknesses in these traits make regular saving a major challenge. This challenge is made worse by the societal pressures of American consumerism.

Other barriers to savings are less abstract and cultural. A lack of familiarity with the mainstream financial system is more likely to deter low-income individuals than it is to discourage their middle-class counterparts. Inconvenient bank locations and hours, high and unexpected bank fees, a negative banking experience, a lack of financial education, and distrust of banks can also lead many individuals to avoid banks and thus also miss out on bank services that can foster savings.

Calmus explores in depth some programs developed to help address these issues and attitudes.

Source: Diane Calmus, "Improving Economic Mobility through Increased Savings," Heritage Foundation, December 21, 2012.


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