Who Doesn't Have a Bank Account? - bank accounts and social security privatization

Challenge,  Nov, 2000  by Thomas Hungerford

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Most of the results presented are not very surprising: The vast majority of families in the United States do not own any stocks or mutual funds, and most families have a checking or savings account. Furthermore, both stock ownership and the likelihood of having a checking or savings account increase with income. What is surprising and perhaps somewhat disconcerting is that 15 percent of the families with a prime-aged working family head in the United States do not have a checking or savings account, and slightly less than half of the families headed by a working African-American do not have a checking or savings account. Furthermore, about 1 million families headed by working African-Americans and almost half a million families headed by whites do not have a checking or savings account over five- or ten-year periods.

Concluding Remarks and Policy Implications

In general, the results from the three years under consideration are fairly consistent. Families with higher income are more likely to have a bank account than lower-income families, which may explain why many stores in poor neighborhoods advertise that they cash checks (the only financial institution many people in economically distressed areas come in contact with is the local convenience store). Families headed by African-Americans are substantially less likely to have checking or savings accounts than whites. All of these results show that families that are more vulnerable to poverty are the least likely to have experience with basic financial institutions. These are also the families that are likely to be at risk of poverty in old age since they are unlikely to have pension coverage or any appreciable savings. Furthermore, these are the families that will rely on social security as the major or only source of retirement income.

These results are important information to consider when assessing social security privatization and individual accounts. A substantial minority of the U.S. population appears to have very little or no experience in even basic money management with a financial institution. While most people could manage an IA, the results suggests that some may be unprepared to manage a social security individual account and make informed investment decisions. Some individuals may recklessly invest their IA assets. [3] Others may ignore their accounts and settle for the default investment option, which will likely be conservative with a low investment return. [4] It may be possible to guard against the former problem by limiting investment options, as many 401(k) pension plans do. However, short of mandating the investment mix of IAs, [5] it will be difficult to guard against the latter problem.

THOMAS HUNGERFORD is a senior economist at the Social Security Administration. He thanks Maria Floro, Susan Grad, Howard lams, and Jane Ross for their comments and suggestions on earlier drafts. He benefited from conversations with Maria Floro and Frank Stafford. The views contained in this paper do not necessarily reflect the views of the Social Security Administration.