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Minding the Gaps: Household Financial Stability in the Southeast
How well are American households managing financially? Can they weather a sudden financial emergency without going into debt? Are they preparing for retirement? The Federal Reserve Board of Governors' 2015 Survey of Household Economics and Decisionmaking (SHED), released in May, provides answers to these and other important questions for different demographic and income groups.1 This article uses the data to examine the financial well-being of households across the Southeast in the aftermath of the Great Recession.2
Household financial stability
In response to the question of how households perceive they are managing financially, 65 percent of those residing in the Southeast described themselves as either "doing okay" or "living comfortably," compared to 69 percent of households nationally (see chart 1). African-American households in the Southeast appear to fare the worst. Just 57 percent are doing okay or are managing comfortably, slightly lower than the 61 percent of African-American households who report those same results nationally.
On this same measure, southeastern whites also lag the national average of their demographic group by 4 percentage points, although the share that are "living comfortably" is nearly double that of African-American households in the Southeast. Interestingly, Hispanic households across the Southeast appear to outperform other groups; 72 percent claim they are doing okay or are living comfortably, compared to 64 percent of Hispanics nationally. Finally, the Southeast has similar shares of low-income households3 that report they are finding it difficult to get by compared to the national average. However, a greater share report they are just getting by: some 37 percent, compared to almost 33 percent nationally.
Southeast households are less likely to be able to cover expenses for three months in case of a financial emergency. Overall, 42 percent of southeastern households have a three-month rainy day fund, compared to 47 percent of households nationally. Similar to the findings above, African-Americans in the Southeast are less likely to have such a fund than African-Americans throughout the country (28 percent versus 34 percent). Southeastern whites also fare worse than whites across the country, just 46 percent have a three-month emergency savings fund, compared to 52 percent nationally. Notably, Hispanic households in the Southeast are more likely to have such a fund than Hispanics across the United States (42 percent compared to 35 percent).
Banking and credit
The SHED provides interesting information on the credit and banking situation of households. For instance, it finds nearly 8 percent of American households are "unbanked"; they do not have a checking or savings account. Of this group, most use alternative financial services, such as a check cashing service, to handle their money. In the Southeast the share of unbanked is slightly higher, at just over 9 percent. These figures match closely the FDIC's 2013 National Survey of Unbanked and Underbanked Households, which found 7.7 percent of American and 9.1 percent of southeastern households unbanked. Among low-income households these numbers are higher: just under 17 percent nationally, and just over 17 percent in the Southeast. Various initiatives under way across the country, such as Bank On 2.0, aim to improve access to the banking system for low-income Americans
A larger demographic discrepancy arises in how households rate their credit scores (see chart 2).4 This credit score gap can have a real impact on the ability of households to apply for and access sources of credit, such as mortgages, and can thus affect homeownership. Overall, 6 percent fewer households in the Southeast consider their credit score "good," "very good," or "excellent" as compared to the national average. Whites disproportionally report higher shares of excellent credit scores, both nationally (37 percent) and in the Southeast (33 percent), more than double the share of African-Americans with 14 percent and 13 percent, respectively, and triple that of Hispanics with 14 percent and 11 percent, respectively. Seven percent fewer African-Americans in the Southeast tend to report good, very good, or excellent credit scores compared to African-Americans nationally. In contrast, 67 percent of southeastern Hispanics report good, very good, or excellent credit scores, outperforming that group's national average by 6 percentage points.
Among low-income households, a similar picture emerges. These households in the Southeast are more likely not to know their credit score (just under 16 percent compared to 13 percent nationally), and are less likely to report good (23 percent), very good (12 percent), or excellent (10 percent) scores.
Finally, the SHED provides data on credit card ownership and usage. Again, there is a racial disparity that mirrors the previously highlighted results. Nationally, 67 percent of African-Americans report owning at least one credit card. In the Southeast, however, only 58 percent do. Southeastern Hispanics, in contrast, report slightly higher credit card ownership than Hispanics do nationally, 69 percent compared to 67 percent. Southeastern whites also lag the national average in this metric; 75 percent report owning a credit card, compared to 80 percent nationally. Lower-income households in the Southeast report higher usage of their credit cards. Over 39 percent have carried a balance on their card most of the time in the past 12 months, compared to 34 percent nationally. The data indicate that a comparatively larger number of low-income households in the Southeast pay interest on their credit cards monthly, reducing their household budget and their ability to save or build assets for retirement.
Preparing for retirement
Overall, there is a significant disparity in participation in retirement savings programs between households in the Southeast and households across the country (see chart 3). The number of households that participate in either a 401(k) or 403(b) program is 7 percentage points lower in the Southeast than nationally, 41 percent compared to 48 percent. Additionally, just 20 percent of households in the Sixth District states report they participate in an IRA or Roth IRA account, compared to 27 percent nationally.
The disparity becomes even starker when examining African-American and Hispanic households. Thirty-seven percent of African-Americans in the Southeast report they have a retirement investment account through their employer, compared to 46 percent of African-Americans nationally. Similarly, the gap between those with and without an IRA account is 8 percentage points; just 9 percent of southeastern African-American households have an IRA account. Notably, only 33 percent of southeastern Hispanics have retirement savings in a 401(k), which is lower than all demographic groups. Southeastern Hispanics participate in IRAs to a slightly greater extent than the Hispanic national average, but their participation trails the overall national average.
Just 21 percent of low-income households in the Southeast participated in a retirement plan through their employer, compared to nearly 46 percent for middle-income (between $40,000 and $100,000), and some 63 percent for high-income (over $100,000) households. The participation rate in IRA plans is even lower: 9 percent for low-income, 20 percent for middle-income, and 39 percent for high-income households. Participation in retirement accounts among low-income southeastern households is comparable to the national average. Interestingly, the discrepancies with the U.S. average are larger for higher-income groups. For instance, middle-income southeastern households report 5 percent lower 401(k) participation and 7 percent lower participation in IRAs. For high-income households, these discrepancies are just under 4 percent for both accounts.
Overall, the SHED data suggest that participation in retirement plans is significantly lower in the Southeast, particularly for middle- and high-income households. This participation gap extends across all age groups, but it is most pronounced for those closest to retirement, between the ages of 55 to 64 (see chart 4). Just 22 percent of this age group in the Southeast participate in some sort of IRA, compared to 37 percent nationally, and just 43 percent participate in a 401(k) or 403(b), compared to 52 percent nationally. This is a significant and worrying disparity. While the survey does not provide estimates of the assets in these accounts, these data suggest southeastern residents may be less likely or able to build up assets for retirement. This calls for further investigation into the reasons for this disparity, to help regional policymakers assess the need to address potentially low levels of retirement savings by southeastern baby boomers nearing retirement age.
Various efforts and initiatives are already under way nationally to address low retirement savings rates. For instance, the myRA retirement account, launched by the Treasury Department in November 2015, offers lower barriers to entry for low-income and part-time workers who may lack access to a 401(k). Individual states like California, Illinois, and Oregon have taken steps to adopt state automatic IRA programs, which set up an automatic payroll deduction (with the option to opt-out) to a retirement plan for workers with employers that don't offer 401(k) or 403(b) plans. There are private sector initiatives as well to lower costs for small businesses to provide a 401(k) plan to their workers. Encouraging companies to extend 401(k) benefits to part-time workers, or to adopt automatic enrollment, could be other avenues to improve retirement savings.
There is much more to the Survey of Household Economics and Decisionmaking than is presented here. Nevertheless, it is clear that the national headline numbers, while certainly interesting, hide important regional disparities. The data show that households in the Southeast, particularly those in the African-American community, persistently lag national averages across a variety of metrics. Southeastern African-American households are managing less well financially compared to African-Americans nationally, have lower credit card ownership rates, are less likely to have an emergency fund, and are considerably less likely to participate in retirement saving programs. While wealth disparities between African-Americans and whites have been well-documented at the national level, these findings show that there are significant regional differences in the financial well-being of the African-American community that warrant further study.
Notably, southeastern Hispanic households are faring comparatively well. They report higher credit scores, a higher share report they are managing well financially, they are more likely to have a rainy day fund, and they have higher credit card ownership rates than Hispanics do nationally. However, southeastern Hispanic households report significantly smaller rates of participation in 401(k) or IRA accounts compared to other demographic groups. One note of caution is this group's relatively limited sample size as well as the different characteristics of Hispanics across the Sixth District region. Nevertheless, the relative success of the southeastern Hispanic community deserves further study and attention.
While southeastern whites fare better than other groups on several measures, including reporting higher credit scores, a greater ability to cover emergency expenses, and greater participation rates in retirement savings programs, they fare worse on every metric compared to whites nationally. Finally, a worrying trend is that participation in retirement accounts among those nearing retirement is significantly lower in the Southeast than nationally.
The survey results show that there is potential for improvement across the Southeast. Financial education alone is unlikely to improve financial health and capability. Other, more targeted interventions to improve the financial well-being of households across the Southeast could include helping families open a savings account and develop savings goals and encouraging firms to adopt auto enrollment of retirement plans or Child Development Accounts such as SEED OK.
The SHED, the Survey of Consumer Finances, and research like the Demographics of Wealth can provide a greater understanding of financial capability, and can guide philanthropy, nonprofits, policymakers, and financial institutions in their efforts to improve financial stability. The results give an indication of where needs are greatest and how limited resources can best be spent. More granular data at lower geographic levels (similar to The Color of Wealth research) would be welcome to help understand what local factors affect household financial health for various communities. While existing regional, ethnic, and income gaps may seem daunting, providing better data to financial institutions, nonprofits, funders, and policymakers could mean improved efforts to narrow these gaps in the future.
By Mels de Zeeuw, research analyst in the Community and Economic development group
1 The 2015 SHED draws on answers to questions from some 5,642 respondents to "better illuminate the activities, experiences, and attitudes of individual consumers regarding their financial lives and the financial well-being of those in their household." The authors of the survey note some caution should be adopted when interpreting these results. As is the case with surveys that test self-perception, the results are completely self-reported, and they could have been influenced by inaccurate respondent knowledge or memories. Additionally, some respondents may have given into the temptation of responding to certain questions with socially desirable answers, thereby skewing the results.
2 I define the Southeast as the six states that fully or partly form the Federal Reserve Bank of Atlanta's Sixth District: Alabama, Georgia, Florida, Louisiana, Mississippi, and Tennessee.
3 Low-income households are defined here as making less than $40,000 a year, middle-income is defined as earning between $40,000 and $100,000, and high-income households are defined as earning more than $100,000.
4 The survey does not define the terms "fair," "good," "'excellent," and so on, leaving it to respondents to interpret what the categories mean.