Savings Incentives for the Poor

The problem of poverty in America looms large even in the best of times. The most recent economic boom got the share of those officially deemed poor down to 11.7 percent, or about 33 million persons, but poverty rates are much higher for economically vulnerable groups such as single mothers, African Americans and Hispanics. Advocates of savings incentives and other asset-building programs for the poor convincingly and passionately make the case that while low incomes are the proximate cause of poverty at any point in time, the inability to accumulate wealth is what keeps people and their families stuck in poverty for generations. As Ray Boshara, who directs the asset-development program at the New America Foundation, wrote in a recent New York Times op-ed, "Lack of income means you don't get by; lack of assets means you don't get ahead." Income supports are a necessary palliative; asset building could be curative.

The asset-building idea that has gone farthest politically and has the greatest bipartisan support is the Individual Development Account (IDA), a subsidized savings account. IDA demonstration projects currently going on around the country, funded by a 1998 federal pilot program and by nonprofit groups, work like this: Low-income persons make deposits to an IDA and their withdrawals -- so long as they are for approved expenditures, such as education, housing or an independent business -- are matched at a multiple, typically 2-to-1 or 3-to-1. The amount of dollars matched is capped to control program costs. The approach combines a savings incentive with a form of income distribution, in the hope of encouraging the poor to acquire the financial habits of the middle class. What could be wrong with that?

A common objection from liberals is that IDAs are fine as far as they go, but the poor can't save enough to make much difference, even with the incentive of generous matches. This, by itself, wouldn't be so bad, critics say, but the effort that think tanks, advocates and policymakers are putting into asset development is taking energy and resources away from other activities that could make a difference.

Research on IDAs does suggest, not surprisingly, that most of the poor are hard pressed to save much. Michael Sherraden, the grand old man of asset-building policies for the poor, and his colleagues recently completed what they call "the first systematic study" of IDAs (available at http://gwbweb.wustl.edu/). They found that low-income participants were only able to put away a net value of about $20 per month on average, with a median of about $10, leading to annual average accumulations -- including the average 2-to-1 match -- of around $700. It's hard to imagine that this level of saving could generate the kinds of investments that can change the economic trajectory of a poor family.

What's more, it is a select group of low-income persons who have volunteered to participate in the current demonstration programs, so the study results probably represent the upper end of what most low-income persons likely can save. As Sherraden et al. report, relative to all low-income families, the participants studied were "better educated, more likely to be employed and more likely to have a bank account." Sherraden also found that two-thirds of the participants made unmatched withdrawals from their IDAs. That's strong evidence of how cash-strapped these poor savers are: They sacrificed $2 later because they needed $1 now (though advocates correctly point out that some of these folks were just using the program to get low-cost banking services).

On the other hand, for the minority (about one-third) of participants who made approved, and thus matched, withdrawals, the average value of their savings plus the match was about $2,500. And a small number of these participants were able to purchase homes or micro-enterprises, or pay for higher education. Presumably these people didn't finance their acquisitions on the basis of the IDA alone, but it surely helped.

So while the poor can't save much, they can save a little (and some more than a little), and the match is clearly redistributive, just like the income-based programs that progressives widely support. Advocates of asset-building programs stress other positive attributes, too. In the demonstration programs, some families put their Earned Income Tax Credit refund in an IDA and got a double-shot of redistribution, as well as a nest egg.

As a matter of practical politics, IDAs have captured the support of Republican legislators hostile to other strategies of income redistribution. Archconservative Sen. Rick Santorum (R-Penn.), for example, is one of the sponsors of a bipartisan IDA bill in the current Congress, which proposes to spend $500 million to create 300,000 IDAs. Does anyone seriously think that, absent IDAs, he'd be suggesting we use those resources to strengthen, say, labor law enforcement?

Some of the skepticism among liberals reflects worries about the individualistic political consciousness embedded in this approach. And indeed, Richard Nadler of the American Shareholders Association, in an article for the Cato Institute (which supports IDAs), predicts that new asset holders will "internalize their new role as capitalists." There's also the legitimate concern that too much emphasis on incentivizing saving distracts us from the structural causes of poverty.

For the most part, what holds back the poor is neither their personal desire to save (or not to save) nor the unfair tilt in the tax code that creates lucrative savings vehicles for the wealthy. What stands between the working poor and their fair slice of the economic pie is their lack of political power in the policy arena and lack of bargaining power in the labor market. The latter is particularly germane in the era of welfare reform, as the working poor get stuck in low-end jobs without union representation, receiving not even a living wage, much less a fair one. When unemployment was low for a few years in the late 1990s, employers had to jack up wages and even low-wage workers were able to claim a share of the national prosperity, but that was an anomalous period in the context of the last three decades, and those days are behind us.

Low-wage workers today are subject more than ever to the vicissitudes of the marketplace, their economic opportunities dictated by a Congress that consistently fails to represent their interests. As noted, these politicians, even the conservative ones, may vote to extend them a matched savings plan, allow them to keep a few more assets and still get food stamps, or, like President Bush, favor increasing the size limits on IRAs (as if that were constraining the poor's ability to save). But when it comes to spending real money, if the politicians redistribute at all, they do so in the wrong direction.

IDAs, at least in their current incarnation, don't do much to challenge this status quo. (Though, in fairness, neither do food stamps nor even the Earned Income Tax Credit.) Each of these programs does redistribute some resources to the poor, and that's helpful. But they fail to shift the power dynamics in such a way as to alter the primary distribution of income, to ensure that the fruits of economic growth are fairly shared with those who create them.

After looking closely at the lay of the land, I find it hard to make a connection between the goals sought by champions of asset broadening and their horse in the race, IDAs. The real problem, it seems to me, is not the concept of IDAs, which is sound enough, but their possible magnitude in the present political climate.

For asset-building policies to have the transformational impact that their supporters desire, they need to be much bigger and bolder. This is widely realized by those in the movement, who frequently talk about "going to scale."

In fact, when they reminisce about great asset-broadening policies of the past, advocates invariably invoke the Homestead Act and the GI Bill. These were, of course, large and universal programs that didn't nibble at the edges of redistribution; they aggressively sought to remove class barriers and create real equality of opportunity. If we want low-income persons to acquire a meaningful asset -- to own a home or a business -- we probably have to go well beyond even generous IDAs.

Ray Boshara has a big idea in this spirit. He argues that for $24 billion per year, we could endow every child with a $6,000 savings account, which would grow over time. The savings could be spent only to acquire specified assets such as a home or higher education. The universality of this scheme is a strong political selling point. And while every child would get an account, it would mean more to the poor. However, the program could be made more progressive by raising the amount for low-income children and adding a phase-out at high-income ranges.

Such policies needn't pose an either/or choice for liberals. There's nothing stopping us from fighting for them while pushing for better income supports as well as programs that lift the bargaining power of the least well-off. And when all is said and done, of course, it's hard to imagine anything transformative occurring in any realm of social policy absent a major shift of political power to the left.

Without doubt the poor need assets, and policies that help the poor accumulate them deserve support. But we can neither save nor incentivize our way out of poverty. We still need a better income-based safety net, higher minimum wages, lower unemployment, fairer tax policies, more refundable tax credits, more unions, better protections against discrimination and so on. And we must be mindful that the growing gulf between classes in our political economy translates into highly skewed power relations, a reality that explains why even promising approaches such as IDAs are kept at token levels rather than the scale of the GI Bill.

See responses to this article from Michael Sherraden of Center for Social Development, and Ray Boshara of the New America Foundation

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