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Terri Friedline, Toward Healthy Balance Sheets: The Role of Savings Accounts for Young Adults' Asset Diversification and Accumulation

May 9, 2014

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   James Bullard, Federal Reserve Bank of St. Louis (5:54)

Keynote Address

- Introduction
   Ray Boshara, Federal Reserve Bank of St. Louis (4:05)

- Keynote Address
   Neil Howe, Founding Partner and President, LifeCourse Associates and President, Saeculum Research (36:03)

   Keynote Q&A (11:04)

   Extended Interview with Keynote Speaker Neil Howe (28:43)

Plenary One — A Micro and Macro Look at Younger Americans' Balance Sheets

- The State of the Balance Sheets of Younger Americans
   Lisa Dettling, Board of Governors, Federal Reserve System (14:25)

- Links Between Younger Americans’ Balance Sheets and Economic Growth
   William Emmons, Federal Reserve Bank of St. Louis (21:40)

- Discussant:
   Steve Fazzari, Washington University in St. Louis (18:14)

   Plenary One Q&A (15:06)

Plenary Two — Student Loans

- Student Loans and the Economic Activity of Young Consumers
   Meta Brown, Federal Reserve Bank of New York (21:12)

- Does Parents’ College Savings Reduce College Debt?
   Melinda Lewis, University of Kansas (18:11)

- Discussant:
   Alex Monge-Naranjo, Federal Reserve Bank of St. Louis (19:01)

   Plenary Two Q&A (18:22)


   Michael Sherraden, Washington University in St. Louis (2:52)

   Clint Zweifel, Missouri State Treasurer (6:26)

   Tishaura Jones, City of St. Louis Treasurer (6:14)

Concurrent Session I

- Moderator:
   Julie Birkenmaier, Saint Louis University (4:36)

- Toward Healthy Balance Sheets: The Role of Savings Accounts for Young Adults’ Asset Diversification and Accumulation
now playing  Terri Friedline, University of Kansas (22:23)

- Financial Decisions of Young Households During the Great Recession: An Examination of the SCF 2007-09 Panel
   Wenhua Di, Federal Reserve Bank of Dallas (19:00)

- Discussant:
   John Sabelhaus, Board of Governors, Federal Reserve System (14:38)

   Session One Panel Response (6:57)

   Session One Q&A (5:41)

Concurrent Session II

- Impacts of Child Development Accounts on Change in Parental Educational Expectations: Evidence from a Statewide Social Experiment
   Michael Sherraden, Washington University in St. Louis (13:09)

- Trends and Patterns in the Asset Holdings of Young Households
   Ellen A. Merry, Board of Governors, Federal Reserve System (15:19)

- Discussant:
   Trina Williams Shanks, University of Michigan (7:06)

   Session Two Q&A (28:58)

Plenary Three — Homeownership

- Moderator:
   Todd Swanstrom, University of Missouri–St. Louis (5:54)

- Homeownership and Wealth Among Low-Income Young Adults: Evidence from the Community Advantage Program
   Blair Russell, Washington University in St. Louis (15:57)

- Aggregate and Distributional Dynamics of Consumer Credit in the U.S.
   Don Schlagenhauf, Federal Reserve Bank of St. Louis (21:53)

- Discussant:
   John Duca, Federal Reserve Bank of Dallas (13:59)

   Plenary Three Panel Response (6:40)

   Plenary Three Q&A (8:46)

Plenary Four — Economic Mobility

- Moderator:
   Jason Purnell, Washington University in St. Louis (2:00)

- The Balance Sheets and Economic Mobility of Generation X
   Diana Elliott, Pew Charitable Trusts (17:58)

- Coming of Age in the Early 1970s vs. the Early 1990s: Differences in Wealth Accumulation of Young Households in the United States, and Implications for Economic Mobility
   Daniel Cooper, Federal Reserve Bank of Boston (17:11)

- Discussant:
   Bhashkar Mazumder, Federal Reserve Bank of Chicago (16:15)

   Plenary Four Panel Response (3:14)

   Plenary Four Q&A (19:02)

Closing Reflections: From Research to Policy

   Michael Sherraden, Washington University in St. Louis (15:59)

   Ray Boshara, Federal Reserve Bank of St. Louis (9:30)

Thank You / Adjourn

   Julie Stackhouse, Federal Reserve Bank of St. Louis (5:59)


Below is a full transcript of this video presentation. It has not been edited or reviewed for accuracy or readability.

Terri Friedline: Hi. Well, good morning. So I will be talking with you today about the rollover savings account for young adult’s asset diversification and accumulation, and to give you some idea of the context of this research. The perspective from which I’m coming is that for a young person, a child in particular, who opens a savings account early in life, you know, we see that there’s a relationship to their educational achievement, to their high school graduation, college enrollment, and graduation, as well as their financial indicators in early young adulthood. So the rollover savings account then really plays a potentially important part across a person’s life course. From early to very late in life.

And so I’m going to talk a little bit about the background of why this might be important, particularly for young adults and some of the research questions that flow from this. I’ll just kind of briefly mention the analytic plan, and the details will be on the slide should you like to focus on those. I’ll talk about the results, and then the implications.

All right, so the financial products that young adults acquire sort of a strategy is for helping them to diversify and accumulate assets, and we think that these are important qualities of a healthy balance sheet. The savings account being one of the most basic financial products. And this we think is because, you know, compared to other types of financial products, like stocks, bonds, etcetera, a savings account has relatively low requirements for acquisition or take up. So generally low, minimum balance, although, you know, we could debate about whether that’s true for all households, or all young adults, particularly those from lower income backgrounds. But relatively speaking, a saving’s account is a pretty basic financial product.

And if we think of savings accounts as a basic financial product, and we think of it as well as a place to start diversification and accumulation. Then, young adults may ascend from a savings account a financial hierarchy, but eventually allows them to save for both short and long-term expenses across the life course. So if we think of a saving’s account as really being used for more day to day types of expenses, this suggests to us that they’re really needing lower level types of survival needs with those basic products or basic accounts. As they accumulate more wealth and more assets, we think that they can, you know, eventually invest in other types of long-term products, like a retirement account. And so if a savings account really plays this type of a role, then that’s something that we need to consider both in terms of how it relates to their asset diversification and accumulation as well as how we think about that savings account in terms of policy.

All right. So the questions that flow from this first are the factors that relate to acquisition and take up. So there was some question yesterday about who are the savers? And in some ways, you know, that looks at really the demographic characteristics of a person with or without a savings account. But we’re interested in acquisition or take up. So who are the people that pick up or require a savings account? And particularly in young adulthood. Once that’s acquired; once they’re able to transition from unbanked to banked status, you know, what fraction actually begin to diversify those portfolios, and then how much does the acquisition of that account and the diverse portfolio contribute to the balance sheet in terms of liquid asset accumulation.

And so we use the survey of income and program participation, which is really not often used to look at really wealth outcomes, or asset outcomes. It’s typically a lower income sample, so it misses compared to the panel study of income dynamics or the survey of consumer finances. Really the broad spectrum of wealth accumulation. So it’s a lower income sample.

Here, we’re looking at young adults between the ages of 18 to 40. And we’re collecting information from two places in the SIP. The first is monthly data. So one of the nice things about SIP is that they have 48 time points over a period of four years. And this is nice to be able to look at really the sensitive changes in account acquisition and take up over that four-year period. We also have asset accumulation and net worth and debt available at the annual level. So we have a monthly sample, as well as this annual sample. And we are using kind of regression-based modeling to look at predictors of the savings account, looking descriptively at the diversification, and then regression, again, to look at asset accumulation.

All right. So in terms of the first research question, which was with regard to the acquisition of a savings account. How we looked at this was looking at quarters. So we started with those 48 time points, and as you can imagine, that’s a lot of information on acquisition and take up. And we narrowed down really to the quarterly level, so looking at 12 time points, 12 quarters of whether or not young adults changed from kind of yes, yes, no to yes, so did they acquire that account between quarters? Did they change from yes to no? Meaning that they, you know, in some ways closed an account. Or was their no account ownership, you know, across, you know, all the transitions between quarters? We controlled for all of the things that you would typically think available in data that we can control for. We did in particular look at the transition, or the role of being a head of household. So we were able to look at, you know, in terms of a rough proxy, whether or not young adults were living kind of with their parents, or if they were transitioning to being heads of households of their own, which I have to say is just generally a small number. So the people who were really originally collected from the SIP were heads of households. So about eight percent really transitioned during the period of the panel to becoming households of their own.

Okay. So this is the graph that looks at the transitions, or really the stationary nature of the account acquisition and holding. So we see age across the bottom in that dark grey shaded area of the graph. Young adults between 18 and 20, you know, move from no account ownership from about 63 percent to 43 percent. So we see then likewise, that there’s account take up, you know, in some ways across age groups over that time. So this is the group of young adults who said yes, yes across those quarters versus those who said no, no.

But if we look at account closure and similarly, account acquisition, those are really, really kind of rare events in the sample. So really, the predominant path, I suppose, in this particular data set is to remain constant between yes, yes, or no, no. And then account acquisition, you know, that percentage ranges from about four to two percent.

So in comparison to no, no. You know, those who didn’t have a savings account across those quarters, we looked at account ownership. Again, that’s yes, yes. Account acquisition. That’s no to yes. And account closure; yes to no. And so in our models, these are the variables that were significantly related across the models. And so I’m just going to highlight them here. The ones that I’ll focus on in the next few slides, and I’ll kind of break these pluses and minuses down for you. So overall, we see few young adults actually acquire or close a savings account over time. And so if the predominant behaviors are the yes to yes—you know, you’ve been piped into the financial mainstream and you’ve stayed there, or you haven’t been, then we potentially need, you know, powerful triggers that will interrupt that no, no to help people get banked, particularly in young adulthood. They’re more likely to own a savings account when they’re younger, and less likely to acquire one as they get older. So this suggests young adulthood is a potentially important time to pipe them into the financial mainstream. Those who were unemployed were less likely to acquire, and more likely to close an account, so access to the labor market in a lot of ways facilitates this access to a savings account, and as well as home ownership. And home ownership, particularly if you’re paying via credit, you know, a bank account is almost a requirement to make that a possibility. So home ownership is a protective factor here.

All right. So we move from that to the first buying asset portfolios. And the financial products that we’re considering here is part of a diverse portfolio. Includes checking, certificates of deposit, savings bonds, money market accounts, stocks, and retirement accounts. And we can see really across the whole sample that few young adults hold really all of these things or any of these things. These are kind of each individually.

And if we look at them combined, so again, we see age on the bottom here, and this is the composition of a diverse portfolio, you know, across young adults 18 to 40. And so 43 percent again are the people that, you know, do not have a savings account. Those no, no’s. 14 percent have a savings account only, so the account without any other type of financial product. And a much larger group hold an account in combination with at least one other type of financial product. And those that are most commonly held are a savings account with stocks, which you know, the percentage here is small. The people holding both of those types of account simultaneously. Savings and retirement accounts at about 19 percent. And savings accounts and checking accounts.

So part of our questions about the diverse portfolio was if young adults own a savings account, will they take up these other types of financial products? So when we look at this in regression-based models, the savings account is by far the dominant predictor and really depresses all other variables of the model. So we don’t statistically look at this, but rather look at some of the descriptive patterns. And so we see in the grey bars across the bottom the different types of financial products. And the dark grey bars are those that have a savings account that created these other types of accounts. So we see some differences in percentages from the previous slide to this slide, and this is because here, we’re looking at just the specific subset of young adults who have the savings account. And 43 percent of those take up a checking account with the savings account at or before the time of checking account ownership. So with our monthly data, we can see whether this savings account is reported kind of at, before, or after the time the savings account is reported. We see that with stocks. Again, 29 percent of those who have opened the savings account also opened stock, and 42 percent with retirement. So this suggests to us that young adults with a savings account compared to the lighter grey shaded boxes are opening these other financial products more often.

So what does this tell us? So we see that young adults consistently own the savings account at or before the acquisition of the diverse portfolio; these other financial products. And so this suggests to us the savings account in some ways is a gateway, but even potentially a prerequisite for acquiring, you know, this diverse portfolio. Our most common combinations, which, you know, really makes sense that they occur with checking stocks and with retirement accounts. These are generally in the population, you know, common financial products held, yeah, across the life course. And less than half own savings accounts with at least one other final financial product. So we are at seeing some diversification, but that is still limited.

And our final question was with regard to the accumulation of liquid assets. So we looked at liquid assets here on an annual level, and we summed all the values of those financial products from the diverse portfolio. The mean here is about 6,000 dollars. The median liquid asset value is about 5100. And we’re controlling consistently for the same things. We did change the way that we looked at home ownership, so we’re able to see if young adults acquired a home during that preceding year. Whether that influenced their accumulative liquid assets.

So here, I’m just going to show you in our models the financial products that we were most interested in. And as we see, no account of any kind. So no savings account, nor any other financial product is negatively related to that liquid asset accumulation. And this makes sense. We wouldn’t expect someone without any accounts to accumulate assets in those accounts. Checking, savings and stocks are all positively related to that asset accumulation. Retirement and stock plus retirement accounts are negatively related, and I can talk through those in the next slide.

So one of the things that we considered was that, you know, these financial products, and the accumulation of liquid assets is sensitive to income in some ways. So we wanted to interact the relationship between mean quarterly income with those financial products in the diverse portfolio. And so when we do that, we see retirement accounts switching in relationship from negative to positive. So we see that the retirement account is sensitive to this quarterly income.

So when we looked at that interaction, we were able to see the predicted values of the different types of financial products, and their contributions to accumulated liquid assets. So the 25th, the 50th, and the 75th income quintiles, we were able to look at how much those accounts contributed. And so we see with savings and checking, you know, really relatively few dollar amounts across all quintiles of income. So a savings account, you know, contributes or relates to about 43 dollars in liquid asset accumulation, which is, you know, really pretty small. At the 25th income quintile, young adults at the lower end of the income spectrum compared to 54 dollars for those at the top. So it’s not really kind of where it’s at in terms of the bang of asset accumulation, although it is certainly useful in diversification. But we see as we kind of ascend the hierarchy of financial products, those that are available for longer-term investments, that more liquid asset accumulation takes place. So we see among retirement accounts, between the 25th and the 75th income quintiles, more than a doubling of the amount attributed to liquid asset accumulation. And same with stock and retirement accounts we see a pretty big jump. Although, there are so few in this sample that actually have the combination of stock and retirement accounts with a savings account.

All right. So overall, this suggests to us that a diverse portfolio contributes to liquid asset accumulation. There’s a relationship there between the diverse portfolio and accumulated liquid assets, which may assist with building the positive side or the healthy balance sheet. These effects contribute to liquid asset accumulation as young adults increase their income. So we see that young adults may be able to leverage not only their diverse portfolio, but their income as well in order to accumulate liquid assets. And that a retirement account is really especially responsive to this.

So what does this mean? So the implications of this we think are firstly with regard to automatic enrollment. So there’s a concurrent session in the other room that’s talking about automatic enrollment of children savings accounts and universally and automatically opening those accounts for young people. If we, you know, want to interrupt some of that very consistent and sticky financial behavior that we see here, then automatic enrollment may be one of those powerful triggers to change that yes, yes to no, yes.

The second is policy change. And I think that I admit here that this is kind of an insufficient description of the policy change needed, and I think, you know, our conversations across yesterday and today really we need to consider everything and all if we’re truly interested in effecting the balance sheets of young adults. So this includes everything that ranges from the tax code to policies with regard to home ownership, and making some substantial changes in a way that is truly going to last for young adults to accumulate liquid assets. Particularly in the financial context in which they currently find themselves, and will likely to continue to find themselves in the future. So their balance sheets of today, you know, what that liquid asset accumulation looks like, how they diversify their portfolios, likely is a window into what that’s going to look like, you know, 20 or 30 years down the road.

And so from this, you know, we certainly have need to address, you know, some more important questions about really how young adults are able to leverage this balance sheet. So are they able to weather income shocks? Are they able to invest in retirement even more so? Are they prepared for retirement when that time comes? Are they able to save for retirement? And how does this relate to the other aspects of the balance sheet? You know, I think from here, those are important questions should we think that this path is, you know, the path from a savings account to the diverse portfolio, to the asset accumulation is one that will, you know, potentially lead to these outcomes.

So with that, thank you, and I’ll pass it over to my colleague.