Protection policies promote stable income—whether from earnings or programs—to help households cope with realized financial risks and changes that come with life; they protect against losses in income. Two approaches to protection policy exist. The first is to bolster an individual’s self-protection, or savings. More savings—and more avenues to accessing savings, without penalties for withdrawals and high administrative fees—means more economic security. The second approach is to mitigate practices that tend to reduce income without offering benefits to the household or community, which this report calls capture.
Credit may fall into either category of protection policy. Access to credit helps bolster economic security, for example, through aiding in the purchase of a house or financing higher education. For individuals without sufficient savings, credit is a means of making it through a negative income shock. But not everyone has access to credit, and not all forms of credit or types of lenders are associated with good outcomes. Moreover, debt may be a form of economic insecurity to the extent that monthly income net of debt payments may not be sufficient to meet household expenses. The U.S.’s primary approach to balancing credit’s tradeoffs is through regulation of lenders.
|Promote savings for retirement
||1. Exempt retirement account balances, up to a certain threshold, from asset tests.
2. Require auto-enrollment in a retirement plan and require periodic retirement contributions on behalf of all workers into an employer plan or a certain defined contribution fund.
3a. Expand access to the Saver’s Credit and make it refundable.
3b. Expand access to the Saver’s Credit, make it refundable, and place any tax refund into the worker’s retirement account.
4. Eliminate pre-retirement distributions in separation from service and allow for limited pre-retirement distributions for certain hardships.
|Promote savings for pre-retirement needs
||1. Create a mandated employer-sponsored automatic savings program.
2. Create a Universal Asset Endowment (aka Baby Bonds, Child Development Accounts).
3. Create “Postal Banking” to allow USPS to provide nonbank financial services.
|Regulate certain private debt practices
← → Equity Policy
|1. Increase regulatory and enforcement capacity of the Consumer Financial Protection Bureau (CFPB) and require consistency in practice.
2. Create a federal Fairness in Lending law.
3. Create an advisory committee to consider student loan forgiveness.
|Regulate certain public debt/fees practices
← → Equity Policy
|1. Reform court-imposed, jail-imposed, and prison-imposed fees.
2. Institute a sliding scale for criminal fines based on ability to pay.
3. Reduce fee and fine nonpayment penalties.
4. Reform the use of money bail.
5. Reform child support.
|Increase access to legal services
||1. Increase funding for the Legal Services Corporation.
2. Remove some of the restrictions on uses of Legal Services Corporation funding.
3. Expand the right to counsel.
|← → This symbol appears throughout the Policy Options tables in cases where a policy fits well under multiple pillars.
Promote savings for retirement
Retirement savings are currently supported through income tax preferences for retirement savings accounts, such as IRAs, 401(k)s, and 403(b)s. Depending on the type of account, either the contributions to the account before retirement or the money taken out during retirement are not subject to the income tax, and the interest on the savings accumulates tax free. Although IRAs may be set up by anyone with access to a bank, 401(k)s and similar accounts must be established through an employer (including self-employers). Sponsoring a plan is voluntary; there is no requirement that employers contribute to these accounts. Currently 67 percent of employees in the private sector have access to a retirement plan at work; 51 percent of private sector employees participate in a plan. Among nonretirees, 55 percent have a defined contribution plan and 25 percent have no retirement savings at all.
Current tax expenditures for retirement savings contributions benefit higher-income earners the most. The Saver’s Credit encourages retirement saving among low- and middle-income earners by giving a partial tax credit for up to $2,000 in contributions, whether to a Roth IRA, traditional IRA, or employer account. This credit is available only for individuals with income less than $33,000 a year ($66,000 filing jointly) who are employees. Depending on income, the credit is 50 percent, 20 percent, or 10 percent of one’s total contribution up to $2,000. Because the Saver’s Credit is nonrefundable, it can be used only to offset tax liability and offers little or nothing to many of the people with low and moderate incomes that it was designed to help.
1. Exempt retirement account balances, up to a certain threshold, from asset tests. Some means-tested programs have asset tests. These tests were designed to ensure that only those with the least resources would qualify for benefits. Unfortunately, asset tests also discourage those receiving the program’s benefits from saving or encourage those trying to use the program to dispose of or even hide most of their assets. Over time, the deleterious consequences of asset limits have been recognized, and many programs have eliminated asset tests or greatly reduced their use, but some asset tests remain. Supplemental Security Income has an asset test determined solely by the federal government. Supplemental Nutrition Assistance and Temporary Assistance to Needy Families have asset tests set by the federal government, but states can remove or amend them.
This policy would, as a rule, not count retirement savings as assets up to a certain threshold, such as $100,000.
2. Require auto-enrollment in a retirement plan and require periodic retirement contributions on behalf of all workers into an employer plan or a certain defined contribution fund. This option would significantly increase the percentage of workers, including self-employed individuals and gig workers, who have some savings for retirement. It would encourage savings by making the default option for workers to contribute some percentage (depending on the policy) of one’s earned income to a retirement account, though an opt-out may be offered in case the worker cannot afford the contributions. Employers of W-2 employees would be required to make contributions of some percentage of each employee’s income with each pay period. Depending on the employer and how the policy is implemented, contributions might go to an employer-sponsored qualified plan, a federally maintained defined contribution fund, or a defined contribution fund maintained by an organization qualified under federal rules.
These mandated plans or funds would have to satisfy a range of tax qualification–and Employee Retirement Security Act of 1974 (ERISA)-like rules to assure that the contributions and earnings are managed in ways that benefit the workers, including investment rules and rules to assure that some portion of a worker’s retirement savings is annuitized to assure consistent, and higher, levels of income in late life. The rules might also include limits on fees and other expenses associated with managing the accounts to protect worker savings.
3a. Expand access to the Saver’s Credit and make it refundable. An increase to the adjusted gross income eligibility threshold ($33,000) and reduced administrative burden for taxpayers to claim the credit would increase the number of individuals who benefit from the Saver’s Credit. An increase in the percentage of contribution returned or an increase in the maximum credit ($2,000) would increase the impact of the credit as well. A refundable credit would ensure that eligible individuals with little to no tax liability would benefit. Further, a refundable credit would reduce the disincentive to save that comes from current consumption needs for low-income households; if individuals are refunded for a (large) portion of what they save, they will not experience overbearing short-term financial constraints imposed by saving.
3b. Expand access to the Saver’s Credit, make it refundable, and place any tax refund into the worker’s retirement account.
This option would implement option 3a and allow the Saver’s Credit to function as a savings match program, thereby increasing retirement savings by larger amounts for the lowest-income tax filers. If the obstacle to saving is having insufficient income, however, this design may not draw more individuals into saving than the alternative described in option 3a.
4. Eliminate pre-retirement distributions in separation from service and allow for limited pre-retirement distributions for certain hardships. A threat to the success of retirement savings, and the efficacy of tax expenditures that promote that saving, is leakage from retirement accounts, otherwise known as pre-retirement withdrawals. Under current law, employer-maintained plans and employees have the option to distribute retirement savings upon an employee’s separation from service with an employer. Current policy allows for pre-retirement use of tax-favored retirement savings for nonretirement purposes. This policy is the largest source of leakage in the U.S. retirement system, thus reducing retirement security and using a government investment in retirement (via tax benefits) outside of its intended purpose.
Simultaneously, current policy either does not allow for or otherwise subjects most pre-retirement distributions (before age 59½) to a 10 percent tax penalty. The penalty creates a barrier to saving for low- and middle-income households who desire an access to savings in the case of an emergency or a “financial opportunity.” Research shows, however, that when given low- or no-penalty access to retirement savings in some form, aggregate contributions tend to rise.
This option would both reduce pre-retirement leakages and increase retirement account contributions using changes to the laws governing pre-retirement distributions. Disallowing penalty-free retirement distributions following separations from service would reduce leakages, and increased access to retirement savings for select emergencies would promote increased contributions. Regarding the latter option, policy makers might, for example, limit distributions to a percentage of contributions made in the last three years and apply a small penalty tax, e.g., 5 percent, to recapture tax benefits to limit any opportunities for “gaming” the system.
Promote savings for pre-retirement needs
Leakages from retirement accounts, otherwise known as pre-retirement withdrawals, are a threat to the success of retirement savings and the efficacy of tax expenditures that promote that savings. To the extent that policies might encourage pre-retirement savings, the likelihood of individuals drawing on retirement accounts prior to retirement will be reduced.
Currently, around 40 percent of U.S. households do not have sufficient cash savings to meet an unexpected $400 expense. Sixteen percent of adults cannot pay their bills in full in a given month. In addition, 6 percent of adults are “unbanked;” they do not have a checking, savings, or money market account. An additional 16 percent were “underbanked;” they had an account but used alternative financial products. Black and Hispanic individuals are overrepresented among those who cannot meet bills and who are un(der)banked. All of these statistics make clear why leakages from retirement accounts might take place.
1. Mandate an employer-sponsored automatic savings program. Rather than opting in to sponsor savings accounts, this policy would mandate that all employers (including contractors of workers currently outside the scope of “employees”) create a savings account for each worker and provide a minimum contribution from each worker’s earned income. These accounts are referred to as Emergency Savings Accounts (ESAs), sidecar savings, or rainy-day accounts, and they are intended to bolster savings and prevent retirement account leakage. Considerations for policy design include whether an opt-out is permitted, the tax treatment of contributions and any earnings on savings, whether to establish a contribution limit in these accounts, whether to regulate allowed uses of funds for nonemergencies (i.e., justifiable pre-retirement needs that are not emergencies), and whether unused funds can be used for retirement needs.
This option might be thought of as an alternative to allowing “for limited pre-retirement distributions for certain hardships” under option 4 in Promote Retirement Savings since allowing pre-retirement distributions from retirement accounts for emergencies would limit the need of nonretirement savings accounts.
2. Create a Universal Asset Endowment. A universal asset endowment is a savings account created at birth that is funded at the very least by an initial government contribution and to which annual contributions may be made. These accounts were originally proposed in 1991 as Child Development Accounts (CDAs), and have recently been proposed as American Opportunity Accounts, but are often referred to as baby bonds.
Under the category of universal asset endowment, this report highlights six key parameters: 1) the relation of the initial contribution to family income and/or wealth; 2) whether annual contributions are made by the government; 3) if annual contributions are made by the government, the relation of annual contributions to family income and/or wealth; 4) whether individuals and families are permitted to make contributions in addition to government contributions; 5) the liquidity of the savings upon the account holder turning eighteen (that is, the extent to which the individual will be limited in the uses of the savings to such as for a college education, a trade school, a training program, a home purchase, a new business, or retirement, or is otherwise free to use the savings as they see fit); and 6) the tax treatment of contributions, earnings on the contributions, and distributions.
Depending on the progressivity of the contribution structure, a universal asset endowment might significantly help close the racial wealth gap. A program of universal asset endowments might also be accompanied by improved financial education at early ages to ensure that the asset turns into a lifelong basis of wealth for every recipient.
3. Create “postal banking” to allow USPS to provide nonbank financial services. From 1911 to 1966, the U.S. Postal Savings Service offered savings accounts at post offices. A reinstated postal banking service would offer nonbank financial services that would target unbanked populations. The USPS Office of Inspector General has proposed reinstating the service.
Regulate certain private debt practices
Lending is a complex and variable practice. The amount lent, whether the loan is secured against an asset such as a house, the value of that security, the borrower’s creditworthiness, how creditworthiness is determined, the interest rate, the payment schedule—these factors can vary with every loan.
For households that have difficulty obtaining credit or accessing bank accounts, borrowing may be costly. On the one hand, individuals may have limited means of obtaining credit to meet immediate needs and, on the other hand, the credit offered might lead to a high-interest debt cycle. A loan with a difficult repayment schedule is distinct from a predatory loan, in which borrowers are manipulated with regard to the exploitative terms of the loan. Regulators and loan originators often disagree about what is a “loan of last resort” to a less creditworthy individual versus predatory lending. In any case, researchers have found suggestive evidence that payday lenders target communities of color.
1. Increase regulatory and enforcement capacity of the Consumer Financial Protection Bureau (CFPB) and require consistency in practice. The CFPB has been highly politicized since its creation after the 2008 Financial Crisis. Its creation consolidated the consumer protection authorities that had previously existed across seven different federal agencies within one agency. Since 2017, many prior regulatory policies and practices of the CFPB were reversed or abandoned. This policy would restore the regulatory capacity of the CFPB and require more consistency in policy and practice so that consumers have a well-defined and reliable set of protections.
2. Create a federal Fairness in Lending law. This option balances the need for credit among low-income households with fairness in lending grounded in limiting loans and associated fees and interest by an individual’s ability to make payments. A form of this law passed in Ohio in 2018 after a series of legal battles that failed to reform the Payday Lending industry. In Ohio, borrowers now have “at least three months to repay unless monthly payments are limited to 6 percent of the borrower’s gross monthly income,” annual interest is capped at 28 percent, monthly fees cannot exceed the lesser of 10 percent or $30, and total interest and fees are capped at 60 percent of loan principal.
3. Create an advisory committee to consider student loan forgiveness. Student loans currently total $1.7 trillion. Loans vary in size across numerous factors, such as the type of school (two-year, four-year, or graduate institution), and many reasons exist for the increasing amount borrowed and number of borrowers. In terms of loan amounts, size is not always correlated with inability to pay; individuals are more likely to be behind on a loan less than $14,000 than a loan greater than $14,000. A recent survey by the Social Policy Institute indicates that student loan forgiveness would heavily change the future behavior of current loan holders.
This policy would create an advisory committee to consider whether some portion of or all student loans should be forgiven and how that determination should be made. Policy may also address loans from schools that are associated with high default among their alumni or fraud and loans serviced by financial institutions that have been found to defraud customers.
Regulate certain public debt/fees practices
The private sector is not the only issuer of debt. In recent years, states and localities have increasingly shifted to a system of “offender-funded justice”—funding their law enforcement and court systems, and in some cases significant portions of overall local budgets, through fines and fees levied on individuals who come into contact with the criminal justice system. One analysis found that people who went through the New Orleans’ justice system in 2015 paid nearly $12 million in fines, fees, and court costs. Examples include various types of “user fees” that get tacked onto a conviction, public defender fees for defendants who exercise their right to counsel, and “pay-to-stay” fees to offset the costs of time spent in jail. These types of user fees are separate from fines, which are the result of a criminal conviction.
On top of the underlying criminal legal debts imposed by statute, many states and localities assess late-payment fees, steep collection fees, and even fees for entering an installment payment plan. And all of these fees are separate from money bail. Criminal debt can be significant and can impose a hardship on families. Further, in many states, individuals are not eligible to expunge or seal their criminal records until they have paid off all criminal debts. Outstanding criminal debt can also stand in the way of public assistance, housing, employment, access to credit, and even the right to vote.
1. Reform court-imposed, jail-imposed, and prison-imposed fees. This policy would limit the practice of “offender-funded justice” and require states to fund courts and court services mostly through their tax base.
2. Institute a sliding scale for criminal fines based on ability to pay. If the purpose of a fine is to deter people from breaking the law, then the size of the fine would scale with the person’s ability to pay, not just the offense.
3. Reduce fee and fine nonpayment penalties. Federal, state, and local governments should study the appropriate use of fines and fees and then remove or reduce fines and fees based on these analyses. Appropriate fines and fees should reflect fair treatment with regard to the amount that low-income individuals are able to pay. Fines and fees must function only as a deterrent to criminal behavior, not as a source of profit or a large source of state/local/municipal revenue.
4. Reform the use of money bail. Bail is an amount of money that some individuals who are charged with a crime must pay to be released while they fight the charges. Bail is determined by the judge and is meant to ensure that the individual appears for their court date. Bail is returned to defendants when their case has concluded or the trial is over. Awaiting trial in jail because of inability to pay is something more likely to be borne by very low-income individuals and, regardless of current income, may have deleterious consequences for the person, who has not been found guilty. This policy would reform the use of bail so that it does not become a de facto punishment for the poor. Monetary bail is not the only means of guaranteeing that an individual meet their court date. Pretrial supervision, for example, would be an alternative to cash bail.
5. Reform child support. Child support is the financial support paid by parents to support a child or children of whom they do not have full custody. For many families, child support is handled through the family court system, with support amounts specified in a divorce decree or custody determination and claims of nonpayment settled through attorneys or resolved by a judge. For low-income families, child support becomes a matter of public interest. A custodial mother may be eligible for SNAP given her own income but would be ineligible if she received full child support. Under the 1996 welfare reform, child support enforcement was enhanced with the goal of making low-income families self-sufficient and showed initial success at doing so.
Evidence shows, however, that rates are set too high for many noncustodial parents (often low-income men), preventing them from meeting payment obligations. They instead accrue debt, interest, and penalties such as loss of their driver’s licenses for nonpayment. Additionally, if the custodial parent, often the mother, is receiving public benefits (TANF), child support is collected by the state, not the custodial parent, and the money collected is often not given to the mother but is kept by the state. The amount of collected child support that the state remits back to the custodial parent is referred to as the “pass-through,” and it varies by state.
Many child support reform proposals put first changing the way support is calculated, collected, and forgiven so that noncustodial parents do not get trapped in a cycle of low income and debt, as well as guaranteeing that all support paid goes to the child. Certain proposals call for a guaranteed monthly minimum of child support to be paid by the government if the noncustodial parent is unable to make payments, while maintaining a legal obligation on the noncustodial parent to make payments.
Increase access to legal services
Policy, no matter how well designed, is not self-implementing, and in many situations, individuals may require legal counsel to, for example, make a complaint of wage theft or discrimination, leave a situation of domestic violence, or fight an eviction notice. The Legal Services Corporation (LSC) was established in 1974 and “promotes equal access to justice by funding high-quality civil legal assistance for low-income Americans.” LSC is a grant-making agency; its budget is redistributed to legal aid providers.
The total funding for LSC in 2020 was $440 million. LSC also received additional money in the CARES Act, a recognition of the importance that LSC plays in times of heightened economic insecurity.
Not everyone, or every situation, qualifies for representation from legal aid. Individual or family income must be below 125 percent of the poverty line, but it could be lower at certain providers; undocumented immigrants are ineligible in most cases, as are persons currently incarcerated. Legal aid can provide assistance in areas of family law, housing and foreclosure, consumer issues, and employment and income maintenance. It is also available to military families. More than half of those seeking legal aid are turned away due to funding and capacity constraints.
1. Increase funding for the Legal Services Corporation (LSC). Legal aid, for many individuals, is the only option in legal representation, but inadequate LSC funding has for years forced legal aid programs across the U.S. to turn eligible individuals away for lack of resources. This proposal would increase LSC funding to a sufficient dollar amount to close the “justice gap” and ensure that all income-eligible individuals are able to receive legal help in their time of need.
2. Remove some of the restrictions on uses of Legal Services Corporation funding. Legal aid programs that receive federal LSC funds are not allowed to assist in many types of cases, ranging from school desegregation litigation to class action suits. Meanwhile, if a legal aid program accepts even $1 in LSC funds, all of its funding is subject to LSC’s funding restrictions. This policy would remove or reform these restrictions, many of which are politically motivated, to enable legal service programs to meet their clients’ legal needs more effectively.
3. Expand the Right to Counsel. Unlike in criminal matters, the right to counsel—to have an attorney represent a person in court, even if they cannot afford one—does not apply to civil legal matters. This policy would expand the right to counsel to apply to civil cases where basic human needs are at stake. Ensuring access to legal representation has been shown to reduce evictions in the localities that have adopted a right to counsel in eviction cases.