Employment and Poverty Among the Homeless - Savings Are Down, Bankruptcies Are Up

One of the risk factors for becoming homeless is the lack of a financial safety net upon which individuals can fall back should something unexpected occur. The loss of a job, and in many cases the concomitant loss of health insurance, is one such occurrence. An accident resulting in the need for expensive medical treatment is another example of the sort of incident that requires a financial safety net. Financial experts stress the importance of maintaining savings that can help see people through this sort of crisis. Yet in the United States, the rate at which Americans save has been declining since the 1980s.

Figure 3.8 provides an overview of the personal savings rate over the period 1970-2004. The Bureau of Economic Analysis defines personal savings as the rate FIGURE 3.7
Percent change in mean income and share of aggregate income, by population fifths, 1990-2001
SOURCE: Created by Information Plus from "Table F-2. Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Families, 1947-2001," Historical Income Tables—Families, U.S. Census Bureau, September 2002, http://www.census.gov/hhes/income/histinc/f02.html (accessed February 21, 2005) and "Table F-3. Mean Income Received by Each Fifth and top 5 Percent of Families (All Races): 1966 to 2001," Historical Income Tables—Families, U.S. Census Bureau, 2002, http://www.census.gov/hhes/income/histinc/f03.html (accessed February 21, 2005) at which we save our disposable income (the income remaining after taxes have been paid). Disposable income grew over this period from $13,563 in 1970 to $27,237 in 2004 (based on constant, inflation-adjusted 2000 dollars). The savings rate in 1970 was 9.4% of disposable income, but by 2004 it had dropped to just 1.2%. As people save less, they become more vulnerable to unplanned expenditures that periodically arise in life.

Exacerbating the problem of low savings is rising consumer credit debt. Kim Khan, in "How Does Your Debt Compare?" reported that not only is debt rising, but 43% of American families spend more than they earn each year and average $8,000 in credit card debt (MSN Money, http://moneycentral.msn.com/content/SavingandDebt/P70581.asp, accessed July 2, 2005). Mortgages also skyrocketed in the early 2000s. Because of historically low interest rates, many homeowners over-borrowed. According to the American Housing Survey for the United States in 2003 (Census Bureau, September 2004), more than 855,000 owners had three or more mortgages on the homes they occupied, and 2.5 million owners had loans equal to or greater than the value of their homes. As a result, bankruptcies and foreclosures were on the rise.

FIGURE 3.8
National savings rate as a percent of disposable income, 1970-2004
SOURCE: Created by Melissa Doak for Information Plus from "Table 2.1. Personal Income and Its Disposition," Bureau of Economic Analysis, February 25, 2005, http://www.bea.doc.gov/bea/dn/nipaweb/TableView.asp#Mid (accessed March 3, 2005)

The rise in the number of bankruptcy filings during the late 1990s, a period of strong economic growth, was likely the result of low savings and high credit debt. According to the Federal Reserve, the typical family filing for bankruptcy in 1997 owed more than one and a half times its annual income in short-term, high-interest debt. For example, a family earning $24,000 had an average of $36,000 in credit card and similar debt. Between 1980 and 2002, the number of personal bank-ruptcy filings rose by an astonishing 435%, from 287,580 in 1980 to 1,539,111 in 2002.

Controversial new bankruptcy regulations were signed into law by President George W. Bush in April 2005, making it more difficult for many to file personal bankruptcy. The new law addresses the uninformed and uneducated use of consumer credit by large numbers of Americans and includes a requirement that the successful conclusion of any personal bankruptcy case be accompanied by credit counseling for the filer, as well as a requirement that some filers repay some of their debt over a period of years, based on means.