“As Good as Money in the Bank”: Building a Personal Safety Net with the Earned Income Tax Credit

“As Good as Money in the Bank”: Building a Personal Safety Net with the Earned Income Tax Credit Abstract The public safety net has increasingly functioned as a system that rewards work, but many low-wage workers now face a double bind: unstable incomes and volatile expenses. We ask how low-wage workers make resource allocation decisions under conditions of uncertainty by examining how they spend and save their tax refunds. Using data from in-depth interviews with a sample of 115 lower-income working families, we find that more than three quarters of families experienced an income or expense shock in the past three years. Although many had aspirations for upward mobility, the insecurity of daily life meant they devoted most of their refund dollars to creating a personal safety net to cushion against income and expense shocks. What appeared to be distinct types of allocations often had the same underlying rationale goal of improving a family’s economic security in the near term. By saving, purchasing durable goods, stockpiling household staples, and paying off debts to kin and creditors at tax refund time, families leveraged their tax refund dollars into multiple forms of self-insurance. Respondents held aspirations for upward mobility that correspond strongly with those of middle-class Americans, but they did not feel they had the luxury of setting aside resources for long-term mobility goals given the instability and insecurity of their work and family lives. Instead, they invested their refunds in more precautionary ways. What might be viewed as current consumption by outsiders was actually a form of in-kind investment that occurred outside the purview of the formal banking system. economic insecurity, economic mobility, social policy, qualitative and mixed methods Over the past several decades, the U.S. social safety net has eroded and individuals are increasingly responsible for their own wellbeing, a trend scholars have labeled “in-sourcing” (Beck 2007:682), the “privatization of risk” (Hacker 2006), and the “commodification of opportunity” (Grusky and MacLean 2016). For poor families, welfare reform, expansions of the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), and reforms to in-kind transfer programs have increasingly tied benefit receipt to employment, making government assistance contingent on individual performance in the labor market. At the same time, insecurity in the low-wage labor market has grown with the rise in contingent employment, variable work hours, and the erosion of nonwage compensation (Western et al. 2012). These dual trends have placed low-wage workers in a double bind: growing economic insecurity and less social assistance to mitigate that insecurity. When the public safety net is inadequate, families must seek alternative strategies to create economic security. The financial decisions of the poor receive a great deal of attention within academic and policy circles due to concerns that poor households do not allocate resources optimally (Bertrand, Mullainathan, and Shafir 2004; Duflo 2006; Mullainathan and Shafir 2009, 2013; Spears 2011), but this work rarely investigates householders’ decision-making rationales directly. In this article, we examine the coping strategies low-income families adopt to mitigate economic risk by studying how they allocate their tax refunds, which come once a year via the EITC and CTC. We use these windfalls during tax refund season as a window into the coping strategies low-income families use to manage the economic risks of life on the financial edge. Using data from in-depth interviews with 115 lower-income working families, we find that although families valued upward economic mobility, most allocations from their tax refund checks were designed to foster economic security rather than economic mobility. What appeared to be distinct types of allocations often had the same underlying rationale: Families attempted to create personal safety nets that made them feel more financially secure in the present and near future. By saving, purchasing durable goods, stockpiling household items, and paying off debts to kin and creditors at tax refund time, families built up an array of resources they could call on in the future when income and expense shocks occurred. Workers leveraged their tax refund dollars into multiple forms of self-insurance, particularly when they had experienced economic insecurity. Because no single source of support was adequate by itself, financial management could look like a patchwork quilt: earnings, child support, help from kin, in-kind benefits, credit cards, some savings, and refundable tax credits were the bits and pieces parents stitched together to make ends meet. These findings call into question the assumption that low-income households make irrational or suboptimal resource allocations when they do not save their tax refunds or invest refund dollars in traditional assets. Instead, we uncover why households feel the need to allocate their refunds towards promoting economic security before making long-term investments to boost economic mobility. Our results add to our understanding of how low-income families have responded to the privatization of risk under the new work-based safety net. BACKGROUND Economic insecurity is produced by a combination of income loss and insufficient social or private insurance to cover such losses (Western et al. 2012). Income volatility—which measures fluctuations in individual and household incomes—has grown since the 1970s (Dynan, Elmendorf, and Sichel 2012; Gottschalk and Moffitt 1994; Gottschalk and Moffitt 2009; Hacker 2006; Hacker and Jacobs 2008; Haider 2001; Shin and Solon 2011), and large income losses have grown most among low-income families (Western et al. 2016). Thomas DiPrete (2002) called adverse events associated with downward mobility “trigger events,” and low-skilled workers are disproportionately likely to experience income losses associated with unemployment, health shocks, and family disruption (Kalleberg 2011; McLanahan 2004). The experience of economic insecurity is consequential for family and child wellbeing, as parents may find that they must divert investments in children to cover basic needs (Brooks-Gunn and Duncan 1997; Sandstrom and Huerta 2013). They may also find it difficult to plan for the future, with negative implications for their psychological and financial wellbeing (Catalano 1991; Gorbachev 2011; Hill et al. 2013; Sullivan, Warren, and Westbrook 2000). The Public Safety Net The consequences of volatile incomes and expenses depend on the surrounding institutional context. Government transfer programs—including most social insurance and assistance programs—can mitigate the income losses associated with adverse events. In some ways, however, trends in U.S. assistance programs have arguably moved in the opposite direction. The welfare rolls have fallen more than 60 percent since the passage of welfare reform in 1996 (Falk 2013; Schott 2012). Critics have argued that cash assistance from TANF has become a less reliable safety net as diversions, sanctions, waiting periods, and employment requirements made it more difficult or less desirable for families to access the program (Danziger 2010; Edin and Shaefer 2015; Seefeldt and Sandstrom 2015). The dwindling availability of this form of public assistance was evident when TANF caseloads only ticked upward slightly during the 2008 recession (Pavetti, Finch, and Schott 2013). While use of in-kind benefit programs, like SNAP, rose between 2007 and 2011 in response to the Great Recession (Rosenbaum and Keith-Jennings 2016), such support is far less flexible than is cash assistance (Edin and Shaefer 2015); to understand household spending decisions, therefore, one must look beyond in-kind programs. The number of people benefiting from refundable tax credits, in particular the EITC, has increased dramatically; in the early 1990s, approximately 8 million households received the credit compared to 27 million in 2013 (Flores 2014; Scholz 1994). More families are receiving more government support through the EITC and the CTC—another partially refundable tax credit for low-income working families—than ever before. The EITC offers a substantial refund for working parents and reaches farther up the income distribution than most other government assistance programs. In 2015, benefits phased in up to annual earnings of about $14,000 and started to phase out around $18,000 for single parents with two children (single parents are the majority of EITC claimants); for this group, benefits were totally phased out when earnings went over about $44,000. For a single parent of two with earnings in the maximum benefit range, the EITC refund was $5,460 in 2014—equivalent to about one third of his or her annual earned income. The EITC boosts average incomes (Grogger and Karoly 2008), and because of its structure—delivered in a large lump sum once a year at tax time—it has been discussed as an opportunity for lower-income families to build assets and save, offering the chance for upward mobility (see, for example, Key et al. 2015; Smeeding 2005). Quantitative research has shown that EITC receipt is tied to a lower likelihood of debt accumulation and less year-to-year consumption volatility (Athreya, Reilly, and Simpson 2014; Shaefer, Song, and Shanks 2013), as well as increased consumption of durable goods, particularly around tax time (Barrow and McGranahan 2000). At the same time, there is little evidence that lower-income families use the EITC for long-term asset building, with only a modest amount of the refund invested in homeownership, education, or long-term savings vehicles (Halpern-Meekin et al. 2015; Smeeding et al. 2000). These findings suggest that families may deploy their tax refund check to promote current consumption rather than economic mobility, but these studies do not focus specifically on how or why families do this. Researchers have found important social-psychological benefits of the EITC. Jennifer Sykes and colleagues (2015) showed that workers found “dignity and dreams” in their tax refund allocations, with their feelings of self-worth, social inclusion, and hope for the future boosted by their ability to make the sorts of purchases that are normally outside the realm of financial possibility. While the Sykes and colleagues’ study examined the meaning recipients attributed to the EITC, the present study focuses on where the dollars and cents actually go; that is, we look at the utility, or use value, of tax refunds, as opposed to their meaning or subjective value. Often, the types of expenditures that are most laden with meaning (e.g., buying treats for children) are not where the bulk of spending actually takes place (Sykes et al. 2015). Therefore, the subjective value and use value of allocations may not be aligned, a possibility we examine here. Private Economic Coping Strategies In addition to public sources of assistance to cushion against economic insecurity, families may also rely on private forms of self-insurance. Although kin networks are an important form of support for lower-income households (Edin and Lein 1997; Stack 1974), the main resources they draw on to insure against adverse events and unexpected income losses—savings, kin, and credit—tend to be more limited than those of economically advantaged households (Harknett 2006; Keister and Moller 2000). Although traditional economic models of financial behavior characterize the financial decision making of the poor as irrational and attribute their financial behaviors to psychological errors (Bertrand et al. 2004; Duflo 2006; Mullainathan and Shafir 2009, 2013; Spears 2011), in-depth investigations of the decision making within poor households has revealed the importance of social context in shaping financial decisions and the meanings individuals attribute to their finances. Savings Precautionary savings—deferring current consumption to save for future consumption in the event of an income loss—is a key household coping strategy. Economic models of precautionary savings suggest that an individual’s precautionary savings rate will be higher when predicted future income insecurity is greater (Leland 1968). There is some empirical evidence for this theory: a doubling of uncertainty—measured by the transitory variance of income—boosts savings rates by 29 percent (Kazarosian 1997). However, it is difficult for lower-income households to accumulate precautionary savings when monthly expenses outstrip their incomes, even when they report that such savings are desirable. Reflecting this, only about one in ten families with earnings under $30,000 expressed confidence in their ability to cope with an unexpected $2,000 expense (Lusardi, Schneider, and Tufano 2011). Kin Support Carol Stack’s (1974) seminal study demonstrated how disadvantaged families relied on extended kin networks to get by. Kathryn Edin and Laura Lein (1997) also showed that kin support was a key element in helping low-income single mothers bridge the gap between their income from welfare or work and their families’ financial needs. The availability of such assistance can be a boon both psychologically and financially for parents, relieving hardship and its stresses simultaneously, and is associated with better emotional and behavioral outcomes for children (for a review, see Ryan, Kalil, and Leininger 2009). However, kin support is distributed unevenly by socioeconomic status, with disadvantaged parents being less able to summon help (Harknett 2006; Harknett and Hartnett 2011) and more likely to see its availability disappear over time (Radey and Brewster 2013) compared to their higher income counterparts. In addition, kin assistance can be undependable and using it extensively can be a source of personal anxiety and can strain relationships. As a result, many low-income adults report that they seek kin support only reluctantly (Desmond 2012; Smith 2010), and they are most reluctant when it involves cash rather than in-kind support or when doing so undermines their sense of self-sufficiency (Sherman 2013; Tach and Greene 2014). Credit Lower-income families were increasingly able to access credit starting in the 1980s with the deregulation of the credit industry and the expansion of credit markets (Draut and Silva 2003; Lyons 2003; Weller 2006). Credit can be used to promote economic stability by borrowing in hard times to smooth consumption. It can also be used to promote upward mobility through investments with long-run payoffs, like education or the equity in a home. Lower-income families are less likely than others to use credit for such mobility purposes; however, they are more likely to have unsecured credit, such as credit cards, and to borrow on less favorable terms than more affluent households. By 2004, over a quarter of low-to-moderate income families (with incomes of $10-50,000) spent more than 40 percent of their take-home income to pay off debt (Weller 2006). Because lower-income households are reluctant to ask kin for assistance with debt and there are few sources of public assistance for debt relief, they typically juggle their debts in private, using a scheme of rotating and partial payments to keep debt collectors at bay (Tach and Greene 2014). The Present Study This study builds on prior research about family economic coping strategies by examining such strategies under the new work-based safety net administered through tax refunds. Prior work, reviewed above, showed that this transformation increased and smoothed consumption for lower-income workers, but did little to reduce income volatility or promote asset building and upward mobility (Athreya, Reilly, and Simpson 2014; Halpern-Meekin et al. 2015; Mendenhall et al. 2012; Shaefer et al. 2013; Smeeding et al. 2000; Western et al. 2016). Using data from in-depth qualitative interviews with 115 lower-income working parents, we explored why families allocated their tax refunds as they did and how economic insecurity shaped allocation decisions. We build on prior research on the EITC by examining the narratives around specific tax refund allocation decisions, rather than the meaning of the EITC in general, and by studying not only what they spent their refund dollars on but also the utility of those expenditures. This approach allows us to analyze how refund allocation decisions fit within a broader set of economic coping strategies and experiences of economic risk. Our findings suggest the need for an expanded understanding of savings behavior, which has implications for how researchers measure families’ financial management strategies and how governmental and nonprofit organizations target savings promotion policies to lower-income families. DATA AND METHODS Data Collection We engaged in a two-stage data collection process in the Boston metropolitan area, first recruiting participants at several tax preparation sites at the time they filed their taxes and then conducting in-depth interviews with a stratified random sample of participants about six months later. Nationally, about 70 percent of EITC claimants file their taxes with for-profit companies, while 30 percent use a Volunteer Income Tax Assistance (VITA) site, have a friend or relative do their taxes, or file by themselves. To capture a variety of EITC claimants, we surveyed parents at two H&R Block locations, two VITA sites, and a set of Head Start centers in the Boston metropolitan area between January and April of 2007.1 The sites were drawn from neighborhoods with different ethno-racial compositions to obtain a diverse sample of respondents. After surveying 332 parents to ascertain their refund amounts and allocation intentions, we drew a stratified random subsample of them for in-depth interviews, which we use for the present analysis. We stratified by race (white, black, and Hispanic) and marital status (married and single) to ensure a diverse sample. All had received the EITC and a refund of at least $1,000, and all claimed dependent children for tax-filing purposes. Of the 120 respondents selected, we were able to interview 115 (96 percent), with approximately one third of each racial-ethnic group married and two thirds unmarried. Table 1 shows the descriptive characteristics of respondents in our sample. Table 1. Descriptive Statistics of Sample of EITC Recipients N (%) Number of qualifying children  Zero 0 (0)  One 30 (26.3)  Two or more 85 (72.8) Tax filing status  Head of household/single 82 (71.3)  Married filing jointly 33 (28.7) Total 2006 tax refund $4,686 2006 EITC refund $2,633 Location in EIC schedule  Phase-in 14 (12.2)  Plateau 22 (19.1)  Phase-out 79 (68.8) Average age 34.5 Gender  Female 104 (90.4)  Male 11 (9.7) Educational attainment  Less than high school 16 (14.1)  High school/GED 16 (14.1)  Some college/vocational education 70 (60.9)  BA or higher 13 (11.4) Marital status  Unmarried 70 (60.9)  Married 45 (39.1) Race/ethnicity  Black or African American 41 (36.0)  Non-Hispanic white 39 (34.2)  Hispanic/Latino 35 (29.7) N = 115 N (%) Number of qualifying children  Zero 0 (0)  One 30 (26.3)  Two or more 85 (72.8) Tax filing status  Head of household/single 82 (71.3)  Married filing jointly 33 (28.7) Total 2006 tax refund $4,686 2006 EITC refund $2,633 Location in EIC schedule  Phase-in 14 (12.2)  Plateau 22 (19.1)  Phase-out 79 (68.8) Average age 34.5 Gender  Female 104 (90.4)  Male 11 (9.7) Educational attainment  Less than high school 16 (14.1)  High school/GED 16 (14.1)  Some college/vocational education 70 (60.9)  BA or higher 13 (11.4) Marital status  Unmarried 70 (60.9)  Married 45 (39.1) Race/ethnicity  Black or African American 41 (36.0)  Non-Hispanic white 39 (34.2)  Hispanic/Latino 35 (29.7) N = 115 Notes: “Location in EIC schedule” refers to where respondents’ incomes place them for EITC determination purposes. For example, in 2007, a single tax filer with two children would be in the “phase in” portion of the schedule as her earnings rose up to approximately $12,000 per year; this means that her EITC benefit would increase as her earnings increased. Once her earnings were between approximately $12,000-$15,000 per year, she would be in the “plateau range,” meaning that she was receiving the maximum benefit available. As her earnings rose above about $15,000, she would be in the “phase out” portion of the schedule, so her EITC benefit would decline with her earnings until phasing out entirely at earnings over about $38,000. Table 1. Descriptive Statistics of Sample of EITC Recipients N (%) Number of qualifying children  Zero 0 (0)  One 30 (26.3)  Two or more 85 (72.8) Tax filing status  Head of household/single 82 (71.3)  Married filing jointly 33 (28.7) Total 2006 tax refund $4,686 2006 EITC refund $2,633 Location in EIC schedule  Phase-in 14 (12.2)  Plateau 22 (19.1)  Phase-out 79 (68.8) Average age 34.5 Gender  Female 104 (90.4)  Male 11 (9.7) Educational attainment  Less than high school 16 (14.1)  High school/GED 16 (14.1)  Some college/vocational education 70 (60.9)  BA or higher 13 (11.4) Marital status  Unmarried 70 (60.9)  Married 45 (39.1) Race/ethnicity  Black or African American 41 (36.0)  Non-Hispanic white 39 (34.2)  Hispanic/Latino 35 (29.7) N = 115 N (%) Number of qualifying children  Zero 0 (0)  One 30 (26.3)  Two or more 85 (72.8) Tax filing status  Head of household/single 82 (71.3)  Married filing jointly 33 (28.7) Total 2006 tax refund $4,686 2006 EITC refund $2,633 Location in EIC schedule  Phase-in 14 (12.2)  Plateau 22 (19.1)  Phase-out 79 (68.8) Average age 34.5 Gender  Female 104 (90.4)  Male 11 (9.7) Educational attainment  Less than high school 16 (14.1)  High school/GED 16 (14.1)  Some college/vocational education 70 (60.9)  BA or higher 13 (11.4) Marital status  Unmarried 70 (60.9)  Married 45 (39.1) Race/ethnicity  Black or African American 41 (36.0)  Non-Hispanic white 39 (34.2)  Hispanic/Latino 35 (29.7) N = 115 Notes: “Location in EIC schedule” refers to where respondents’ incomes place them for EITC determination purposes. For example, in 2007, a single tax filer with two children would be in the “phase in” portion of the schedule as her earnings rose up to approximately $12,000 per year; this means that her EITC benefit would increase as her earnings increased. Once her earnings were between approximately $12,000-$15,000 per year, she would be in the “plateau range,” meaning that she was receiving the maximum benefit available. As her earnings rose above about $15,000, she would be in the “phase out” portion of the schedule, so her EITC benefit would decline with her earnings until phasing out entirely at earnings over about $38,000. A team of six interviewers conducted the in-depth qualitative interviews approximately six months after the surveys, allowing parents time to receive and allocate their refund checks.2 The interviews lasted 2.5 hours on average, and they typically took place in respondents’ homes. In households with more than one adult we asked to speak with the person in charge of family finances. We collected detailed budgets using a standardized budget sheet to capture all sources of income and expenditures during (1) the few months after they got their tax refund, and (2) the rest of the year. We also collected detailed information about how families spent their tax refunds. These budgets were supplemented with a set of open-ended questions that explored why families allocated their refunds in the way that they did, what economic coping strategies they used to make ends meet, and how tax refunds fit into their lives as workers, parents, and members of broader kinship networks. Data Analysis All interviews were digitally recorded and transcribed. To identify economic insecurity, two authors read the full transcripts and coded every instance of employment shocks, family shocks, health shocks, or “other” shocks that did not fit into one of the prior three categories.3 We counted all events that happened within three years of the interview, but we also included several events that happened as long as five years before the interview because the respondent felt that the event was still affecting the family.4 Shocks were categorized by what the respondent described as their root cause. For example, if a respondent’s husband was injured on the job and lost his job as a result, we coded this as a health shock (rather than an economic or family shock) because the injury was the precipitating event. The most common employment shocks included unstable work hours or seasonal employment that created economic hardship; job loss for one’s self, partner, or child’s father; and unexpected changes in benefits. The most common family shocks included: family members who needed money, pregnancies, and divorces/dissolutions that caused financial hardship. Health shocks included a range of injuries or chronic conditions that affected the family either by resulting in hefty bills or preventing a family member from working. Finally, we created a residual category for other shocks that included a range of experiences that caused unexpected financial hardships, such as housing instability, cars breaking down, and unexpected garnishment of tax refunds.5 Many times the shocks were unexpected, but some still resulted in hardship even if they were expected because they created variable or trying financial situations (e.g., a family member who always needs money, Head Start teachers getting laid off each summer). The shocks we coded inductively from our interviews correspond closely to the types of experiences DiPrete (2002) termed “trigger events,” which trigger downward mobility for families across the socioeconomic spectrum but are both more common and costly for low-income families. We then linked data on economic shocks to respondents’ refund expenditures. First, we coded expenditures into broad categories that have typically been used in prior literature: savings and assets; current consumption; treats; durable goods; bills; and debt obligations (Halpern-Meekin et al. 2015; Smeeding et al. 2000) and compared expenditures in a typical month and expenditures after receiving the tax refund. We then examined how economic shocks were associated with variation in refund allocation decisions across these categories. Finally, we examined respondents’ narrative accounts of why they made the allocation decisions they did. We approached these accounts inductively, first reading their responses and then open coding them according to common themes that emerged across the interviews, including allocations made for upward mobility purposes, for catching up on outstanding debts, and for promoting economic security in the future. RESULTS We first describe the finances of the families in this study, highlighting the levels of and instability in their incomes. We then describe the ways they allocate their tax refund checks, and analyze how their allocations vary based on their experience of economic shocks. Finally, we present qualitative accounts of five areas to which parents allot refund dollars—savings, durable goods, stockpiling, and paying down debts to kin and to creditors—and analyze how families describe the utility of this spending. Household Finances: Instability and Insecurity Like EITC recipient households nationally, most families in our sample are getting by just above the poverty line. As Table 2 shows, single parents, who compose two thirds of our sample, earn approximately $1,500 a month on average, putting them just above the poverty line for a family of three in 2007 ($17,170). Adding the tax refund to this annual income boosts them to about 135 percent of the poverty line. This is consistent with quantitative studies, which find that the EITC pushes a substantial number of Americans above the poverty line each year (Center on Budget and Policy Priorities 2014). Table 2. Respondents’ Average Monthly and Annual Incomes, by Marital Status Monthly Earned Income Annual Earned Income Tax Refunda Refund as Percentage of Annual Earned Income Single (N = 75) $1,562 $18,744 $4,545 24.2 Married (N = 40) $2,496 $29,952 $4,952 16.5 Total (N = 115) $1,887 $22,644 $4,686 20.7 Monthly Earned Income Annual Earned Income Tax Refunda Refund as Percentage of Annual Earned Income Single (N = 75) $1,562 $18,744 $4,545 24.2 Married (N = 40) $2,496 $29,952 $4,952 16.5 Total (N = 115) $1,887 $22,644 $4,686 20.7 Notes: Marital status refers to respondents’ tax filing status with the IRS. Single respondents used the “head of household” status, and married respondents used the “married, filing jointly” status. Incomes are in 2007 dollars. a Tax refund includes the refundable EITC, the refundable child tax credit, and refunds of paycheck withholding. It includes both federal and state tax refunds. Table 2. Respondents’ Average Monthly and Annual Incomes, by Marital Status Monthly Earned Income Annual Earned Income Tax Refunda Refund as Percentage of Annual Earned Income Single (N = 75) $1,562 $18,744 $4,545 24.2 Married (N = 40) $2,496 $29,952 $4,952 16.5 Total (N = 115) $1,887 $22,644 $4,686 20.7 Monthly Earned Income Annual Earned Income Tax Refunda Refund as Percentage of Annual Earned Income Single (N = 75) $1,562 $18,744 $4,545 24.2 Married (N = 40) $2,496 $29,952 $4,952 16.5 Total (N = 115) $1,887 $22,644 $4,686 20.7 Notes: Marital status refers to respondents’ tax filing status with the IRS. Single respondents used the “head of household” status, and married respondents used the “married, filing jointly” status. Incomes are in 2007 dollars. a Tax refund includes the refundable EITC, the refundable child tax credit, and refunds of paycheck withholding. It includes both federal and state tax refunds. What the averages in Table 2 hide, however, is the frequent financial instability families faced. Many parents in this sample had seasonal jobs—teachers’ aides, preschool staff, construction workers, and even tax preparers—so they spent part of each year without a paycheck. Others had jobs in the retail or service sectors or with temp agencies, where hours fluctuate often: A home health aide’s patient enters the hospital, and she sees her hours fall by a third from one week to the next, or a waitress is sent home each time there are not many customers. Further, families often depended on child support and help from kin for a portion of their monthly income—about $200 among those who receive anything from kin; as with income from wages, these other sources of money were not always dependable, fluctuating with the finances and emotions of exes and kin. Financial shocks hit often, and parents would struggle to cope with them. Jerry Morales was a white, 32-year-old, married father of three whose family experienced four separate shocks in the prior year: his wife’s job loss (employment shock), a death and a birth in the immediate family (two family shocks), and an illness that limited his ability to work (health shock). He lived with his wife, Tessa, their kids, and his mother in a housing project in South Boston. He worked two jobs—full time during the week in a community college mailroom and, on the weekends, a 2:00 a.m. shift delivering doughnuts. Despite his hard work, his financial dreams remained elusive. “My dream basically is to get a house and be settled financially, everything. That’s all I ever wanted. No matter how much we try, there’s always something that just kicks us in the butt.” Jerry’s wife Tessa recalled the year the financial hits just kept on coming. First, she lost her waitressing job. Then, “My mom passed away. I just had [my youngest daughter]. Jerry got sick [and couldn’t work]. So, it was a stressed year.” This combination of family, health, and employment instability was the norm, rather than the exception, for families in our sample. More than three-quarters of families (77 percent) reported at least one shock in the past three years, with an average of two shocks per family and more than a third reporting three or more such events. Specifically, one third of respondents reported an experience of employment insecurity, such as a layoff or an unexpected cut in work hours; just under half reported an experience of family insecurity, such as family members who needed money, pregnancies, divorces, or even deaths; over a third reported an experience of health insecurity such as injuries or chronic conditions that resulted in hefty bills or work limitations; and over a third experienced some other form of insecurity, such as car trouble or housing instability. Although we coded for the root cause of each shock, we also found that qualitatively many experiences of insecurity cascaded across categories, amplifying their consequences. For example, a health shock that caused a job loss, or a period of incarceration that caused a couple to break up. While most families reported experiencing some kind of shock, nearly a quarter did not report such insecurity. Those who had not experienced a shock stood out because they had relatively stable work and family lives and health situations; but beyond that, there were few demographic or economic characteristics that distinguished them from those who did experience shocks. Families’ monthly incomes often left them not able to keep up with regular expenses, let alone with room to spare to pay down debts, like credit card bills or student loans. Each month could be a juggling act, as they figured out what to pay and what to let slide, hoping for a forgiving landlord or a naïve employee at the electric company who believed that the check really was in the mail. Given such circumstances, it was not surprising that tax time, with its large annual refunds from the EITC and other sources, was keenly anticipated by so many, likened to “winning the lottery,” getting “a bonus,” and “better than Christmas.” Table 2 shows that that the average tax refund check was equivalent to approximately one sixth of annual income for those who filed as married, and one quarter of annual earned income for those filing as single. Tax Refund Allocations Amid Economic Insecurity What did families do with their windfalls? Table 3 shows that the tax refund allocations of respondents in our sample were similar to the findings from larger population-based surveys about planned expenditures (Rhine et al. 2005; Smeeding et al. 2000; Spader, Ratcliffe, and Stegman 2005). Families who received the EITC devoted the bulk of their refunds to paying off debt and current consumption. They spent much less on investments that might boost upward mobility, and they “blew” very little of the refund on nonessential items. Families initially saved 17 percent of refund dollars, either in a savings account or through informal means like hiding it in the house or having a family member hold on to it. However, most of this savings was spent over the ensuing months—on average, only 7 percent of refund dollars remained in savings six months after receipt of the check. Table 3. Allocations of Tax Refund N (%) Who Spent In Category Percentage of Total Refund Dollars Spent Initial savings 46 (40.0) 16.8 Asset building  Education 8 (6.9) 1.9  Home ownership/improvement 7 (6.1) 3.1  Other 1 (.9) .2 Current consumption  Shopping 57 (49.6) 6.3  Groceries 31 (26.9) 3.5  Child expenses 115 (100.0) 6.1  Other 17 (14.8) .9 Treats 43 (37.4) 10.7 Durable goods  Furniture/appliances 33 (28.7) 7.8  Car purchase/repair 30 (26.1) 8.0 Bills and debt obligations  Kin repayment 33 (28.7) 4.7  Current bill payments 17 (14.8) 7.1  Bill pre-payments 11 (9.6) 2.7  Debts and back bills 77 (66.9) 20.9 N = 115 Respondents N (%) Who Spent In Category Percentage of Total Refund Dollars Spent Initial savings 46 (40.0) 16.8 Asset building  Education 8 (6.9) 1.9  Home ownership/improvement 7 (6.1) 3.1  Other 1 (.9) .2 Current consumption  Shopping 57 (49.6) 6.3  Groceries 31 (26.9) 3.5  Child expenses 115 (100.0) 6.1  Other 17 (14.8) .9 Treats 43 (37.4) 10.7 Durable goods  Furniture/appliances 33 (28.7) 7.8  Car purchase/repair 30 (26.1) 8.0 Bills and debt obligations  Kin repayment 33 (28.7) 4.7  Current bill payments 17 (14.8) 7.1  Bill pre-payments 11 (9.6) 2.7  Debts and back bills 77 (66.9) 20.9 N = 115 Respondents Notes: Asset building includes spending on items such as educational expenses (e.g., community college tuition) or increasing the value of one’s home. Current consumption includes regular monthly expenses, such as groceries, clothing, or children’s school supplies. Treats include items such as eating out, gifts, and lottery tickets. Durable goods include items such as purchasing a car, furniture, or appliances. Bills and debt obligations include repayment on debts to kin, creditors, and other companies (e.g., heating bill or rent), payment of current bills, and paying ahead on bills (e.g., paying for six months of car insurance at once, rather than waiting for each monthly bill). Table 3. Allocations of Tax Refund N (%) Who Spent In Category Percentage of Total Refund Dollars Spent Initial savings 46 (40.0) 16.8 Asset building  Education 8 (6.9) 1.9  Home ownership/improvement 7 (6.1) 3.1  Other 1 (.9) .2 Current consumption  Shopping 57 (49.6) 6.3  Groceries 31 (26.9) 3.5  Child expenses 115 (100.0) 6.1  Other 17 (14.8) .9 Treats 43 (37.4) 10.7 Durable goods  Furniture/appliances 33 (28.7) 7.8  Car purchase/repair 30 (26.1) 8.0 Bills and debt obligations  Kin repayment 33 (28.7) 4.7  Current bill payments 17 (14.8) 7.1  Bill pre-payments 11 (9.6) 2.7  Debts and back bills 77 (66.9) 20.9 N = 115 Respondents N (%) Who Spent In Category Percentage of Total Refund Dollars Spent Initial savings 46 (40.0) 16.8 Asset building  Education 8 (6.9) 1.9  Home ownership/improvement 7 (6.1) 3.1  Other 1 (.9) .2 Current consumption  Shopping 57 (49.6) 6.3  Groceries 31 (26.9) 3.5  Child expenses 115 (100.0) 6.1  Other 17 (14.8) .9 Treats 43 (37.4) 10.7 Durable goods  Furniture/appliances 33 (28.7) 7.8  Car purchase/repair 30 (26.1) 8.0 Bills and debt obligations  Kin repayment 33 (28.7) 4.7  Current bill payments 17 (14.8) 7.1  Bill pre-payments 11 (9.6) 2.7  Debts and back bills 77 (66.9) 20.9 N = 115 Respondents Notes: Asset building includes spending on items such as educational expenses (e.g., community college tuition) or increasing the value of one’s home. Current consumption includes regular monthly expenses, such as groceries, clothing, or children’s school supplies. Treats include items such as eating out, gifts, and lottery tickets. Durable goods include items such as purchasing a car, furniture, or appliances. Bills and debt obligations include repayment on debts to kin, creditors, and other companies (e.g., heating bill or rent), payment of current bills, and paying ahead on bills (e.g., paying for six months of car insurance at once, rather than waiting for each monthly bill). While most families reported experiencing some kind of economic shock, nearly a quarter did not report such insecurity; this allows us to examine variations in tax refund allocation between these two groups. Although there were few demographic or economic characteristics that distinguished those with shocks from those without, those who reported shocks were much less likely to save part of their refund than those with no such reported insecurity (35 percent versus 64 percent). Among those who initially saved some of their refund, the insecure had less of their refund still saved six months later (21 percent versus 32 percent). Those who experienced a shock were also less likely to devote some of their refund to educational expenses (5 percent versus 16 percent). Instead, they were more likely to spend their refunds on cars (31 percent versus 8 percent), tax filing fees, including Refund Anticipation Loans (22 percent versus 12 percent), clothes (57 percent versus 28 percent), and furniture (33 percent versus 20 percent). We analyze respondents’ narrative accounts regarding why they made such allocation decisions below. We examined if these results were simply a product of poverty; that is, the financially insecure may simply be poorer than the financially secure, thereby explaining their differential allocation patterns. Our results indicated that this did not seem to be the case. First, the distribution of experiences of shocks is pretty evenly spread across the sample’s income quartiles.6 Second, we split the sample at the median family income, and found that refund allocation patterns by shock status were generally the same within income groups. However, there was one important exception: Experiencing shocks was not associated with saving part of the refund for those in the bottom half of the income distribution, but it was strongly associated with less savings in the upper half of the income distribution. This suggests that a very limited income is an obstacle to building savings, regardless of the experience of shocks. Unpacking Allocation Decisions: Creating a Personal Safety Net We next examined respondents’ narrative accounts of why they allocated their refunds as they did. In our analysis of these narrative accounts of decision making, we found that what appeared to be distinct types of allocations—like debt repayment, grocery shopping, savings account deposits, and car purchases—often had the same underlying rationale: Families attempted to create personal safety nets that made them feel more financially secure in the present as well as in the near future. They viewed setting some savings aside as a guard against future shocks; acquiring durable goods—like a car—made them more independent and gave reliable access to work and school; grocery shopping could include stockpiling goods for use during lean times ahead; paying back kin made the possibility of future assistance more likely; and paying down debts created, among other things, the option of future spending on credit. Late winter’s tax refund time was typically the only time of year when families could make substantial strides in ironing out past deficits and building up future protections, as they were often unable to cover even basic monthly expenses at other times of the year. Savings Many parents leveraged their tax refund checks to achieve greater financial security in a straight-forward way, via saving (35 percent of those who reported a shock versus 64 percent of those who did not). Twenty-three-year-old LaWanda James, a black single emergency medical technician and the mother of an elementary schooler, had little savings but wanted to put aside some of her tax refund. She did not have specific uses in mind, but said she wanted to save it “Just for a rainy, a real rainy day, a thunderstorm, blizzard, hurricane, I wanna save . . . Just want to have a nice cushion of money.” Angela Capponi, a 30-year-old white single mother of three with another baby on the way, saved for the little expenses that cropped up. She worked as an assistant manager at an electronics store. After stocking up on the items she would need for the new baby and having birthday parties for her boys, she said, “What I had left, I just put in my drawer, and took out money here and there when I needed things.” The tax refund’s association with the ability to save was part of what made it so prized. Tiffany Grier, a white 22-year-old single mother of two toddlers who worked as a store clerk, described why she liked the “enforced savings” function built into the tax refund system: “[The tax refund is] as good as putting the money in the bank. You just can’t take it out when you want.” If they had to save on their own, many families acknowledged that they would have drawn on the money for other expenses, so they would not have accumulated very much. Therefore, those dedicated to saving devised strategies to make their money harder to access, like using a passbook-only savings account in another town or giving it to a relative for safe keeping. It was common for families to describe saving for reasons that looked more like precautionary savings or deferred consumption than as a way of building assets or long-term investments in the future. Like Angela, most parents would “pinch off” their saved refund dollars over the ensuing months as needs and wants arose, enabling an ease of spending and a sense of financial security not experienced during other times of the year. As we noted above, most parents spent a large portion of their saved refund dollars within about six months; parents who had experienced a shock were less likely to still have savings at this point than were those who did not report such instability (21 percent versus 32 percent). Durable Goods Economists and policymakers typically think of precautionary savings as money that is saved for future consumption in the event of a loss of income, but we found that families viewed some of the goods they bought in this way as well. In particular, many viewed the purchase of durable goods as a means of smoothing their future consumption by increasing their independence, providing stable access to employment, and, anticipating future consumption needs by making purchases when money was available. Such “precautionary spending,” as we call it, was more common among those who had experienced a shock: they were more likely to spend refund money on a car (31 percent versus 8 percent), furniture (33 percent versus 20 percent), and clothing (57 percent versus 28 percent). Marisa Castillo, a 49-year-old Hispanic mother of five, was separated from her husband; he had not been contributing anything to the family from his disability check (he had terminal cancer). She decided to use a large portion of her $5,000 refund check to put a down payment on a car and pay for a year’s worth of insurance, costing her $2,500 in total. “We needed a good car. I did not have my husband with me anymore … So we decided to buy the car because we had this very old car.” While Marisa had dreams of using her refund as the down payment on a house, she ultimately concluded it was not practical at this point, and so she set her sights on the car. The car helped to buffer the loss of income and reliable transportation that resulted from her husband’s illness and their separation; it also ensured that they would be less reliant on family and friends (or an unreliable old car) when they needed transportation to work and school. Linda Valdez was a 41-year-old Hispanic single mother of two elementary schoolers. During our visit to her apartment in a South Boston housing project, she proudly showed off the bedroom set she bought for her daughters using her tax refund: two white twin beds and dressers, decorated with small flowers painted on the drawers; they previously had shared her mattress each night. She did not earn much at her part-time cleaning job, and since her daughters’ father left her for someone else, he had not helped a lot financially. Before they recently started getting SNAP, they had sometimes run short on food between paychecks. With her refund check, Linda was also able to make the more expensive clothing purchases her girls needed: sneakers and school uniforms. She was thinking ahead to the upcoming school year, six months away, when her youngest daughter would join her eldest at public school. Come fall she knew she would not have the cash on hand to make such purchases. The refund check bought them more stable finances—these purchases meant fewer demands on her finances in the future—and offered a greater sense of security that came from being able to provide the basic necessities for her children. This included both necessities in the present (like a place to sleep), as well as future obligations (like the school uniforms) that she might not be able to afford when times became lean again. Stockpiling Because the working poor and near-poor often live with financial uncertainty, it was not uncommon for us to hear stories of families using tax time’s windfall to buy in bulk at discount stores and fill pantries and deep freezers.7 These stockpiles helped to ensure that food would not run short when money got tight. Mariella Ambrosini was a white 57-year-old with three daughters; her emphysema kept her from working and secured her a monthly SSI check, while her husband worked seasonally in construction. A large shelf overflowing with pasta, canned goods, chips, and cereal sat prominently in Mariella’s East Boston apartment. She told us, “My big expense is food; my refrigerator gotta be full all the time. Otherwise I get very depressed.” Like Mariella, many parents saw their pantries as a basic gauge of how they were faring financially; not being able to feed one’s children meant financial, and personal, disaster. Brenda Hutchinson was a married, white school lunch aid in her late thirties who had two daughters. At tax time this year, they bought box upon box of pizza bagels, cases of soup, and over $400 worth of meat, which she stored in her mother’s stand-alone freezer. Brenda said, “I just keep them like stocked up so you don’t have to worry about running out of food, you know?” Another way parents “stockpiled” was by paying ahead on bills when their refund checks came. As Ashlee Reed, a 29-year-old white mother of three who worked as a preschool teacher, explained, “I do the monthly payments for the car insurance so I figure okay, let me just try to pay off all the insurance [with my refund], so that’s one less bill for the rest of the year …” Prepaying bills was one way families could free up earnings at a later date for spending on expected expenses and to guard against unplanned shocks. Paying Back Kin Approximately 20 percent of respondents received help from kin or romantic partners during a typical month, averaging just under $200 a month. There were two central kinds of monetary assistance from kin that families described receiving. The first included small cash payments and in-kind support, such as a gallon of milk, $20 for gas, or a new outfit for the baby. Respondents did not view this sort of help as a loan, and it did not come with an expectation of repayment. The second form of assistance was larger sums of money for major expenses, and these were seen as loans that required repayment. Given how tight finances were during the typical month, it was common for workers to wait until tax time’s lump sum arrived to make good on these debts. Among families in our study, tax time was the time of year to catch up on loans from kin, ranging from a few hundred dollars up to $2,500. On the lower end of this range is Sheri Frye, a white 29-year-old clerical worker and mother of two. When tax time arrived, Sheri was able to pay her sister the $500 she borrowed for Christmas gifts for her boys. At the other end of the spectrum, Ricardo Torres used tax time to give $1,600 to his kin. This 33-year-old, Hispanic father of three with a fourth on the way worked full-time as a cashier and part-time cleaning offices while his girlfriend (who he refers to as his “wife”) took care of the children and managed their household. The Torres’ situation illustrates the complexity of kinship support, as Ricardo used their tax time windfall both to send money to their families in El Salvador—approximately $600 this year—and to pay back loans from different family members—about $1,000 to his girlfriend’s mother. He described his conversation with his girlfriend’s mother, “She told me, ‘Don’t worry about it and pay me at the end of the year.’” Because she was someone the family turns to routinely for money in hard times, living up to their end of the bargain, and making the repayment at the expected time, was essential. Tax time offered the opportunity to do so, and, in fact, the terms of the loan were made around the arrival of tax time’s expected windfall. Being able to settle those debts brought a sense of relief since outstanding obligations could be a source of stress or even tension in family relationships. Tamara Bishop, a 33-year-old black assistant preschool teacher and single mother of four, said that, come December, she was eagerly looking ahead to the arrival of tax time and the opportunity it offered to make good on her debts. “I try to like take care of people that I owe that are, you know, basically my mom because she gets her taxes every year and she saves every year, so we have her to go to. She’s like our bank in between.” For Tamara, withdrawals from this maternal “bank” were a regular occurrence during the year, with her borrowing to cover her $250 monthly grocery bills for the family as well as the $250 payments for her kids’ after-school programs, leaving her repaying a hefty $2,500 to her mother when her refund check arrived. Tamara kept a careful log of how much she borrowed from her mother throughout the year. Repaying this loan was important both to Tamara’s relationship with her mother as well as her future ability to borrow from her “bank.” Without her own tax refund, Tamara said, she would be “crying probably” and her mom “would stress too much [about] the money I owe her.” Paying Down Debts For a regular month—not during tax refund time—the typical household in our sample paid $173 monthly toward their outstanding debt and back bills, constituting 6 percent of their monthly expenditures; this sum does not include rent or regular monthly payments on items like furniture, appliances, or cars. This did not even come close to covering debt obligations for many. For this reason, tax season was often viewed as the time of year for paying off debts. Regardless of income or shock experience, most parents—approximately two-thirds to three-quarters—paid down debts at tax time. While paying off debts offers psychological relief, it also has a practical implication: it gives more space for the accumulation of debts in the future. While parents did not articulate this as the primary motivation for debt repayment, it nonetheless had this consequence. There is only so long you can go without paying your electric bill before services are shut off or skipping on your rent before you are evicted. Getting caught up means you can fall behind on such bills in the future when money is tight without risking catastrophe. Paying down debts, therefore, is in part a way of securing economic stability. Sharon Ingram, a 47-year-old black clerical worker with a 21-year-old daughter and a 15-year-old son, paid off her credit card debt in full with her refund. Sharon explained that she prioritized paying off bills to “just get a little ahead of the game. Just get a little ahead of myself. Just breathe a little better.” In February, Ashlee Reed got a refund check totaling $4,704—more than three times the amount that she brought home in an average month from her job as a preschool teacher. Much of her allocation decisions revolved around the financial consequences of being out of work during the summer, when school was not in session. Ashlee needed to be out of work for a week before she could apply for unemployment insurance, and once she did it often took three weeks for her first check to arrive, leaving her to cover a month without income. I try to save [a lot of my refund]. My goal usually, even though I don’t ever make it, is to have enough money saved up for the summer for when I go onto unemployment . . . That’s four weeks without pay if I don’t have anything saved up from when I was working. Instead of saving, however, Ashlee used her refund to pay off the debt she accrued each summer: her student loan, some of the principal on her credit cards, and overdue cable and phone bills. Even though she never managed to save, using her refund to pay down some of her bills and to pay ahead on others allowed Ashlee to face the summer’s financial crunch with more credit at her disposal, smoothing consumption before her UI check arrived. Taken together, we found that what appeared to be distinct types of allocations—debt repayment, saving, paying back kin, stockpiling, and durable goods purchases—often had the same underlying goal of improving a family’s economic security in the near term. These forms of what we call “precautionary spending” served as a safeguard against future shocks. For example, acquiring durable goods—like a car—made families more independent and gave reliable access to work and school; grocery shopping could include stockpiling goods for use during lean times ahead; paying back kin made the possibility of future assistance more likely; and paying down debts created, among other things, the option of future spending on credit. What might be viewed as current consumption by outsiders was actually a form of in-kind investment that occurred outside the purview of the formal banking system. Exceptions: Asset Builders While the bulk of refund allocations were focused on building personal safety nets as a precaution against future needs, we examined our sample to identify those who did apportion some of their tax refund for asset-building purposes: contributing refund dollars towards educational expenses or home investment, or keeping more than $1,000 from the refund in savings at least six months after tax time. In total, 27 families (23 percent) fell in this category, with 8 (7 percent) having allocated money to education, 7 (6 percent) to homes, and 14 (12 percent) with money in savings. This select group of asset builders shared some characteristics: they were more likely to be employed full time, have bank accounts, be older, be immigrants, and to have little economic insecurity. Just one in five families who had experienced an economic shock were able to use some of their refund for asset building, compared to over one third of those who experienced no shocks.8 Some asset builders also went to extraordinary lengths to cut back on their expenses in service of their savings goals, which resulted in significantly lower monthly expenses than non-savers ($2,140 per month for savers, on average, compared to $2,814 for non-savers) despite similar average monthly incomes. However, frugality does not appear to be a sufficient cause of saving; nor was kin support or institutional support from government or nonprofit programs. Rather, together frugality combined with economic stability and kin or institutional support made saving more feasible. Linda Valdez, who purchased the bedroom set for her daughters, was among the relatively rare group who was able to keep part of her refund in long-term savings. Like many other asset builders in our sample, she had a bank account, was an immigrant, and, at 42, was older than the 35-year-old average age. Linda received just over $6,000 between her federal and state refunds, and she spent about $3,000 of that buying furniture and other items for the house and clothing for her daughters. The other $3,000, she explains, she deposited into her brother-in-law’s bank account since she, as a public housing resident, would see her rent increase were she to have a substantial sum in her savings account. Linda’s ability to save was in part due to her financial planning and frugality—she had calculated, based on the dates of her paychecks and bills, exactly which day each month she must pay each bill. She only had one credit card with a $200 limit that she paid on every month. She avoided many of the purchases other families made, like movie rentals or a cell phone. Her ability to save was also due in part to the government assistance programs available to her, including public housing, MassHealth, and SNAP. Also, her frame of reference was informed by her status as an immigrant. She remembered growing up on her family’s farm in Honduras, where they lacked enough money to buy shoes or bread; her father would hunt armadillos and iguanas to feed his children. Her current meager budget seemed relatively plentiful by comparison. Juliana Soto was also an asset builder, and she and her family lived very frugally, fueled by dreams of mobility. When we interviewed Juliana, she and her husband, Diego, had just realized one of these dreams: the parents of two had bought a single-family house in a working-class suburb. Juliana and Diego, now in their thirties, moved into public housing when she got pregnant at 18; Juliana went on welfare when their children were young. After both landed stable jobs, they continued to live in public housing until they purchased their home. Juliana does not have fond memories of her life in public housing, recounting rats, roaches, and “disgusting neighbors.” One day, she recalled saying to Diego, “I’ve been here long enough. I can’t do it anymore. I have to get out.” Many families in our sample talked of wanting desperately to get out of public housing but few managed to do so. How were Juliana and Diego able to achieve this goal? First, both had long-term, stable jobs with benefits, and their 12-year marriage allowed them to pool their resources. Juliana had worked for eight years as a receptionist at a financial services company, and she cashed out her company 401k to help with their down payment. Diego worked first as an EMT and then as a physical therapy assistant at a local hospital; he got medical insurance and tuition assistance through the job, which he used to earn his associate’s degree. Second, the Soto family lived quite frugally for the ten years it took them to save the $10,000 down payment, which they were able to save while living in public housing by keeping Diego off of their public housing lease. As Juliana remembered, “I scrimped on everything. I got my bills paid, got the food, and then we budgeted everything … If I had ten dollars left over, there it went [into the house savings account].” As in the past, this year they used their tax refunds to pay off credit cards and boost their credit ratings in anticipation of buying the house. They devoted the rest of the refund to expenses related to the home purchase: closing costs, home inspection, and a moving truck. They also had some help in realizing their mobility dreams: they got home ownership counseling and affordable mortgage terms through MassHousing, a local non-profit specializing in affordable homeownership. In this study, we argue that volatility of income and expenses necessitate that workers use their tax refund’s windfall to “self-insure” via short-term saving, purchasing durable goods, stockpiling, and paying down debts. Implied is that in the absence of such economic instability, families would make fundamentally different allocation decisions. While we are limited in our ability to examine this counterfactual directly, the group of asset builders in our sample does offer some support for this argument. For instance, they were likely to have more secure employment situations, offering the financial stability necessary to divert refund dollars from building a personal safety net to investments with the potential for upward mobility, like educational expenses, home purchase or repair, or long-term, substantial savings. Similarly in support of this argument, we saw that those who did not report experience with shocks were more likely to save in traditional ways at tax time and to maintain this money in savings over the subsequent six months. CONCLUSION Using data from a sample of 115 lower-income working families who received the EITC, we found that workers leveraged their tax refund dollars into multiple forms of self-insurance to cushion against future income and expense shocks. In contrast to in-kind benefits, refund dollars can potentially be spent in any way recipients choose; in this universe of possibilities, we saw that they engaged in what Ulrich Beck (2007) termed “in sourcing” (p. 682). Allocations made to seemingly distinct categories of expenditures—like debt, current consumption, durable goods, and savings—were often done with the goal of ensuring economic security for the present and near future. In addition to precautionary savings, families made other precautionary investments in anticipation of lean times ahead by paying off debts and kin obligations, purchasing durable goods that promoted economic independence and security, stockpiling food and other household goods, and paying ahead on bills and other expenses. Engaging in these alternative savings strategies was particularly common among those who reported recent experience with a financial, family, health, or other shock. These findings challenge the assumption that low-income households hold different orientations toward finances than middle-class households. The households in our sample held aspirations for upward mobility that correspond strongly with those of middle-class Americans, but they did not feel they had the luxury of setting aside resources for long-term goals given the instability and insecurity of their work and family lives; instead, they invested their refunds in more precautionary ways. The current study suggests that families may be engaging in a variety of savings-like behaviors that are misunderstood as consumption or debt payment, which calls traditional categorizations of expenditures into question. These findings suggest the need for a broader definition of precautionary assets that extends beyond savings in the bank and does not contrast consumption and investment as mutually exclusive possibilities. Future research on household expenditures and financial decision making—such as work on economic coping strategies, wealth and consumption inequality, and financial investments in children—should incorporate this broader conception of saving and spending behaviors. Our results also shed light on the “puzzle” of why EITC recipients do not invest more of their refund dollars in traditional assets like home ownership, education, or stocks.9 Given the instability and insecurity of their work and family lives, they did not have the luxury of setting aside resources for a distant future because they viewed their current needs as pressing and unpredictable. This did not mean that they had no aspirations for traditional forms of economic mobility, like better jobs, better homes and neighborhoods, or ample savings; in fact, mobility dreams were strong and persistent, despite repeated setbacks. But these dreams must be put on hold in order to invest in a protective way. In this way, the meaning and psychological nourishment that comes at tax time may be distinct from its more concrete utilities. It fuels dreams for the long-term future, while helping to provide security over the short term. Even though their precautionary investments might not move them very far up the income ladder, families did feel better off knowing that they had a more secure footing on that ladder. The use of the refund to foster economic security likely has important material, as well as psychological, benefits for low-income workers and their families and perhaps explains why EITC receipt results in less food insecurity and consumption volatility (Athreya et al. 2014; Shaefer et al. 2013). Some might question why parents chose to spend the refund money in the short term on durable goods and stockpiles that would not be needed for several months rather than saving this money and then making purchases, such as school uniforms and food, as these needs arose. Families’ preferences for future-oriented consumption was in line with their appreciation for the “forced savings” function of the tax refund; many told us that were they to have the money on hand, it would be claimed by expenses and treats in the interim, leaving them short when these anticipated expenses demanded payment. Work in economic psychology demonstrates that times of financial abundance might offer greater clarity in decision making, as parents are freed from the typical stresses and distractions of making ends meet (Mullainathan and Shafir 2013). Tax refund time may offer just such a window, and the research on resource scarcity indicates that parents might be wise to make their allocation decisions in this period. By pre-purchasing items and pre-paying bills, parents ensure that they have spent their available dollars in their most preferred way. Our study is not without limitations. In particular, the set of families captured in our sample is not representative of all EITC recipients. This was a place-based sample, drawn from an urban area with high housing costs and relatively generous public housing assistance; it is possible that results could be different elsewhere in the country. Further, while many EITC beneficiaries do not get the credit more than one year in a row and some also only receive a small sum (Dowd and Horowitz 2011), most of those in our sample received a substantial check at tax time and expected to do so year after year. As a result, respondents in our sample may be more likely than some EITC recipients to use their refunds as self-insurance and less likely than some to view the refund as a one-time windfall. Our results have important implications for policy and program design. There is growing interest among policymakers in leveraging tax time as a “magic moment” to encourage workers to make deposits in savings accounts or other savings vehicles like bonds (Grinstein-Weiss et al. 2016; Harris 2013; Tufano, Schneider, and Beverly 2005). Attempts to incentivize families to engage in more traditional savings behaviors at tax time should gauge their achievements cautiously. Plusher savings accounts should not be taken as the only measure of success, as this may simply be a trade-off with other investments in economic security that may also have value, like purchasing durable goods, stockpiling, or paying back debts. For savings promotion programs to truly be deemed a success, they must actually show an improvement in participants’ wellbeing. To be worthwhile, savings programs must provide more benefits to participants than the personal safety net strategies they currently pursue on their own. Policymakers have also considered disbursing the EITC in smaller periodic payments during the year rather than in a single lump sum at tax time (Holt 2015). The large lump sum makes the EITC unique among anti-poverty programs because it offers families unusual opportunities to make investments and expenditures that they could not make in a typical month. It also fuels mobility aspirations in a way that no other means-tested program does (Halpern-Meekin et al. 2015; Skyes et al. 2015). From the participants’ perspective, other government safety net programs did not fully buffer against the regular sources of economic insecurity that they faced, such as lost wages and fluctuating expenses, often derived from financial, family, health, or other shocks. Until their incomes are more stable, or until a more robust system of public and private insurance can cushion against that income instability, it is unlikely (and perhaps unwise) for EITC-eligible households to direct more of their refunds toward long-term economic mobility purposes. The authors thank the Ford Foundation for funding the data collection. Previous versions of this article were presented at the annual meetings of the American Sociological Association and the Association for Public Policy Analysis and Management in 2014. Direct correspondence to: Laura Tach, 253 Martha van Rensselaer Hall, Cornell University, Ithaca, NY 14853. Email: lauratach@cornell.edu. Footnotes 1 At the H&R Block and VITA locations, respondents had just filed their taxes when they filled out our survey. At the Head Start centers, respondents had filed their taxes recently, typically within the past month. 2 The interview team consisted of six female graduate students and faculty, including two interviewers of color and one interviewer fluent in Spanish. 3 Our interview guide did not ask explicit questions about financial insecurity; these experiences emerged spontaneously in response to a range of different questions throughout the interviews. Respondents brought the events up to us because they were a significant part of their family’s economic story. Thus, this is not an exhaustive list of all of the financial insecurities experienced by our interviewees—there are surely even more experiences of insecurity than we have cataloged here; that is, our analyses likely underestimate the role of shocks in shaping families’ tax time allocations. 4 Because the interviews focused on respondents’ current and recent financial situations, generally within the last five years, we restricted the coding of shocks to that time period as well. 5 Refunds can be garnished for child support arrears and educational loans, for example. 6 This is likely because we purposely sampled a low-income group, basing sample eligibility on EITC receipt. 7 We were not able to measure the incidence of stockpiling quantitatively as these purchases are defined by differences in degree, not in kind, therefore classifying the purchase of a certain amount of cold cereal, for example, as stockpiling or not was not possible quantitatively in this data. 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Google Scholar CrossRef Search ADS © The Author(s) 2018. Published by Oxford University Press on behalf of the Society for the Study of Social Problems.All rights reserved. For permissions, please e-mail: journals.permissions@oup.com This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/lega l/notices) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Social Problems Oxford University Press

“As Good as Money in the Bank”: Building a Personal Safety Net with the Earned Income Tax Credit

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Abstract

Abstract The public safety net has increasingly functioned as a system that rewards work, but many low-wage workers now face a double bind: unstable incomes and volatile expenses. We ask how low-wage workers make resource allocation decisions under conditions of uncertainty by examining how they spend and save their tax refunds. Using data from in-depth interviews with a sample of 115 lower-income working families, we find that more than three quarters of families experienced an income or expense shock in the past three years. Although many had aspirations for upward mobility, the insecurity of daily life meant they devoted most of their refund dollars to creating a personal safety net to cushion against income and expense shocks. What appeared to be distinct types of allocations often had the same underlying rationale goal of improving a family’s economic security in the near term. By saving, purchasing durable goods, stockpiling household staples, and paying off debts to kin and creditors at tax refund time, families leveraged their tax refund dollars into multiple forms of self-insurance. Respondents held aspirations for upward mobility that correspond strongly with those of middle-class Americans, but they did not feel they had the luxury of setting aside resources for long-term mobility goals given the instability and insecurity of their work and family lives. Instead, they invested their refunds in more precautionary ways. What might be viewed as current consumption by outsiders was actually a form of in-kind investment that occurred outside the purview of the formal banking system. economic insecurity, economic mobility, social policy, qualitative and mixed methods Over the past several decades, the U.S. social safety net has eroded and individuals are increasingly responsible for their own wellbeing, a trend scholars have labeled “in-sourcing” (Beck 2007:682), the “privatization of risk” (Hacker 2006), and the “commodification of opportunity” (Grusky and MacLean 2016). For poor families, welfare reform, expansions of the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), and reforms to in-kind transfer programs have increasingly tied benefit receipt to employment, making government assistance contingent on individual performance in the labor market. At the same time, insecurity in the low-wage labor market has grown with the rise in contingent employment, variable work hours, and the erosion of nonwage compensation (Western et al. 2012). These dual trends have placed low-wage workers in a double bind: growing economic insecurity and less social assistance to mitigate that insecurity. When the public safety net is inadequate, families must seek alternative strategies to create economic security. The financial decisions of the poor receive a great deal of attention within academic and policy circles due to concerns that poor households do not allocate resources optimally (Bertrand, Mullainathan, and Shafir 2004; Duflo 2006; Mullainathan and Shafir 2009, 2013; Spears 2011), but this work rarely investigates householders’ decision-making rationales directly. In this article, we examine the coping strategies low-income families adopt to mitigate economic risk by studying how they allocate their tax refunds, which come once a year via the EITC and CTC. We use these windfalls during tax refund season as a window into the coping strategies low-income families use to manage the economic risks of life on the financial edge. Using data from in-depth interviews with 115 lower-income working families, we find that although families valued upward economic mobility, most allocations from their tax refund checks were designed to foster economic security rather than economic mobility. What appeared to be distinct types of allocations often had the same underlying rationale: Families attempted to create personal safety nets that made them feel more financially secure in the present and near future. By saving, purchasing durable goods, stockpiling household items, and paying off debts to kin and creditors at tax refund time, families built up an array of resources they could call on in the future when income and expense shocks occurred. Workers leveraged their tax refund dollars into multiple forms of self-insurance, particularly when they had experienced economic insecurity. Because no single source of support was adequate by itself, financial management could look like a patchwork quilt: earnings, child support, help from kin, in-kind benefits, credit cards, some savings, and refundable tax credits were the bits and pieces parents stitched together to make ends meet. These findings call into question the assumption that low-income households make irrational or suboptimal resource allocations when they do not save their tax refunds or invest refund dollars in traditional assets. Instead, we uncover why households feel the need to allocate their refunds towards promoting economic security before making long-term investments to boost economic mobility. Our results add to our understanding of how low-income families have responded to the privatization of risk under the new work-based safety net. BACKGROUND Economic insecurity is produced by a combination of income loss and insufficient social or private insurance to cover such losses (Western et al. 2012). Income volatility—which measures fluctuations in individual and household incomes—has grown since the 1970s (Dynan, Elmendorf, and Sichel 2012; Gottschalk and Moffitt 1994; Gottschalk and Moffitt 2009; Hacker 2006; Hacker and Jacobs 2008; Haider 2001; Shin and Solon 2011), and large income losses have grown most among low-income families (Western et al. 2016). Thomas DiPrete (2002) called adverse events associated with downward mobility “trigger events,” and low-skilled workers are disproportionately likely to experience income losses associated with unemployment, health shocks, and family disruption (Kalleberg 2011; McLanahan 2004). The experience of economic insecurity is consequential for family and child wellbeing, as parents may find that they must divert investments in children to cover basic needs (Brooks-Gunn and Duncan 1997; Sandstrom and Huerta 2013). They may also find it difficult to plan for the future, with negative implications for their psychological and financial wellbeing (Catalano 1991; Gorbachev 2011; Hill et al. 2013; Sullivan, Warren, and Westbrook 2000). The Public Safety Net The consequences of volatile incomes and expenses depend on the surrounding institutional context. Government transfer programs—including most social insurance and assistance programs—can mitigate the income losses associated with adverse events. In some ways, however, trends in U.S. assistance programs have arguably moved in the opposite direction. The welfare rolls have fallen more than 60 percent since the passage of welfare reform in 1996 (Falk 2013; Schott 2012). Critics have argued that cash assistance from TANF has become a less reliable safety net as diversions, sanctions, waiting periods, and employment requirements made it more difficult or less desirable for families to access the program (Danziger 2010; Edin and Shaefer 2015; Seefeldt and Sandstrom 2015). The dwindling availability of this form of public assistance was evident when TANF caseloads only ticked upward slightly during the 2008 recession (Pavetti, Finch, and Schott 2013). While use of in-kind benefit programs, like SNAP, rose between 2007 and 2011 in response to the Great Recession (Rosenbaum and Keith-Jennings 2016), such support is far less flexible than is cash assistance (Edin and Shaefer 2015); to understand household spending decisions, therefore, one must look beyond in-kind programs. The number of people benefiting from refundable tax credits, in particular the EITC, has increased dramatically; in the early 1990s, approximately 8 million households received the credit compared to 27 million in 2013 (Flores 2014; Scholz 1994). More families are receiving more government support through the EITC and the CTC—another partially refundable tax credit for low-income working families—than ever before. The EITC offers a substantial refund for working parents and reaches farther up the income distribution than most other government assistance programs. In 2015, benefits phased in up to annual earnings of about $14,000 and started to phase out around $18,000 for single parents with two children (single parents are the majority of EITC claimants); for this group, benefits were totally phased out when earnings went over about $44,000. For a single parent of two with earnings in the maximum benefit range, the EITC refund was $5,460 in 2014—equivalent to about one third of his or her annual earned income. The EITC boosts average incomes (Grogger and Karoly 2008), and because of its structure—delivered in a large lump sum once a year at tax time—it has been discussed as an opportunity for lower-income families to build assets and save, offering the chance for upward mobility (see, for example, Key et al. 2015; Smeeding 2005). Quantitative research has shown that EITC receipt is tied to a lower likelihood of debt accumulation and less year-to-year consumption volatility (Athreya, Reilly, and Simpson 2014; Shaefer, Song, and Shanks 2013), as well as increased consumption of durable goods, particularly around tax time (Barrow and McGranahan 2000). At the same time, there is little evidence that lower-income families use the EITC for long-term asset building, with only a modest amount of the refund invested in homeownership, education, or long-term savings vehicles (Halpern-Meekin et al. 2015; Smeeding et al. 2000). These findings suggest that families may deploy their tax refund check to promote current consumption rather than economic mobility, but these studies do not focus specifically on how or why families do this. Researchers have found important social-psychological benefits of the EITC. Jennifer Sykes and colleagues (2015) showed that workers found “dignity and dreams” in their tax refund allocations, with their feelings of self-worth, social inclusion, and hope for the future boosted by their ability to make the sorts of purchases that are normally outside the realm of financial possibility. While the Sykes and colleagues’ study examined the meaning recipients attributed to the EITC, the present study focuses on where the dollars and cents actually go; that is, we look at the utility, or use value, of tax refunds, as opposed to their meaning or subjective value. Often, the types of expenditures that are most laden with meaning (e.g., buying treats for children) are not where the bulk of spending actually takes place (Sykes et al. 2015). Therefore, the subjective value and use value of allocations may not be aligned, a possibility we examine here. Private Economic Coping Strategies In addition to public sources of assistance to cushion against economic insecurity, families may also rely on private forms of self-insurance. Although kin networks are an important form of support for lower-income households (Edin and Lein 1997; Stack 1974), the main resources they draw on to insure against adverse events and unexpected income losses—savings, kin, and credit—tend to be more limited than those of economically advantaged households (Harknett 2006; Keister and Moller 2000). Although traditional economic models of financial behavior characterize the financial decision making of the poor as irrational and attribute their financial behaviors to psychological errors (Bertrand et al. 2004; Duflo 2006; Mullainathan and Shafir 2009, 2013; Spears 2011), in-depth investigations of the decision making within poor households has revealed the importance of social context in shaping financial decisions and the meanings individuals attribute to their finances. Savings Precautionary savings—deferring current consumption to save for future consumption in the event of an income loss—is a key household coping strategy. Economic models of precautionary savings suggest that an individual’s precautionary savings rate will be higher when predicted future income insecurity is greater (Leland 1968). There is some empirical evidence for this theory: a doubling of uncertainty—measured by the transitory variance of income—boosts savings rates by 29 percent (Kazarosian 1997). However, it is difficult for lower-income households to accumulate precautionary savings when monthly expenses outstrip their incomes, even when they report that such savings are desirable. Reflecting this, only about one in ten families with earnings under $30,000 expressed confidence in their ability to cope with an unexpected $2,000 expense (Lusardi, Schneider, and Tufano 2011). Kin Support Carol Stack’s (1974) seminal study demonstrated how disadvantaged families relied on extended kin networks to get by. Kathryn Edin and Laura Lein (1997) also showed that kin support was a key element in helping low-income single mothers bridge the gap between their income from welfare or work and their families’ financial needs. The availability of such assistance can be a boon both psychologically and financially for parents, relieving hardship and its stresses simultaneously, and is associated with better emotional and behavioral outcomes for children (for a review, see Ryan, Kalil, and Leininger 2009). However, kin support is distributed unevenly by socioeconomic status, with disadvantaged parents being less able to summon help (Harknett 2006; Harknett and Hartnett 2011) and more likely to see its availability disappear over time (Radey and Brewster 2013) compared to their higher income counterparts. In addition, kin assistance can be undependable and using it extensively can be a source of personal anxiety and can strain relationships. As a result, many low-income adults report that they seek kin support only reluctantly (Desmond 2012; Smith 2010), and they are most reluctant when it involves cash rather than in-kind support or when doing so undermines their sense of self-sufficiency (Sherman 2013; Tach and Greene 2014). Credit Lower-income families were increasingly able to access credit starting in the 1980s with the deregulation of the credit industry and the expansion of credit markets (Draut and Silva 2003; Lyons 2003; Weller 2006). Credit can be used to promote economic stability by borrowing in hard times to smooth consumption. It can also be used to promote upward mobility through investments with long-run payoffs, like education or the equity in a home. Lower-income families are less likely than others to use credit for such mobility purposes; however, they are more likely to have unsecured credit, such as credit cards, and to borrow on less favorable terms than more affluent households. By 2004, over a quarter of low-to-moderate income families (with incomes of $10-50,000) spent more than 40 percent of their take-home income to pay off debt (Weller 2006). Because lower-income households are reluctant to ask kin for assistance with debt and there are few sources of public assistance for debt relief, they typically juggle their debts in private, using a scheme of rotating and partial payments to keep debt collectors at bay (Tach and Greene 2014). The Present Study This study builds on prior research about family economic coping strategies by examining such strategies under the new work-based safety net administered through tax refunds. Prior work, reviewed above, showed that this transformation increased and smoothed consumption for lower-income workers, but did little to reduce income volatility or promote asset building and upward mobility (Athreya, Reilly, and Simpson 2014; Halpern-Meekin et al. 2015; Mendenhall et al. 2012; Shaefer et al. 2013; Smeeding et al. 2000; Western et al. 2016). Using data from in-depth qualitative interviews with 115 lower-income working parents, we explored why families allocated their tax refunds as they did and how economic insecurity shaped allocation decisions. We build on prior research on the EITC by examining the narratives around specific tax refund allocation decisions, rather than the meaning of the EITC in general, and by studying not only what they spent their refund dollars on but also the utility of those expenditures. This approach allows us to analyze how refund allocation decisions fit within a broader set of economic coping strategies and experiences of economic risk. Our findings suggest the need for an expanded understanding of savings behavior, which has implications for how researchers measure families’ financial management strategies and how governmental and nonprofit organizations target savings promotion policies to lower-income families. DATA AND METHODS Data Collection We engaged in a two-stage data collection process in the Boston metropolitan area, first recruiting participants at several tax preparation sites at the time they filed their taxes and then conducting in-depth interviews with a stratified random sample of participants about six months later. Nationally, about 70 percent of EITC claimants file their taxes with for-profit companies, while 30 percent use a Volunteer Income Tax Assistance (VITA) site, have a friend or relative do their taxes, or file by themselves. To capture a variety of EITC claimants, we surveyed parents at two H&R Block locations, two VITA sites, and a set of Head Start centers in the Boston metropolitan area between January and April of 2007.1 The sites were drawn from neighborhoods with different ethno-racial compositions to obtain a diverse sample of respondents. After surveying 332 parents to ascertain their refund amounts and allocation intentions, we drew a stratified random subsample of them for in-depth interviews, which we use for the present analysis. We stratified by race (white, black, and Hispanic) and marital status (married and single) to ensure a diverse sample. All had received the EITC and a refund of at least $1,000, and all claimed dependent children for tax-filing purposes. Of the 120 respondents selected, we were able to interview 115 (96 percent), with approximately one third of each racial-ethnic group married and two thirds unmarried. Table 1 shows the descriptive characteristics of respondents in our sample. Table 1. Descriptive Statistics of Sample of EITC Recipients N (%) Number of qualifying children  Zero 0 (0)  One 30 (26.3)  Two or more 85 (72.8) Tax filing status  Head of household/single 82 (71.3)  Married filing jointly 33 (28.7) Total 2006 tax refund $4,686 2006 EITC refund $2,633 Location in EIC schedule  Phase-in 14 (12.2)  Plateau 22 (19.1)  Phase-out 79 (68.8) Average age 34.5 Gender  Female 104 (90.4)  Male 11 (9.7) Educational attainment  Less than high school 16 (14.1)  High school/GED 16 (14.1)  Some college/vocational education 70 (60.9)  BA or higher 13 (11.4) Marital status  Unmarried 70 (60.9)  Married 45 (39.1) Race/ethnicity  Black or African American 41 (36.0)  Non-Hispanic white 39 (34.2)  Hispanic/Latino 35 (29.7) N = 115 N (%) Number of qualifying children  Zero 0 (0)  One 30 (26.3)  Two or more 85 (72.8) Tax filing status  Head of household/single 82 (71.3)  Married filing jointly 33 (28.7) Total 2006 tax refund $4,686 2006 EITC refund $2,633 Location in EIC schedule  Phase-in 14 (12.2)  Plateau 22 (19.1)  Phase-out 79 (68.8) Average age 34.5 Gender  Female 104 (90.4)  Male 11 (9.7) Educational attainment  Less than high school 16 (14.1)  High school/GED 16 (14.1)  Some college/vocational education 70 (60.9)  BA or higher 13 (11.4) Marital status  Unmarried 70 (60.9)  Married 45 (39.1) Race/ethnicity  Black or African American 41 (36.0)  Non-Hispanic white 39 (34.2)  Hispanic/Latino 35 (29.7) N = 115 Notes: “Location in EIC schedule” refers to where respondents’ incomes place them for EITC determination purposes. For example, in 2007, a single tax filer with two children would be in the “phase in” portion of the schedule as her earnings rose up to approximately $12,000 per year; this means that her EITC benefit would increase as her earnings increased. Once her earnings were between approximately $12,000-$15,000 per year, she would be in the “plateau range,” meaning that she was receiving the maximum benefit available. As her earnings rose above about $15,000, she would be in the “phase out” portion of the schedule, so her EITC benefit would decline with her earnings until phasing out entirely at earnings over about $38,000. Table 1. Descriptive Statistics of Sample of EITC Recipients N (%) Number of qualifying children  Zero 0 (0)  One 30 (26.3)  Two or more 85 (72.8) Tax filing status  Head of household/single 82 (71.3)  Married filing jointly 33 (28.7) Total 2006 tax refund $4,686 2006 EITC refund $2,633 Location in EIC schedule  Phase-in 14 (12.2)  Plateau 22 (19.1)  Phase-out 79 (68.8) Average age 34.5 Gender  Female 104 (90.4)  Male 11 (9.7) Educational attainment  Less than high school 16 (14.1)  High school/GED 16 (14.1)  Some college/vocational education 70 (60.9)  BA or higher 13 (11.4) Marital status  Unmarried 70 (60.9)  Married 45 (39.1) Race/ethnicity  Black or African American 41 (36.0)  Non-Hispanic white 39 (34.2)  Hispanic/Latino 35 (29.7) N = 115 N (%) Number of qualifying children  Zero 0 (0)  One 30 (26.3)  Two or more 85 (72.8) Tax filing status  Head of household/single 82 (71.3)  Married filing jointly 33 (28.7) Total 2006 tax refund $4,686 2006 EITC refund $2,633 Location in EIC schedule  Phase-in 14 (12.2)  Plateau 22 (19.1)  Phase-out 79 (68.8) Average age 34.5 Gender  Female 104 (90.4)  Male 11 (9.7) Educational attainment  Less than high school 16 (14.1)  High school/GED 16 (14.1)  Some college/vocational education 70 (60.9)  BA or higher 13 (11.4) Marital status  Unmarried 70 (60.9)  Married 45 (39.1) Race/ethnicity  Black or African American 41 (36.0)  Non-Hispanic white 39 (34.2)  Hispanic/Latino 35 (29.7) N = 115 Notes: “Location in EIC schedule” refers to where respondents’ incomes place them for EITC determination purposes. For example, in 2007, a single tax filer with two children would be in the “phase in” portion of the schedule as her earnings rose up to approximately $12,000 per year; this means that her EITC benefit would increase as her earnings increased. Once her earnings were between approximately $12,000-$15,000 per year, she would be in the “plateau range,” meaning that she was receiving the maximum benefit available. As her earnings rose above about $15,000, she would be in the “phase out” portion of the schedule, so her EITC benefit would decline with her earnings until phasing out entirely at earnings over about $38,000. A team of six interviewers conducted the in-depth qualitative interviews approximately six months after the surveys, allowing parents time to receive and allocate their refund checks.2 The interviews lasted 2.5 hours on average, and they typically took place in respondents’ homes. In households with more than one adult we asked to speak with the person in charge of family finances. We collected detailed budgets using a standardized budget sheet to capture all sources of income and expenditures during (1) the few months after they got their tax refund, and (2) the rest of the year. We also collected detailed information about how families spent their tax refunds. These budgets were supplemented with a set of open-ended questions that explored why families allocated their refunds in the way that they did, what economic coping strategies they used to make ends meet, and how tax refunds fit into their lives as workers, parents, and members of broader kinship networks. Data Analysis All interviews were digitally recorded and transcribed. To identify economic insecurity, two authors read the full transcripts and coded every instance of employment shocks, family shocks, health shocks, or “other” shocks that did not fit into one of the prior three categories.3 We counted all events that happened within three years of the interview, but we also included several events that happened as long as five years before the interview because the respondent felt that the event was still affecting the family.4 Shocks were categorized by what the respondent described as their root cause. For example, if a respondent’s husband was injured on the job and lost his job as a result, we coded this as a health shock (rather than an economic or family shock) because the injury was the precipitating event. The most common employment shocks included unstable work hours or seasonal employment that created economic hardship; job loss for one’s self, partner, or child’s father; and unexpected changes in benefits. The most common family shocks included: family members who needed money, pregnancies, and divorces/dissolutions that caused financial hardship. Health shocks included a range of injuries or chronic conditions that affected the family either by resulting in hefty bills or preventing a family member from working. Finally, we created a residual category for other shocks that included a range of experiences that caused unexpected financial hardships, such as housing instability, cars breaking down, and unexpected garnishment of tax refunds.5 Many times the shocks were unexpected, but some still resulted in hardship even if they were expected because they created variable or trying financial situations (e.g., a family member who always needs money, Head Start teachers getting laid off each summer). The shocks we coded inductively from our interviews correspond closely to the types of experiences DiPrete (2002) termed “trigger events,” which trigger downward mobility for families across the socioeconomic spectrum but are both more common and costly for low-income families. We then linked data on economic shocks to respondents’ refund expenditures. First, we coded expenditures into broad categories that have typically been used in prior literature: savings and assets; current consumption; treats; durable goods; bills; and debt obligations (Halpern-Meekin et al. 2015; Smeeding et al. 2000) and compared expenditures in a typical month and expenditures after receiving the tax refund. We then examined how economic shocks were associated with variation in refund allocation decisions across these categories. Finally, we examined respondents’ narrative accounts of why they made the allocation decisions they did. We approached these accounts inductively, first reading their responses and then open coding them according to common themes that emerged across the interviews, including allocations made for upward mobility purposes, for catching up on outstanding debts, and for promoting economic security in the future. RESULTS We first describe the finances of the families in this study, highlighting the levels of and instability in their incomes. We then describe the ways they allocate their tax refund checks, and analyze how their allocations vary based on their experience of economic shocks. Finally, we present qualitative accounts of five areas to which parents allot refund dollars—savings, durable goods, stockpiling, and paying down debts to kin and to creditors—and analyze how families describe the utility of this spending. Household Finances: Instability and Insecurity Like EITC recipient households nationally, most families in our sample are getting by just above the poverty line. As Table 2 shows, single parents, who compose two thirds of our sample, earn approximately $1,500 a month on average, putting them just above the poverty line for a family of three in 2007 ($17,170). Adding the tax refund to this annual income boosts them to about 135 percent of the poverty line. This is consistent with quantitative studies, which find that the EITC pushes a substantial number of Americans above the poverty line each year (Center on Budget and Policy Priorities 2014). Table 2. Respondents’ Average Monthly and Annual Incomes, by Marital Status Monthly Earned Income Annual Earned Income Tax Refunda Refund as Percentage of Annual Earned Income Single (N = 75) $1,562 $18,744 $4,545 24.2 Married (N = 40) $2,496 $29,952 $4,952 16.5 Total (N = 115) $1,887 $22,644 $4,686 20.7 Monthly Earned Income Annual Earned Income Tax Refunda Refund as Percentage of Annual Earned Income Single (N = 75) $1,562 $18,744 $4,545 24.2 Married (N = 40) $2,496 $29,952 $4,952 16.5 Total (N = 115) $1,887 $22,644 $4,686 20.7 Notes: Marital status refers to respondents’ tax filing status with the IRS. Single respondents used the “head of household” status, and married respondents used the “married, filing jointly” status. Incomes are in 2007 dollars. a Tax refund includes the refundable EITC, the refundable child tax credit, and refunds of paycheck withholding. It includes both federal and state tax refunds. Table 2. Respondents’ Average Monthly and Annual Incomes, by Marital Status Monthly Earned Income Annual Earned Income Tax Refunda Refund as Percentage of Annual Earned Income Single (N = 75) $1,562 $18,744 $4,545 24.2 Married (N = 40) $2,496 $29,952 $4,952 16.5 Total (N = 115) $1,887 $22,644 $4,686 20.7 Monthly Earned Income Annual Earned Income Tax Refunda Refund as Percentage of Annual Earned Income Single (N = 75) $1,562 $18,744 $4,545 24.2 Married (N = 40) $2,496 $29,952 $4,952 16.5 Total (N = 115) $1,887 $22,644 $4,686 20.7 Notes: Marital status refers to respondents’ tax filing status with the IRS. Single respondents used the “head of household” status, and married respondents used the “married, filing jointly” status. Incomes are in 2007 dollars. a Tax refund includes the refundable EITC, the refundable child tax credit, and refunds of paycheck withholding. It includes both federal and state tax refunds. What the averages in Table 2 hide, however, is the frequent financial instability families faced. Many parents in this sample had seasonal jobs—teachers’ aides, preschool staff, construction workers, and even tax preparers—so they spent part of each year without a paycheck. Others had jobs in the retail or service sectors or with temp agencies, where hours fluctuate often: A home health aide’s patient enters the hospital, and she sees her hours fall by a third from one week to the next, or a waitress is sent home each time there are not many customers. Further, families often depended on child support and help from kin for a portion of their monthly income—about $200 among those who receive anything from kin; as with income from wages, these other sources of money were not always dependable, fluctuating with the finances and emotions of exes and kin. Financial shocks hit often, and parents would struggle to cope with them. Jerry Morales was a white, 32-year-old, married father of three whose family experienced four separate shocks in the prior year: his wife’s job loss (employment shock), a death and a birth in the immediate family (two family shocks), and an illness that limited his ability to work (health shock). He lived with his wife, Tessa, their kids, and his mother in a housing project in South Boston. He worked two jobs—full time during the week in a community college mailroom and, on the weekends, a 2:00 a.m. shift delivering doughnuts. Despite his hard work, his financial dreams remained elusive. “My dream basically is to get a house and be settled financially, everything. That’s all I ever wanted. No matter how much we try, there’s always something that just kicks us in the butt.” Jerry’s wife Tessa recalled the year the financial hits just kept on coming. First, she lost her waitressing job. Then, “My mom passed away. I just had [my youngest daughter]. Jerry got sick [and couldn’t work]. So, it was a stressed year.” This combination of family, health, and employment instability was the norm, rather than the exception, for families in our sample. More than three-quarters of families (77 percent) reported at least one shock in the past three years, with an average of two shocks per family and more than a third reporting three or more such events. Specifically, one third of respondents reported an experience of employment insecurity, such as a layoff or an unexpected cut in work hours; just under half reported an experience of family insecurity, such as family members who needed money, pregnancies, divorces, or even deaths; over a third reported an experience of health insecurity such as injuries or chronic conditions that resulted in hefty bills or work limitations; and over a third experienced some other form of insecurity, such as car trouble or housing instability. Although we coded for the root cause of each shock, we also found that qualitatively many experiences of insecurity cascaded across categories, amplifying their consequences. For example, a health shock that caused a job loss, or a period of incarceration that caused a couple to break up. While most families reported experiencing some kind of shock, nearly a quarter did not report such insecurity. Those who had not experienced a shock stood out because they had relatively stable work and family lives and health situations; but beyond that, there were few demographic or economic characteristics that distinguished them from those who did experience shocks. Families’ monthly incomes often left them not able to keep up with regular expenses, let alone with room to spare to pay down debts, like credit card bills or student loans. Each month could be a juggling act, as they figured out what to pay and what to let slide, hoping for a forgiving landlord or a naïve employee at the electric company who believed that the check really was in the mail. Given such circumstances, it was not surprising that tax time, with its large annual refunds from the EITC and other sources, was keenly anticipated by so many, likened to “winning the lottery,” getting “a bonus,” and “better than Christmas.” Table 2 shows that that the average tax refund check was equivalent to approximately one sixth of annual income for those who filed as married, and one quarter of annual earned income for those filing as single. Tax Refund Allocations Amid Economic Insecurity What did families do with their windfalls? Table 3 shows that the tax refund allocations of respondents in our sample were similar to the findings from larger population-based surveys about planned expenditures (Rhine et al. 2005; Smeeding et al. 2000; Spader, Ratcliffe, and Stegman 2005). Families who received the EITC devoted the bulk of their refunds to paying off debt and current consumption. They spent much less on investments that might boost upward mobility, and they “blew” very little of the refund on nonessential items. Families initially saved 17 percent of refund dollars, either in a savings account or through informal means like hiding it in the house or having a family member hold on to it. However, most of this savings was spent over the ensuing months—on average, only 7 percent of refund dollars remained in savings six months after receipt of the check. Table 3. Allocations of Tax Refund N (%) Who Spent In Category Percentage of Total Refund Dollars Spent Initial savings 46 (40.0) 16.8 Asset building  Education 8 (6.9) 1.9  Home ownership/improvement 7 (6.1) 3.1  Other 1 (.9) .2 Current consumption  Shopping 57 (49.6) 6.3  Groceries 31 (26.9) 3.5  Child expenses 115 (100.0) 6.1  Other 17 (14.8) .9 Treats 43 (37.4) 10.7 Durable goods  Furniture/appliances 33 (28.7) 7.8  Car purchase/repair 30 (26.1) 8.0 Bills and debt obligations  Kin repayment 33 (28.7) 4.7  Current bill payments 17 (14.8) 7.1  Bill pre-payments 11 (9.6) 2.7  Debts and back bills 77 (66.9) 20.9 N = 115 Respondents N (%) Who Spent In Category Percentage of Total Refund Dollars Spent Initial savings 46 (40.0) 16.8 Asset building  Education 8 (6.9) 1.9  Home ownership/improvement 7 (6.1) 3.1  Other 1 (.9) .2 Current consumption  Shopping 57 (49.6) 6.3  Groceries 31 (26.9) 3.5  Child expenses 115 (100.0) 6.1  Other 17 (14.8) .9 Treats 43 (37.4) 10.7 Durable goods  Furniture/appliances 33 (28.7) 7.8  Car purchase/repair 30 (26.1) 8.0 Bills and debt obligations  Kin repayment 33 (28.7) 4.7  Current bill payments 17 (14.8) 7.1  Bill pre-payments 11 (9.6) 2.7  Debts and back bills 77 (66.9) 20.9 N = 115 Respondents Notes: Asset building includes spending on items such as educational expenses (e.g., community college tuition) or increasing the value of one’s home. Current consumption includes regular monthly expenses, such as groceries, clothing, or children’s school supplies. Treats include items such as eating out, gifts, and lottery tickets. Durable goods include items such as purchasing a car, furniture, or appliances. Bills and debt obligations include repayment on debts to kin, creditors, and other companies (e.g., heating bill or rent), payment of current bills, and paying ahead on bills (e.g., paying for six months of car insurance at once, rather than waiting for each monthly bill). Table 3. Allocations of Tax Refund N (%) Who Spent In Category Percentage of Total Refund Dollars Spent Initial savings 46 (40.0) 16.8 Asset building  Education 8 (6.9) 1.9  Home ownership/improvement 7 (6.1) 3.1  Other 1 (.9) .2 Current consumption  Shopping 57 (49.6) 6.3  Groceries 31 (26.9) 3.5  Child expenses 115 (100.0) 6.1  Other 17 (14.8) .9 Treats 43 (37.4) 10.7 Durable goods  Furniture/appliances 33 (28.7) 7.8  Car purchase/repair 30 (26.1) 8.0 Bills and debt obligations  Kin repayment 33 (28.7) 4.7  Current bill payments 17 (14.8) 7.1  Bill pre-payments 11 (9.6) 2.7  Debts and back bills 77 (66.9) 20.9 N = 115 Respondents N (%) Who Spent In Category Percentage of Total Refund Dollars Spent Initial savings 46 (40.0) 16.8 Asset building  Education 8 (6.9) 1.9  Home ownership/improvement 7 (6.1) 3.1  Other 1 (.9) .2 Current consumption  Shopping 57 (49.6) 6.3  Groceries 31 (26.9) 3.5  Child expenses 115 (100.0) 6.1  Other 17 (14.8) .9 Treats 43 (37.4) 10.7 Durable goods  Furniture/appliances 33 (28.7) 7.8  Car purchase/repair 30 (26.1) 8.0 Bills and debt obligations  Kin repayment 33 (28.7) 4.7  Current bill payments 17 (14.8) 7.1  Bill pre-payments 11 (9.6) 2.7  Debts and back bills 77 (66.9) 20.9 N = 115 Respondents Notes: Asset building includes spending on items such as educational expenses (e.g., community college tuition) or increasing the value of one’s home. Current consumption includes regular monthly expenses, such as groceries, clothing, or children’s school supplies. Treats include items such as eating out, gifts, and lottery tickets. Durable goods include items such as purchasing a car, furniture, or appliances. Bills and debt obligations include repayment on debts to kin, creditors, and other companies (e.g., heating bill or rent), payment of current bills, and paying ahead on bills (e.g., paying for six months of car insurance at once, rather than waiting for each monthly bill). While most families reported experiencing some kind of economic shock, nearly a quarter did not report such insecurity; this allows us to examine variations in tax refund allocation between these two groups. Although there were few demographic or economic characteristics that distinguished those with shocks from those without, those who reported shocks were much less likely to save part of their refund than those with no such reported insecurity (35 percent versus 64 percent). Among those who initially saved some of their refund, the insecure had less of their refund still saved six months later (21 percent versus 32 percent). Those who experienced a shock were also less likely to devote some of their refund to educational expenses (5 percent versus 16 percent). Instead, they were more likely to spend their refunds on cars (31 percent versus 8 percent), tax filing fees, including Refund Anticipation Loans (22 percent versus 12 percent), clothes (57 percent versus 28 percent), and furniture (33 percent versus 20 percent). We analyze respondents’ narrative accounts regarding why they made such allocation decisions below. We examined if these results were simply a product of poverty; that is, the financially insecure may simply be poorer than the financially secure, thereby explaining their differential allocation patterns. Our results indicated that this did not seem to be the case. First, the distribution of experiences of shocks is pretty evenly spread across the sample’s income quartiles.6 Second, we split the sample at the median family income, and found that refund allocation patterns by shock status were generally the same within income groups. However, there was one important exception: Experiencing shocks was not associated with saving part of the refund for those in the bottom half of the income distribution, but it was strongly associated with less savings in the upper half of the income distribution. This suggests that a very limited income is an obstacle to building savings, regardless of the experience of shocks. Unpacking Allocation Decisions: Creating a Personal Safety Net We next examined respondents’ narrative accounts of why they allocated their refunds as they did. In our analysis of these narrative accounts of decision making, we found that what appeared to be distinct types of allocations—like debt repayment, grocery shopping, savings account deposits, and car purchases—often had the same underlying rationale: Families attempted to create personal safety nets that made them feel more financially secure in the present as well as in the near future. They viewed setting some savings aside as a guard against future shocks; acquiring durable goods—like a car—made them more independent and gave reliable access to work and school; grocery shopping could include stockpiling goods for use during lean times ahead; paying back kin made the possibility of future assistance more likely; and paying down debts created, among other things, the option of future spending on credit. Late winter’s tax refund time was typically the only time of year when families could make substantial strides in ironing out past deficits and building up future protections, as they were often unable to cover even basic monthly expenses at other times of the year. Savings Many parents leveraged their tax refund checks to achieve greater financial security in a straight-forward way, via saving (35 percent of those who reported a shock versus 64 percent of those who did not). Twenty-three-year-old LaWanda James, a black single emergency medical technician and the mother of an elementary schooler, had little savings but wanted to put aside some of her tax refund. She did not have specific uses in mind, but said she wanted to save it “Just for a rainy, a real rainy day, a thunderstorm, blizzard, hurricane, I wanna save . . . Just want to have a nice cushion of money.” Angela Capponi, a 30-year-old white single mother of three with another baby on the way, saved for the little expenses that cropped up. She worked as an assistant manager at an electronics store. After stocking up on the items she would need for the new baby and having birthday parties for her boys, she said, “What I had left, I just put in my drawer, and took out money here and there when I needed things.” The tax refund’s association with the ability to save was part of what made it so prized. Tiffany Grier, a white 22-year-old single mother of two toddlers who worked as a store clerk, described why she liked the “enforced savings” function built into the tax refund system: “[The tax refund is] as good as putting the money in the bank. You just can’t take it out when you want.” If they had to save on their own, many families acknowledged that they would have drawn on the money for other expenses, so they would not have accumulated very much. Therefore, those dedicated to saving devised strategies to make their money harder to access, like using a passbook-only savings account in another town or giving it to a relative for safe keeping. It was common for families to describe saving for reasons that looked more like precautionary savings or deferred consumption than as a way of building assets or long-term investments in the future. Like Angela, most parents would “pinch off” their saved refund dollars over the ensuing months as needs and wants arose, enabling an ease of spending and a sense of financial security not experienced during other times of the year. As we noted above, most parents spent a large portion of their saved refund dollars within about six months; parents who had experienced a shock were less likely to still have savings at this point than were those who did not report such instability (21 percent versus 32 percent). Durable Goods Economists and policymakers typically think of precautionary savings as money that is saved for future consumption in the event of a loss of income, but we found that families viewed some of the goods they bought in this way as well. In particular, many viewed the purchase of durable goods as a means of smoothing their future consumption by increasing their independence, providing stable access to employment, and, anticipating future consumption needs by making purchases when money was available. Such “precautionary spending,” as we call it, was more common among those who had experienced a shock: they were more likely to spend refund money on a car (31 percent versus 8 percent), furniture (33 percent versus 20 percent), and clothing (57 percent versus 28 percent). Marisa Castillo, a 49-year-old Hispanic mother of five, was separated from her husband; he had not been contributing anything to the family from his disability check (he had terminal cancer). She decided to use a large portion of her $5,000 refund check to put a down payment on a car and pay for a year’s worth of insurance, costing her $2,500 in total. “We needed a good car. I did not have my husband with me anymore … So we decided to buy the car because we had this very old car.” While Marisa had dreams of using her refund as the down payment on a house, she ultimately concluded it was not practical at this point, and so she set her sights on the car. The car helped to buffer the loss of income and reliable transportation that resulted from her husband’s illness and their separation; it also ensured that they would be less reliant on family and friends (or an unreliable old car) when they needed transportation to work and school. Linda Valdez was a 41-year-old Hispanic single mother of two elementary schoolers. During our visit to her apartment in a South Boston housing project, she proudly showed off the bedroom set she bought for her daughters using her tax refund: two white twin beds and dressers, decorated with small flowers painted on the drawers; they previously had shared her mattress each night. She did not earn much at her part-time cleaning job, and since her daughters’ father left her for someone else, he had not helped a lot financially. Before they recently started getting SNAP, they had sometimes run short on food between paychecks. With her refund check, Linda was also able to make the more expensive clothing purchases her girls needed: sneakers and school uniforms. She was thinking ahead to the upcoming school year, six months away, when her youngest daughter would join her eldest at public school. Come fall she knew she would not have the cash on hand to make such purchases. The refund check bought them more stable finances—these purchases meant fewer demands on her finances in the future—and offered a greater sense of security that came from being able to provide the basic necessities for her children. This included both necessities in the present (like a place to sleep), as well as future obligations (like the school uniforms) that she might not be able to afford when times became lean again. Stockpiling Because the working poor and near-poor often live with financial uncertainty, it was not uncommon for us to hear stories of families using tax time’s windfall to buy in bulk at discount stores and fill pantries and deep freezers.7 These stockpiles helped to ensure that food would not run short when money got tight. Mariella Ambrosini was a white 57-year-old with three daughters; her emphysema kept her from working and secured her a monthly SSI check, while her husband worked seasonally in construction. A large shelf overflowing with pasta, canned goods, chips, and cereal sat prominently in Mariella’s East Boston apartment. She told us, “My big expense is food; my refrigerator gotta be full all the time. Otherwise I get very depressed.” Like Mariella, many parents saw their pantries as a basic gauge of how they were faring financially; not being able to feed one’s children meant financial, and personal, disaster. Brenda Hutchinson was a married, white school lunch aid in her late thirties who had two daughters. At tax time this year, they bought box upon box of pizza bagels, cases of soup, and over $400 worth of meat, which she stored in her mother’s stand-alone freezer. Brenda said, “I just keep them like stocked up so you don’t have to worry about running out of food, you know?” Another way parents “stockpiled” was by paying ahead on bills when their refund checks came. As Ashlee Reed, a 29-year-old white mother of three who worked as a preschool teacher, explained, “I do the monthly payments for the car insurance so I figure okay, let me just try to pay off all the insurance [with my refund], so that’s one less bill for the rest of the year …” Prepaying bills was one way families could free up earnings at a later date for spending on expected expenses and to guard against unplanned shocks. Paying Back Kin Approximately 20 percent of respondents received help from kin or romantic partners during a typical month, averaging just under $200 a month. There were two central kinds of monetary assistance from kin that families described receiving. The first included small cash payments and in-kind support, such as a gallon of milk, $20 for gas, or a new outfit for the baby. Respondents did not view this sort of help as a loan, and it did not come with an expectation of repayment. The second form of assistance was larger sums of money for major expenses, and these were seen as loans that required repayment. Given how tight finances were during the typical month, it was common for workers to wait until tax time’s lump sum arrived to make good on these debts. Among families in our study, tax time was the time of year to catch up on loans from kin, ranging from a few hundred dollars up to $2,500. On the lower end of this range is Sheri Frye, a white 29-year-old clerical worker and mother of two. When tax time arrived, Sheri was able to pay her sister the $500 she borrowed for Christmas gifts for her boys. At the other end of the spectrum, Ricardo Torres used tax time to give $1,600 to his kin. This 33-year-old, Hispanic father of three with a fourth on the way worked full-time as a cashier and part-time cleaning offices while his girlfriend (who he refers to as his “wife”) took care of the children and managed their household. The Torres’ situation illustrates the complexity of kinship support, as Ricardo used their tax time windfall both to send money to their families in El Salvador—approximately $600 this year—and to pay back loans from different family members—about $1,000 to his girlfriend’s mother. He described his conversation with his girlfriend’s mother, “She told me, ‘Don’t worry about it and pay me at the end of the year.’” Because she was someone the family turns to routinely for money in hard times, living up to their end of the bargain, and making the repayment at the expected time, was essential. Tax time offered the opportunity to do so, and, in fact, the terms of the loan were made around the arrival of tax time’s expected windfall. Being able to settle those debts brought a sense of relief since outstanding obligations could be a source of stress or even tension in family relationships. Tamara Bishop, a 33-year-old black assistant preschool teacher and single mother of four, said that, come December, she was eagerly looking ahead to the arrival of tax time and the opportunity it offered to make good on her debts. “I try to like take care of people that I owe that are, you know, basically my mom because she gets her taxes every year and she saves every year, so we have her to go to. She’s like our bank in between.” For Tamara, withdrawals from this maternal “bank” were a regular occurrence during the year, with her borrowing to cover her $250 monthly grocery bills for the family as well as the $250 payments for her kids’ after-school programs, leaving her repaying a hefty $2,500 to her mother when her refund check arrived. Tamara kept a careful log of how much she borrowed from her mother throughout the year. Repaying this loan was important both to Tamara’s relationship with her mother as well as her future ability to borrow from her “bank.” Without her own tax refund, Tamara said, she would be “crying probably” and her mom “would stress too much [about] the money I owe her.” Paying Down Debts For a regular month—not during tax refund time—the typical household in our sample paid $173 monthly toward their outstanding debt and back bills, constituting 6 percent of their monthly expenditures; this sum does not include rent or regular monthly payments on items like furniture, appliances, or cars. This did not even come close to covering debt obligations for many. For this reason, tax season was often viewed as the time of year for paying off debts. Regardless of income or shock experience, most parents—approximately two-thirds to three-quarters—paid down debts at tax time. While paying off debts offers psychological relief, it also has a practical implication: it gives more space for the accumulation of debts in the future. While parents did not articulate this as the primary motivation for debt repayment, it nonetheless had this consequence. There is only so long you can go without paying your electric bill before services are shut off or skipping on your rent before you are evicted. Getting caught up means you can fall behind on such bills in the future when money is tight without risking catastrophe. Paying down debts, therefore, is in part a way of securing economic stability. Sharon Ingram, a 47-year-old black clerical worker with a 21-year-old daughter and a 15-year-old son, paid off her credit card debt in full with her refund. Sharon explained that she prioritized paying off bills to “just get a little ahead of the game. Just get a little ahead of myself. Just breathe a little better.” In February, Ashlee Reed got a refund check totaling $4,704—more than three times the amount that she brought home in an average month from her job as a preschool teacher. Much of her allocation decisions revolved around the financial consequences of being out of work during the summer, when school was not in session. Ashlee needed to be out of work for a week before she could apply for unemployment insurance, and once she did it often took three weeks for her first check to arrive, leaving her to cover a month without income. I try to save [a lot of my refund]. My goal usually, even though I don’t ever make it, is to have enough money saved up for the summer for when I go onto unemployment . . . That’s four weeks without pay if I don’t have anything saved up from when I was working. Instead of saving, however, Ashlee used her refund to pay off the debt she accrued each summer: her student loan, some of the principal on her credit cards, and overdue cable and phone bills. Even though she never managed to save, using her refund to pay down some of her bills and to pay ahead on others allowed Ashlee to face the summer’s financial crunch with more credit at her disposal, smoothing consumption before her UI check arrived. Taken together, we found that what appeared to be distinct types of allocations—debt repayment, saving, paying back kin, stockpiling, and durable goods purchases—often had the same underlying goal of improving a family’s economic security in the near term. These forms of what we call “precautionary spending” served as a safeguard against future shocks. For example, acquiring durable goods—like a car—made families more independent and gave reliable access to work and school; grocery shopping could include stockpiling goods for use during lean times ahead; paying back kin made the possibility of future assistance more likely; and paying down debts created, among other things, the option of future spending on credit. What might be viewed as current consumption by outsiders was actually a form of in-kind investment that occurred outside the purview of the formal banking system. Exceptions: Asset Builders While the bulk of refund allocations were focused on building personal safety nets as a precaution against future needs, we examined our sample to identify those who did apportion some of their tax refund for asset-building purposes: contributing refund dollars towards educational expenses or home investment, or keeping more than $1,000 from the refund in savings at least six months after tax time. In total, 27 families (23 percent) fell in this category, with 8 (7 percent) having allocated money to education, 7 (6 percent) to homes, and 14 (12 percent) with money in savings. This select group of asset builders shared some characteristics: they were more likely to be employed full time, have bank accounts, be older, be immigrants, and to have little economic insecurity. Just one in five families who had experienced an economic shock were able to use some of their refund for asset building, compared to over one third of those who experienced no shocks.8 Some asset builders also went to extraordinary lengths to cut back on their expenses in service of their savings goals, which resulted in significantly lower monthly expenses than non-savers ($2,140 per month for savers, on average, compared to $2,814 for non-savers) despite similar average monthly incomes. However, frugality does not appear to be a sufficient cause of saving; nor was kin support or institutional support from government or nonprofit programs. Rather, together frugality combined with economic stability and kin or institutional support made saving more feasible. Linda Valdez, who purchased the bedroom set for her daughters, was among the relatively rare group who was able to keep part of her refund in long-term savings. Like many other asset builders in our sample, she had a bank account, was an immigrant, and, at 42, was older than the 35-year-old average age. Linda received just over $6,000 between her federal and state refunds, and she spent about $3,000 of that buying furniture and other items for the house and clothing for her daughters. The other $3,000, she explains, she deposited into her brother-in-law’s bank account since she, as a public housing resident, would see her rent increase were she to have a substantial sum in her savings account. Linda’s ability to save was in part due to her financial planning and frugality—she had calculated, based on the dates of her paychecks and bills, exactly which day each month she must pay each bill. She only had one credit card with a $200 limit that she paid on every month. She avoided many of the purchases other families made, like movie rentals or a cell phone. Her ability to save was also due in part to the government assistance programs available to her, including public housing, MassHealth, and SNAP. Also, her frame of reference was informed by her status as an immigrant. She remembered growing up on her family’s farm in Honduras, where they lacked enough money to buy shoes or bread; her father would hunt armadillos and iguanas to feed his children. Her current meager budget seemed relatively plentiful by comparison. Juliana Soto was also an asset builder, and she and her family lived very frugally, fueled by dreams of mobility. When we interviewed Juliana, she and her husband, Diego, had just realized one of these dreams: the parents of two had bought a single-family house in a working-class suburb. Juliana and Diego, now in their thirties, moved into public housing when she got pregnant at 18; Juliana went on welfare when their children were young. After both landed stable jobs, they continued to live in public housing until they purchased their home. Juliana does not have fond memories of her life in public housing, recounting rats, roaches, and “disgusting neighbors.” One day, she recalled saying to Diego, “I’ve been here long enough. I can’t do it anymore. I have to get out.” Many families in our sample talked of wanting desperately to get out of public housing but few managed to do so. How were Juliana and Diego able to achieve this goal? First, both had long-term, stable jobs with benefits, and their 12-year marriage allowed them to pool their resources. Juliana had worked for eight years as a receptionist at a financial services company, and she cashed out her company 401k to help with their down payment. Diego worked first as an EMT and then as a physical therapy assistant at a local hospital; he got medical insurance and tuition assistance through the job, which he used to earn his associate’s degree. Second, the Soto family lived quite frugally for the ten years it took them to save the $10,000 down payment, which they were able to save while living in public housing by keeping Diego off of their public housing lease. As Juliana remembered, “I scrimped on everything. I got my bills paid, got the food, and then we budgeted everything … If I had ten dollars left over, there it went [into the house savings account].” As in the past, this year they used their tax refunds to pay off credit cards and boost their credit ratings in anticipation of buying the house. They devoted the rest of the refund to expenses related to the home purchase: closing costs, home inspection, and a moving truck. They also had some help in realizing their mobility dreams: they got home ownership counseling and affordable mortgage terms through MassHousing, a local non-profit specializing in affordable homeownership. In this study, we argue that volatility of income and expenses necessitate that workers use their tax refund’s windfall to “self-insure” via short-term saving, purchasing durable goods, stockpiling, and paying down debts. Implied is that in the absence of such economic instability, families would make fundamentally different allocation decisions. While we are limited in our ability to examine this counterfactual directly, the group of asset builders in our sample does offer some support for this argument. For instance, they were likely to have more secure employment situations, offering the financial stability necessary to divert refund dollars from building a personal safety net to investments with the potential for upward mobility, like educational expenses, home purchase or repair, or long-term, substantial savings. Similarly in support of this argument, we saw that those who did not report experience with shocks were more likely to save in traditional ways at tax time and to maintain this money in savings over the subsequent six months. CONCLUSION Using data from a sample of 115 lower-income working families who received the EITC, we found that workers leveraged their tax refund dollars into multiple forms of self-insurance to cushion against future income and expense shocks. In contrast to in-kind benefits, refund dollars can potentially be spent in any way recipients choose; in this universe of possibilities, we saw that they engaged in what Ulrich Beck (2007) termed “in sourcing” (p. 682). Allocations made to seemingly distinct categories of expenditures—like debt, current consumption, durable goods, and savings—were often done with the goal of ensuring economic security for the present and near future. In addition to precautionary savings, families made other precautionary investments in anticipation of lean times ahead by paying off debts and kin obligations, purchasing durable goods that promoted economic independence and security, stockpiling food and other household goods, and paying ahead on bills and other expenses. Engaging in these alternative savings strategies was particularly common among those who reported recent experience with a financial, family, health, or other shock. These findings challenge the assumption that low-income households hold different orientations toward finances than middle-class households. The households in our sample held aspirations for upward mobility that correspond strongly with those of middle-class Americans, but they did not feel they had the luxury of setting aside resources for long-term goals given the instability and insecurity of their work and family lives; instead, they invested their refunds in more precautionary ways. The current study suggests that families may be engaging in a variety of savings-like behaviors that are misunderstood as consumption or debt payment, which calls traditional categorizations of expenditures into question. These findings suggest the need for a broader definition of precautionary assets that extends beyond savings in the bank and does not contrast consumption and investment as mutually exclusive possibilities. Future research on household expenditures and financial decision making—such as work on economic coping strategies, wealth and consumption inequality, and financial investments in children—should incorporate this broader conception of saving and spending behaviors. Our results also shed light on the “puzzle” of why EITC recipients do not invest more of their refund dollars in traditional assets like home ownership, education, or stocks.9 Given the instability and insecurity of their work and family lives, they did not have the luxury of setting aside resources for a distant future because they viewed their current needs as pressing and unpredictable. This did not mean that they had no aspirations for traditional forms of economic mobility, like better jobs, better homes and neighborhoods, or ample savings; in fact, mobility dreams were strong and persistent, despite repeated setbacks. But these dreams must be put on hold in order to invest in a protective way. In this way, the meaning and psychological nourishment that comes at tax time may be distinct from its more concrete utilities. It fuels dreams for the long-term future, while helping to provide security over the short term. Even though their precautionary investments might not move them very far up the income ladder, families did feel better off knowing that they had a more secure footing on that ladder. The use of the refund to foster economic security likely has important material, as well as psychological, benefits for low-income workers and their families and perhaps explains why EITC receipt results in less food insecurity and consumption volatility (Athreya et al. 2014; Shaefer et al. 2013). Some might question why parents chose to spend the refund money in the short term on durable goods and stockpiles that would not be needed for several months rather than saving this money and then making purchases, such as school uniforms and food, as these needs arose. Families’ preferences for future-oriented consumption was in line with their appreciation for the “forced savings” function of the tax refund; many told us that were they to have the money on hand, it would be claimed by expenses and treats in the interim, leaving them short when these anticipated expenses demanded payment. Work in economic psychology demonstrates that times of financial abundance might offer greater clarity in decision making, as parents are freed from the typical stresses and distractions of making ends meet (Mullainathan and Shafir 2013). Tax refund time may offer just such a window, and the research on resource scarcity indicates that parents might be wise to make their allocation decisions in this period. By pre-purchasing items and pre-paying bills, parents ensure that they have spent their available dollars in their most preferred way. Our study is not without limitations. In particular, the set of families captured in our sample is not representative of all EITC recipients. This was a place-based sample, drawn from an urban area with high housing costs and relatively generous public housing assistance; it is possible that results could be different elsewhere in the country. Further, while many EITC beneficiaries do not get the credit more than one year in a row and some also only receive a small sum (Dowd and Horowitz 2011), most of those in our sample received a substantial check at tax time and expected to do so year after year. As a result, respondents in our sample may be more likely than some EITC recipients to use their refunds as self-insurance and less likely than some to view the refund as a one-time windfall. Our results have important implications for policy and program design. There is growing interest among policymakers in leveraging tax time as a “magic moment” to encourage workers to make deposits in savings accounts or other savings vehicles like bonds (Grinstein-Weiss et al. 2016; Harris 2013; Tufano, Schneider, and Beverly 2005). Attempts to incentivize families to engage in more traditional savings behaviors at tax time should gauge their achievements cautiously. Plusher savings accounts should not be taken as the only measure of success, as this may simply be a trade-off with other investments in economic security that may also have value, like purchasing durable goods, stockpiling, or paying back debts. For savings promotion programs to truly be deemed a success, they must actually show an improvement in participants’ wellbeing. To be worthwhile, savings programs must provide more benefits to participants than the personal safety net strategies they currently pursue on their own. Policymakers have also considered disbursing the EITC in smaller periodic payments during the year rather than in a single lump sum at tax time (Holt 2015). The large lump sum makes the EITC unique among anti-poverty programs because it offers families unusual opportunities to make investments and expenditures that they could not make in a typical month. It also fuels mobility aspirations in a way that no other means-tested program does (Halpern-Meekin et al. 2015; Skyes et al. 2015). From the participants’ perspective, other government safety net programs did not fully buffer against the regular sources of economic insecurity that they faced, such as lost wages and fluctuating expenses, often derived from financial, family, health, or other shocks. Until their incomes are more stable, or until a more robust system of public and private insurance can cushion against that income instability, it is unlikely (and perhaps unwise) for EITC-eligible households to direct more of their refunds toward long-term economic mobility purposes. The authors thank the Ford Foundation for funding the data collection. Previous versions of this article were presented at the annual meetings of the American Sociological Association and the Association for Public Policy Analysis and Management in 2014. Direct correspondence to: Laura Tach, 253 Martha van Rensselaer Hall, Cornell University, Ithaca, NY 14853. Email: lauratach@cornell.edu. Footnotes 1 At the H&R Block and VITA locations, respondents had just filed their taxes when they filled out our survey. At the Head Start centers, respondents had filed their taxes recently, typically within the past month. 2 The interview team consisted of six female graduate students and faculty, including two interviewers of color and one interviewer fluent in Spanish. 3 Our interview guide did not ask explicit questions about financial insecurity; these experiences emerged spontaneously in response to a range of different questions throughout the interviews. Respondents brought the events up to us because they were a significant part of their family’s economic story. Thus, this is not an exhaustive list of all of the financial insecurities experienced by our interviewees—there are surely even more experiences of insecurity than we have cataloged here; that is, our analyses likely underestimate the role of shocks in shaping families’ tax time allocations. 4 Because the interviews focused on respondents’ current and recent financial situations, generally within the last five years, we restricted the coding of shocks to that time period as well. 5 Refunds can be garnished for child support arrears and educational loans, for example. 6 This is likely because we purposely sampled a low-income group, basing sample eligibility on EITC receipt. 7 We were not able to measure the incidence of stockpiling quantitatively as these purchases are defined by differences in degree, not in kind, therefore classifying the purchase of a certain amount of cold cereal, for example, as stockpiling or not was not possible quantitatively in this data. 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Social ProblemsOxford University Press

Published: Mar 13, 2018

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