# Presentation: 063666

## Policy Approaches for Saving and Asset Building by Low-Income Americans FDIC Advisory Committee on Economic InclusionMarch 19, 2008

- Ray Boshara
- New America Foundation
- Washington, DC
- 202-986-2700
-  _[boshara@newamerica.net](mailto:boshara@newamerica.net)_
- _[www.newamerica.net](http://www.newamerica.net/)_

## Goals for Today

- To convey the most important research findings for low-income persons to save and build assets
- To articulate a forward-looking public policy agenda for low-income persons to save and build assets
- To offer specific recommendations for the FDIC

## I.  Key Research Findings

- Low-income persons can save and build assets
- Low-income persons have multiple savings needs, not just for savings that lead to productive assets
- Individual characteristics – education, employment, welfare receipt, and even income – matter little in predicting savings and asset accumulation by low-income persons
- Program or “institutional” characteristics matter a lot in predicting saving and asset accumulation by low-income persons
- Holding assets appears to lead to positive social, behavioral, psychological, civic and other outcomes for children and adults

## IDA Monitoring Research:Can the Poor Save in IDAs?Number of Accountholders: 2,364.  Mean participation: 24.5 monthsSchreiner et al., 2002

-    _Savings Performance_
- Average monthly deposit: $19 net, $40 gross
- With average match of 2:1, total savings was $700 per year
- Withdrawals:
- 46% home purchase/repair
- 23% microenterprise
- 18% small business
- 64% made unmatched withdrawals
- 51 cents was saved for every dollar that could have been matched

-    _Regression Results_
- Income not correlated with saving
- Each dollar increase in monthly savings match cap is associated with a 40-50% increase in average savings
- Total amount matched (match cap) matters more than match rate (e.g., 1-1 vs. 2-1)
- Financial education is correlated with greater savings, but only up to 10 hours
- Participant characteristics matter little

## IDA Experimental Research: What’s the Effect of IDAs on Savings and Asset Accumulation?Sample size: 840 (412 treatment, 428 control).  Time: 48 months Mills et al., 2004

| Homeownership | Significant positive effect, esp. for African Americans |
| --- | --- |
| Real assets and total assets | Positive effect for subgroups that experienced increases in homeownership |
| Retirement savings | Positive for African Americans |
| Liquid assets | Negative (due to acquiring other assets) |
| Liabilities | Negative (due to acquiring other assets) |
| Net worth | No measured effect (but this finding is disputed) |
| Educational attainment | Significant positive effect (whether one had taken a non-degree course) |

## Institutional Determinants of Savings 

- Focus of assets field has evolved:  *Program **** Product **** Plan*
- Institutional Determinants of Savings (Sherraden *et al*.)
- Access (is a savings plan offered)
- Information (financial education)
- Incentives (tax break or match)
- Facilitation (someone does it for you)
- Expectations (match caps or savings goals)
- Restrictions (contribution limits, limits on uses)
- Security (is the money safe)
- Convergence with behavioral economics

## The Effect of Savings Plans and Defaults

- Auto 401(k):
- 	_Employee_   	_Opt-in_    _Opt-out_
- 	Females	35%	  86%
- 	Hispanic	19%	  75%
- 	Under 20K	13%	  80%
- Auto Escalation: “Save More Tomorrow” trial was shown to lead to a substantial increase in contribution rates over time
- IRA participation (voluntary): 5-15%
-      401(k) participation (structured savings plan): 75%
- Split Refunds experiment: Participants saved $606, or 47% of their refunds
- The one-fourth with prior savings saved $924 – a 90% increase in their savings
- Those three-fourths with no prior savings saved $479

## Research on Asset EffectsSummarized by Sherraden, 2005

- Holding assets at 23 is associated with later positive outcomes such as better labor market experience, marriages, health and political interest. (Bynner & Paxton, 2001)
- The presence of the asset appears to matter more than the monetary value of the asset. (Bynner & Paxton, 2001)
- The presence of small wealth at critical times can have “transformative” effects on the life course. (Shapiro, 2004)
- Parental wealth is positively associated with cognitive development, physical health, and socio-emotional behavior of children – even in very poor families. (Williams, 2003)

- Wealth seems to be a better predictor of well-being as children grow older, while income is a better predictor when they are younger.  (Williams, 2003)
- Low-income, single mothers’ assets are positively associated with children’s educational attainment.  (Zahn and Sherraden, 2003)
- Income is associated with educational achievement when assets are not in the model.  However, income becomes non-significant when assets are included.  (Zahn and Sherraden, 2003)
- Assets lead to positive attitudes and behaviors, and positive attitudes and behaviors lead to assets may be a glimpse of a “virtuous cycle” wherein household development is a reinforcing feedback loop.  (Yadama and Sherraden, 1996)

## II.  Policy Agenda – Lessons and Guidance

- Small changes to existing products and systems can generate significant new savings and assets for low-income persons
- Operate on a two-track agenda: Pursue low-cost ideas aggressively, while laying the foundation for enacting bolder policies as opportunities arise
- To achieve scale and sustainability, saving and asset accumulation by low-income persons must be profitable for financial institutions
- Make saving easy, automatic, and frequent – ideally in “plan” structures

## Policy Agenda(see Assets Agenda for details)

- Establish lifelong savings and asset-building accounts at birth
- Promote products and plans for flexible savings
- Improve access to wealth-building financial services and effective financial education
- Connect tax refunds to transaction, savings and asset accumulation products and plans
- Promote matched savings for the working-poor for higher education, small business development, homeownership, and retirement

- Rebuild the U.S. Savings Bond program
- Encourage progressive state-based “529” college savings plans
- Revise or eliminate asset limits in public assistance programs
- Improve established micro-enterprise, post-secondary education, homeownership, and retirement security programs
- Strengthen laws to protect assets; distinguish “good” debt from “bad” debt

## Lower-Cost Policies

- Realize the full potential of Split Refunds and Auto401(k)s
*Split Refunds*: $82 billion/yr. in refunds for AGI < $30,000
*Auto401(k):* $75 billion/yr. increase in savings by low-income workers
- Enact the *New Savers Act*
- Improves access to wealth-building financial services
- Creates Young Savers Accounts
- Gives Savers Credit for contributions to 529s and Coverdells
- Revives and promote Savings Bonds
- Improves transparency and progressivity of 529s
- Promotes financial education, savings and asset accumulation at tax time
- Enact the *Automatic IRA Act*
- Encourages employers not offering a 401(k) to facilitate automatic payroll deposits from employees into IRAs
- Revise asset limits in the Food Stamp Program (Farm Bill)
- Excludes IRAs, 529s and indexes/raises existing limit to inflation

## Savings Accounts for Children

- _United States_
*In Congress:*
- ASPIRE Act
- Plus Accounts
- Baby Bonds
- Young Savers Accounts
- 401Kids
*In States:*
- 529s at birth
- Matched 529s
- Commissions/Task Forces
*Commercial*
- Young Americans Bank
*Research/Policy Initiative:*
- SEED Initiative

- _Around the World_
*Established in Law/National Policy:*
- Child Trust Fund (UK)
- Canada Education Savings Program
- Baby Bonus, CDAs (Singapore)
- Child Development Accounts (Korea)
*Commercial Financial Institutions:*
- Hatton Bank (Sri Lanka)
- Children’s Mutual (UK)
- Barclays (Uganda, Ghana)
- Equity Bank (Kenya)
- Banco Estada (Chile)
- ICICI (India)
- ANZ (Australia, New Zealand)
- HSBC (Sri Lanka)
- XacBank (Mongolia)

## III.  Recommendations for the FDIC – Part One

- Provide Clarity
- Complete work to clarify FDIC insurance coverage for individuals in pooled and non-traditional accounts, particularly with prepaid products
- Tie CRA credit to offer and take-up of meaningful savings products
- Work with other regulators to promote greater transparency in disclosures of terms, fees, and charges of traditional banking products and new products coming on line
- Promote and Research Innovations
- Utilize existing alliances, such as the eight Alliance for Economic Inclusion Regional Initiatives, to deliver or pilot savings initiatives in states or communities
- Promote sweep account products that automatically move money into a higher yielding savings vehicles (after a certain balance is met)
- Focus attention on the nature of, restrictions on, and usage of the savings accounts tied to small-value loan products in the FDIC pilot
- Revive and promote a modern version of the “Credit Builder Account,” which builds savings, establishes a credit score, and leads to a reasonably priced mortgage

## Recommendations for the FDIC – Part Two

- Promote savings and asset accumulation, especially through automation
- At tax time
- At the workplace
- Tied to consumption
- Tied to shorter-term loans
- Tied to mortgages
- Promote savings accounts for children
- Encourage banks to expand and promote savings programs for kids, especially in schools
- Encourage Congress to authorize Young Savers Accounts (Sen. Baucus)
- A “Kids Roth” – a lifelong, tax-benefited product that allows parents and others to contribute to a child’s YSA (contributions governed by parents’ earned income)
- Permissible, penalty-free withdrawals already include first-time home purchase and post-secondary education, in addition to retirement
- Contributions to YSAs from low-income households qualify for the Savers Credit
- YSAs fully excluded from determining eligibility from all means-tested programs

## Selected References

- Sherraden, M., and Boshara, R (forthcoming). Learning from Individual Development Accounts. In Lusardi, A. (ed).  *Improving the effectiveness of financial education and savings Programs. *Chicago: University of Chicago Press.
- Boshara, R., Cramer, R., and O’Brien, R. (2007).  *The assets agenda.*  Washington: The New America Foundation.
- Boshara, R.  (2005).  *Individual Development Accounts*.  Washington: The Brookings Institution.
- Beshears. J., Choi, J., Laibson, D., & Madrian, B. (2005).  *The importance of default options for retirement savings outcomes: evidence from the United States.* Turin: Sixth annual conference of The Center for Research on Pension and Welfare Policies.
- Bynner, J.B., & Paxton, W. (2001). *The asset effect*. London: Institute for Public Policy
- Meyer, J., Zimmerman, J., Boshara, R.. (forthcoming). *Global trends in child savings accounts.* Washington: New America Foundation.
- Mills, G., Patterson, R., Orr, L., & DeMarco, D. (2004). *Evaluation of the American Dream Demonstration*, final evaluation report. Cambridge, MA: Abt Associates.
- Schreiner, M., Clancy, M, & Sherraden, M. (2002). *Saving performance in the American Dream Demonstration*, research report. St. Louis: Center for Social Development, Washington University.
- Shapiro, T. (2004). *The hidden costs of being African-American*. New York: Oxford University Press.
- Sherraden, M. (2005). Testimony for Hearing on “Building Assets for Low-Income Families” Subcommittee on Social Security and Family Policy.  Washington: Senate Finance Committee.
- Williams, T. (2003). *The impact of household wealth and poverty on child outcomes: Examining asset effects*, doctoral dissertation, Washington University in St. Louis.
- Yadama, G., & Sherraden, M. (1996). Effects of assets on attitudes and behaviors: Advance test of a social policy proposal, *Social Work Research *20(1), 3-11.
- Zhan M., & Sherraden, M. (2003). Assets, expectations, and children’s educational achievement in single-parent households, *Social Service Review *77(2), 191-211.