What’s financial empowerment got to do with it?

20 November 2017
To reprise Tina Turner’s classic song, when it comes to poverty reduction, policy makers may well ask – What’s financial empowerment got to do with it? 
 
The answer is – everything. It has everything to do with it.
 
Household finances fall along a spectrum from deep vulnerability at one end to financial well-being at the other. At our most vulnerable, we are in crisis. At the other end, lies opportunity – where we enjoy enough financial security and choices today to be able to look ahead, plan for, and invest in our longer term future.
 
Financial empowerment is a proven set of interventions that helps people with low incomes to move along this spectrum from crisis to stability and onward to opportunity. 
 
Financial empowerment focuses on strengthening financial inclusion, knowledge, behaviours, and opportunities – all key building blocks of financial security and well-being. These building blocks are typically missing, though, from our financial and social support systems where people with low incomes are concerned.  
 
Why? Because few organizations have the mandate, resources and expertise to address low-income Canadians’ financial needs. Financial institutions design products and services for more affluent customers and often lack insight into the financial realities of people with low incomes so don’t serve them effectively. Community organizations may see their clients’ financial troubles, but lack the programs, training, tools and funding to help. 
 
This means people, organizations and institutions engaged in the critical work of reducing poverty in Canada may not see an immediate connection between financial empowerment and their work or have trouble building it in when they do.
 
As the federal government considers how best to combat poverty and what to include in its forthcoming National Poverty Reduction Strategy, it is critical that policy makers understand that financial empowerment is  a necessary piece of the puzzle and that building it into many other  poverty reduction initiatives can actually help them to realize their full potential. Here’s why: 
 
  • Many people cannot access existing income supports without additional outreach and help
The federal government’s recent national consultation and research report, Tackling Poverty Together, identified that, while many Canadians are helped by key income programs like the Canada Child Benefit and GIS, they are not always aware of other important programs (e.g. Canada Learning Bond, Working Income Tax Benefit). Others cannot access the supports they need because of the way programs are designed and delivered.  
 
Financial empowerment includes screening Canadians with low incomes for benefits they are eligible for, but not receiving, and helping them to access these benefits. Proven solutions exist that can dramatically increase the flow of benefits to eligible low-income Canadians and their families. With some strategic investment and focused effort, these can be scaled sustainably by weaving them into existing services that people with low incomes already use. This can increase the income of some households with children by as much as 40-50 per cent, lift some families out of poverty altogether and significantly reduce the depth of poverty for many more.
 
  • Poverty is not just about income. Assets, debt and spending matter too.  
When we consider our own financial health, we don’t just look at our income. We look at our overall household balance sheet – our spending relative to our income and our assets relative to our debts.  
 
Once families have a modicum of income, liquid savings actually play the greatest role in determining whether a household will experience financial hardship. Evidence indicates that low-income families with savings are actually more financially resilient than middle-income families without savings. The U.S. Consumer Financial Protection Bureau’s recent national financial well-being study found that savings and financial cushions provide the greatest differentiation between people with different levels of financial well-being. Similarly, a 2017 U.S Federal Reserve study weighed the impact of different balance sheet components and found that liquid assets had the greatest predictive power when it came to assessing a household’s risk of experiencing financial hardship and possession of liquid assets significantly reduced that risk. 
 
Why? Because liquid assets provide a cushion against life’s emergencies, help low-income families to smooth month-to-month income/expense gaps when incomes are volatile, and reduce the need to turn to costly, high-risk loans to make ends meet. In the longer run, households that achieve financial stability and build savings are able to look beyond day-to-day survival to their future and make investments to pursue proven routes out of poverty – education/training, employment, entrepreneurship, and ownership of a home or other assets.
 
If we want to prevent and reduce poverty, we have to help people build their broader financial well-being, not just their incomes. Boosting incomes may be job one, but it is only the start. We also need to help people build their financial capability, access safe and affordable financial products, reduce debt, and – most of all – build liquid savings that can help them stabilize financially, increase their resilience and open the door to future opportunities. 
  • Financial empowerment can have a ‘supervitamin’ effect when built into other social supports.
Financial empowerment is a complement to, not a substitute for, other poverty reduction strategies. While still typically a missing piece in Canada’s social safety net, evidence from other countries shows that relevant interventions can measurably improve people’s employment, earning, housing and mental health outcomes when they are woven into other programs and services like income assistance, employment programs, housing and shelter services, and primary health care.  This “supervitamin” effect is why over 40 U.S. cities are currently building financial empowerment solutions into a wide array of municipal public services [1].
 
Conversely, when people with low incomes who participate in social safety net programs have underlying financial problems that go unaddressed, these can undermine their progress or even snowball and undo important gains they have achieved. Financial instability and stress are frequently contributors to poor mental health, employment instability, housing instability and recurring homelessness. We can make many of our income, health and social support programs for vulnerable Canadians more cost-effective by building in financial empowerment solutions where there is evidence that this can improve participant financial outcomes and enhance broader program outcomes.
 
These are just a few of the ways that financial empowerment can help to prevent and reduce poverty in Canada (for more, please see the ABLE Financial Empowerment Network’s recent brief). 
 
In view of the above, the federal government should be building financial empowerment into Canada’s National Poverty Reduction Strategy. Here are three important ways it can start:
 
  1. Invest in coordinated community outreach and support strategies to connect Canadians with low incomes to their benefits. An estimated $1+ billion in benefits goes unclaimed annually by people with low incomes. Systematic benefit screening and hands-on help to tax file and apply for benefits are proven interventions that successfully connect vulnerable people to their benefits. For more information, see Prosper Canada’s 2017 Pre-Budget Submission
  2. Expand our definition of poverty to include asset poverty and invest in federal research to monitor and report regularly on the financial inclusion and health of Canadian households. This should include looking at dynamics and disparities with respect to inclusion, income, assets and debt – particularly for Canadians living on low incomes and populations at high risk of poverty. We need a more comprehensive national research effort to understand and address financial challenges that exacerbate poverty and prevent Canadians from moving from poverty to opportunity.
  3. Build financial empowerment into federal policies and programs where evidence shows it can improve program outcomes, as well as financial outcomes, for participants with low incomes. Federal settlement, housing, homelessness, education financing, employment and Indigenous programs all offer important opportunities to further help participants build their financial well-being. Integration should include, where relevant, investment in sustainable community capacity to deliver financial empowerment supports.
When it comes to reducing poverty, we need to broaden our thinking beyond income alone to encompass other aspects of our household balance sheets that can hold us back or empower us, close the door on life’s possibilities and a better future, or help us to realize our dreams and aspirations. 
 
This means helping families with low incomes to boost their incomes, but also to build emergency savings, reduce debt, build their financial capability, and access safe and affordable financial products, services and advice that meet their needs and support their journey from poverty to opportunity.
 
What does financial empowerment have to do with this?  Everything.

Footnotes:
[1] See New York Office for Financial Empowerment ‘Supervitamin’ Reports on the integration of financial counselling and other financial empowerment supports into municipal social services: