U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

26–852—PDF 2005

S. HRG. 109–357

BUILDING ASSETS FOR LOW - INCOME FAMILIES

HEARING

BEFORE THE

SUBCOMMITTEE ON SOCIAL SECURITY

AND FAMILY POLICY

OF THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

APRIL 28, 2005

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

SUBCOMMITTEE ON SOCIAL SECURITY AND FAMILY POLICY

RICK SANTORUM, Pennsylvania, Chairman

CHARLES E. GRASSLEY, Iowa

JIM BUNNING, Kentucky

BILL FRIST, Tennessee

TRENT LOTT, Mississippi

JON KYL, Arizona

GORDON SMITH, Oregon

MIKE CRAPO, Idaho

KENT CONRAD, North Dakota

JOHN D. ROCKEFELLER IV, West Virginia

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Santorum, Hon. Rick, a U.S. Senator from Pennsylvania, chairman, Subcommittee on Social Security and Family Policy ............................................... 1

Lincoln, Hon. Blanche, a U.S. Senator from Arkansas ........................................ 2

Bunning, Hon. Jim, a U.S. Senator from Kentucky ............................................. 4

WITNESSES

Simmons, Michelle, account holder, Women’s Opportunity Resource Center

(WORC), Norristown, PA ..................................................................................... 5

Beale, Dorothy, account holder, Women’s Opportunity Resource Center

(WORC), Philadelphia, PA .................................................................................. 7

Palmer, Chuck, president, Institute for Social and Economic Development

(ISED), Des Moines, IA ........................................................................................ 9

Gonzalez-Rubio, Dr. Victoria, principal, Delmar-Harvard Elementary School,

University City, MO ............................................................................................. 10

Edelman, Ric, Edelman Financial Services, Incorporated, Fairfax, VA .............. 12

Wilson, Bernard M., vice president, Outreach and Business Development,

H&R Block, Kansas City, MO ............................................................................. 14

Sherraden, Dr. Michael, author of ‘‘Assets and the Poor,’’ professor, Washington University, St. Louis, MO ........................................................................ 23

Shanks, Dr. Trina R. Williams, professor, University of Michigan, Ann Arbor,

MI .......................................................................................................................... 25

Goldberg, Fred, Skadden, Arps, Slate, Meagher & Flom, LLP; former Commissioner of the IRS under President George H.W. Bush, Washington,

DC .......................................................................................................................... 26

Boshara, Ray, director, Asset-Building Program, New America Foundation,

Washington, DC ................................................................................................... 28

John, David, research fellow, The Heritage Foundation, Washington, DC ........ 30

Iwry, J. Mark, nonresident senior fellow, The Brookings Institution, Washington, DC ............................................................................................................. 31

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Beale, Dorothy:

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 39

Responses to questions from Senator Lincoln ................................................ 42

Boshara, Ray:

Testimony .......................................................................................................... 28

Prepared statement .......................................................................................... 43

Responses to questions from Senator Lincoln ................................................ 60

Bunning, Hon. Jim:

Opening statement ........................................................................................... 4

Edelman, Ric:

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 61

Goldberg, Fred:

Testimony .......................................................................................................... 26

Prepared statement .......................................................................................... 65

Gonzalez-Rubio, Dr. Victoria:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 72

Responses to questions from Senator Lincoln ................................................ 80

Page

IV

Iwry, J. Mark:

Testimony .......................................................................................................... 31

Prepared statement .......................................................................................... 82

John, David:

Testimony .......................................................................................................... 30

Prepared statement .......................................................................................... 140

Responses to questions from Senator Lincoln ................................................ 148

Lincoln, Hon. Blanche:

Opening statement ........................................................................................... 2

Palmer, Chuck:

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 149

Santorum, Hon. Rick:

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 154

Shanks, Dr. Trina R. Williams:

Testimony .......................................................................................................... 25

Prepared statement .......................................................................................... 158

Responses to questions from Senator Lincoln ................................................ 168

Sherraden, Dr. Michael:

Testimony .......................................................................................................... 23

Prepared statement .......................................................................................... 171

Responses to questions from Senator Lincoln ................................................ 192

Simmons, Michelle:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 194

Responses to questions from Senator Lincoln ................................................ 197

Wilson, Bernard M.:

Testimony .......................................................................................................... 14

Prepared statement .......................................................................................... 198

(1)

BUILDING ASSETS FOR

LOW - INCOME FAMILIES

THURSDAY, APRIL 28, 2005

U.S. SENATE,

COMMITTEE ON FINANCE,

SUBCOMMITTEE ON SOCIAL SECURITY & FAMILY POLICY,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:37 a.m., in

room SD–628, Dirksen Senate Office Building, Hon. Rick Santorum

(chairman of the subcommittee) presiding.

Also present: Senators Bunning, Conrad, and Lincoln.

OPENING STATEMENT OF HON. RICK SANTORUM, A U.S. SENATOR FROM PENNSYLVANIA, CHAIRMAN, SUBCOMMITTEE

ON SOCIAL SECURITY AND FAMILY POLICY

Senator SANTORUM. Good morning. Let me thank all of those

who are here this morning, particularly those who are going to be

testifying before the committee this morning, for being here.

I have a rather lengthy statement which I will put in the record,

without objection. Since I am the only one here—oh, I am sorry.

You snuck up on me, there. Thank you, Senator Lincoln. You are

not objecting though, are you?

Senator LINCOLN. No.

Senator SANTORUM. Good. [Laughter.] Well, thank you for being

here.

[The prepared statement of Senator Santorum appears in the appendix.]

Senator SANTORUM. This is a hearing that I have actually been

looking forward to doing for quite some time on an issue that I am

excited about, because it is an issue that, in what seems to be an

increasingly partisan atmosphere, has very strong and deep bipartisan support.

It is an issue of how we can work to bridge the wealth gap in

America, how we can work together to create opportunities for

ownership for lower-income individuals so they will have the ability

to be able to climb the economic ladder, whether it is through financial literacy, by having savings accounts, or small business, or

a home, or other financial assets in which they can become educated as to, again, moving up that economic ladder, or whether it

is the opportunity of just having that security to know that you

have a nest egg that you can fall back on, that you have other options available to you, that you are not just one paycheck away

from a life-changing experience for the worse.

2

All of those things are important elements of a policy that I

think the government has a role to play in, to create financial assets for lower-income individuals, to give them that security, to

give them that literacy, to give them that opportunity to improve

their lot in life and to move up the economic ladder of success.

So I am pleased. Senator Conrad and I are members of a bicameral, bipartisan caucus that is focused on asset accumulation

and bridging the wealth gap. There are ideas that have been put

out there.

Senator Lieberman and I, yesterday, introduced the Individual

Development Accounts bill, which I said yesterday, I hope that it

is the last time—it is probably the fourth time that we have introduced this legislation—we have to introduce this legislation, because that would mean it will have passed. We have come close

many times, but we have not been able to get it done. But with the

fact that the President has IDAs in his budget and that we have

strong bipartisan support this year, maybe this is something that

we can actually accomplish in this session of Congress.

Senator Corzine and I have introduced a piece of legislation

called the KIDS Accounts as part of the ASPIRE Act. Again, it has

bipartisan, bicameral support and is vitally important as a tool to

help younger people. In fact, it is a proposal that provides a

matched savings account for every child born in America.

So, every child will have the opportunity to have something of

their own, something that they can build on, something that can

realize the miracle of compound interest and investment over time,

all of those things which are right now, simply, and unfortunately,

not available to many children in our society. So, there are lots of

ideas out there.

We want to hear today from those who are participating in programs either at a State level or through private philanthropy that

are employing the ideas that I just spoke about, and other ideas,

to try to help change the dynamic for lower-income individuals in

our society.

So, I want to thank Chairman Grassley and Ranking Member

Baucus for allowing this hearing to take place. This is something

that is near and dear to my heart, and I know it is to Senator

Conrad and to Senator Lincoln.

I thank you for being here, and I know this is also important for

you, as someone who has worked hard on the CARE Act, on the

charitable giving bill, which is another part of this program.

I certainly appreciate your attendance and your support of these

efforts. I will now recognize you, if you would like to make an opening statement.

OPENING STATEMENT OF HON. BLANCHE LINCOLN,

A U.S. SENATOR FROM ARKANSAS

Senator LINCOLN. Well, thank you, Mr. Chairman. Certainly, we

appreciate you bringing us together to discuss building assets for

low-income families.

We all know that increasing personal savings and assets is critically important to our country, but it is enormously important to

putting people on a path away from poverty and towards financial

independence. That is why encouraging personal savings has been

3

one of my key objectives throughout our discussion on Social Security, as well as many of our other debates.

Being able to give low-income working families the ability to take

care of their children puts value in their families through the hardearned dollars that they work for. I worked very hard on the

refundability of the Child Tax Credit, and some other means with

which to try to allow families to be able to do all of what they want

to do on behalf of their families and to have the resources to do

that.

I think that is really critically important. I know that from my

own personal experience and upbringing, I am truly my grandfather’s child, who was enormously alarmed about unusual

amounts of debt. My grandfather pretty much put the fear of God

in me about that.

I have certainly some great concerns about the historic debt that

we are finding ourselves in, but also enormously alarmed with the

fact that the United States has the lowest national savings rate of

any industrialized nation. It clearly points to much of our societal

changes that we currently have the lowest savings rate, one of the

greatest nations, certainly in the history of the world.

But more and more, Americans find themselves facing financial

commitments that impair their abilities to save, whether it is the

fact that their wages have been stagnant for well over 7 years and

they do not have that expendable income to set aside, whether it

is that the cost of raising their families and providing for their families has increased without the increase in wages, has been a real

issue.

But we desperately need to change. I appreciate the Chairman’s

comments about financial literacy, which is absolutely essential. If

we do not begin to teach our children at a younger age the responsibility of balancing checkbooks and understanding what savings

can mean to them, understanding what borrowing means and what

kind of interest they can gain on an account that they start, regardless of what small amount they may put into it, but making

sure that they understand financial literacy and the repercussions

and consequences it has for them for the rest of their lives.

So we have an awful lot, I think, there that we can really move

forward on. I hope, with the leadership of many in Congress, we

will.

Just a couple of specifics. I am looking forward to exploring many

of those options today, and I apologize, Mr. Chairman, that I will

not be able to stay with you for the entire hearing. But the Individual Development Accounts are something that we have seen,

particularly in a State where we are disproportionately low-income,

which are assisted accounts that help low-income individuals save

for a variety of things: business start-up, first-time home purchase

or higher-education expenses.

One of the things I worked hard on before was the private mortgage insurance deduction, deductibility for home ownership and

trying to ensure that we can provide all of the tools that individuals need for home ownership, which we know is a forced savings

and an important way to provide individuals to save and to build

equity.

4

Additionally, the saver’s credit, which was created in the 2001

tax law, has encouraged savings among low- to moderate-income

individuals. It is a good tool, and I hope that we will look for ways

to build on the successes of both of these so that we can benefit

even more people in the future.

The last thing that I was kind of interested in bringing up, and

I hope we will hear from our panelists, is the Saving for Education,

Entrepreneurship, and Downpayment, the SEED initiative.

An organization in my State of Arkansas is currently participating in this initiative. In fact, the SEED accounts program is

being implemented in my hometown in eastern Arkansas, one of

the 25 poorest counties in the Nation, and it is helping families

successfully build long-term assets.

These are just a few of the programs that I think we already

have seen we can expand on. One of the key things, particularly

in terms of IDAs, is that those programs are not going to be successful unless we here in Washington support them, both in resources that are needed in the budget, and also in the tools that

individuals need to implement those programs.

So as someone who represents a State where 80 percent of my taxpayers have an adjusted gross income of under $50,000, and

over 50 percent of them have an adjusted gross income of less than

$25,000, these are innovative programs, like the SEED initiative

and others, that have an enormous opportunity to make an impact

on people’s lives in my own State, and certainly across the Nation,

if we look seriously at them, how we can improve them, reinforce

them, and make sure that people are aware that many of these

programs exist.

So, thank you, Mr. Chairman. I have lots more, and I am excited

about your interest here, and I look forward to working with you

in the subcommittee and the full committee, and I look forward to

our panelists.

Thank you.

Senator SANTORUM. Thank you, Senator Lincoln.

Senator Bunning?

OPENING STATEMENT OF HON. JIM BUNNING,

A U.S. SENATOR FROM KENTUCKY

Senator BUNNING. Thank you, Mr. Chairman.

I am pleased you have decided to spend time focusing this subcommittee on an important issue of helping low-income families to

achieve the American dream.

President Bush has talked a lot recently about developing an

ownership society. I believe so strongly in this principle. All individuals deserve the self-respect and independence that comes with

being in control of their own lives and destinies. I want every individual to know that they have a stake in the future of this country.

On a micro level, we see time and time again, an individual becomes a home owner and starts to feel an even stronger sense of

pride and dignity in their community than they ever did before.

They begin to feel strongly that they have a stake, not just in

their home, but in their communities at large. This pride shows

itself in ways that strengthen not just our society, but the individual and his or her family as well.

5

As one of our witnesses today stated in her written testimony,

‘‘It is the best feeling in the world to know I own something.’’

Today, I hope we will be able to explore more ways to ensure that

every individual in America knows that feeling. I know that we will

be a better Nation for it.

Thank you, Mr. Chairman.

Senator SANTORUM. Thank you, Senator Bunning.

I would now ask the panelists to come forward so we can have

our first panel of witnesses: Michelle Simmons, Dorothy Beale,

Chuck Palmer, Victoria Gonzalez-Rubio, Ric Edelman, and Bernard

Wilson, if they can all take their seats.

Let me thank the witnesses for coming. In particular, let me

thank Michelle and Dorothy, two constituents from southeastern

Pennsylvania. Michelle is from Norristown, who, as I mentioned

yesterday, was at a press conference with Senator Lieberman and

I, and Dorothy, from Philadelphia. Both are account holders of a

similar thing, an FSA account in Pennsylvania, but it is what we

call IDAs here on the Federal level.

We do not call them that yet because we do not have them done,

but we will call them that when we get this legislation passed. I

want to welcome them in particular for being here, and all of our

other guests. We certainly appreciate the financial expertise that

you bring to that. You bring different opinions, and we look forward to hearing those opinions.

But, please, Ms. Simmons, Michelle, would you begin your testimony? Thank you for being here.

STATEMENT OF MICHELLE SIMMONS, ACCOUNT HOLDER,

WOMEN’S OPPORTUNITY RESOURCE CENTER (WORC), NORRISTOWN, PA

Ms. SIMMONS. Thank you, Mr. Chairman. My name is Michelle

Ann Simmons, and I am a graduate of the Self-Employment Training Program and the Family Savings Account.

And if you hear me say ‘‘Family Savings Account,’’ that is what

it is known as in Pennsylvania, but here it is called the IDA. So,

I just want to make that clear up front, just to repeat what the

Senator just said.

I would like to tell you my story. For years, I was a hope-to-die

dope fiend, living in a cardboard box on the streets of L.A. I was

in and out of jail for 10 years.

I was released from prison, and I decided to try to break the

cycle of addiction, imprisonment, and making all the promises to

my children that I would be there. I knew I had to change or I

would die.

When I was released from prison, I moved back to Montgomery

County and had a difficult time finding employment and housing.

I wanted a job, and I did not want a job at McDonald’s. Not that

I have anything against McDonald’s, but it is real hard to work all

week and make $239, and your rent is $524. It is just so frustrating. And me, already being an ex-offender, having that X in the

box, it was real hard for me.

So, I wanted something viable, so I started to tell of my goals

and my dreams, and someone directed me to the Women’s Opportunity Resource Center. They said, maybe you should start your

6

own business. You have a big mouth, you like to talk, maybe you

could do something.

I went there, and there is where I learned about the FSA account

and the program. I was really encouraged when I heard about the

program because I had never gotten a gift, or anybody wanting to

help me or do anything.

From a very young age, I was abused and was told, ‘‘You are

never going to be anything,’’ ‘‘You are never going to have anything,’’ and that is the mentality that I had. Then here it is, after

10 years of being in prison, in and out, somebody told me, if you

help yourself, we are going to give you something else to help you.

They said, ‘‘What would you like to do?’’ I said, ‘‘I want my own

house.’’ They said, ‘‘Well, here is a program. If you begin to save,

then we are going to help you with your savings.’’ And it is not just

the money piece that the FSA is so great about, it is the educational piece. I learned how to save. I did not ever have a savings

account before I signed up for FSA.

I have never had a budgeting class. I did not know how important it is not to put my 50 cents in the soda machine every day.

You see, we just drop 50 cents in there every day and we think it

is just 50 cents, but my budgeting counselor taught me to add that

up after 7 days, and then add that up at the end of the month, and

that was a lot of money I was putting into that soda machine.

So, it was these little simple things that I learned by joining this

program. I think it is real vital that legislation get passed, whoever

needs to do it, because remember, I told you that I was on drugs,

hoped to die.

I saw the light, and gave my life to God. But there are so many

women in the same position, and men, that I was in, that just need

that break, that just need that hand up, not a hand-out. We do not

want to be giving anybody anything, but those that want a better

life, that want some education, that want to start their own business.

I remember, when I signed up for FSA, I was not sure if I was

going to get my house first or get my business, but I knew I was

not going back to prison, and I knew I was not going to continue

living that life.

There, I found different resources. With those resources, just

knowing that they were available, gave me motivation, gave me incentive that I could do this. There were programs that were going

to help.

One thing I would like to comment on, in closing, is what Senator Lincoln said about my children. My children used to be like,

‘‘Ma, why are you rushing down to the bank?’’ I said, ‘‘Because I

have to get it in by the 31st.’’ You have to save every month. They

just learned discipline from that.

I probably could go on for another half hour talking about what

this program has done for me and what it has meant for me, but

clearly it has given me new self-esteem, new self-worth. I now own

my own home. I now have my own business. I have a program for

women ex-offenders, and I go back out into the community and let

them know they can make it as well. With these programs, it just

gives them the boost that they need. All right. So, thank you.

[Applause.]

7

Senator SANTORUM. Well done.

[The prepared statement of Ms. Simmons appears in the appendix.]

Senator SANTORUM. Dorothy, thank you for being here.

STATEMENT OF DOROTHY BEALE, ACCOUNT HOLDER, WOMEN’S OPPORTUNITY RESOURCE CENTER (WORC), PHILADELPHIA, PA

Ms. BEALE. Thank you for having me. I just want to start out

by saying good morning to everyone on the panel, and all my fellow

people that are up here with me. I am a little nervous this morning

because I have never spoken in front of such important people, but

we are all ordinary people when you think about it.

So, I just want to start out by saying, good morning. My name

is Dorothy Beale, from Philadelphia, PA. I graduated, also, from

the same program that Michelle was speaking of, the Women’s Opportunity Resource Center, which has a family savings account program, which is also called the Individual Development Account,

also known as IDA.

I joined the program in 2003 as a single mother who was working and just could not get ahead. I had always dreamed of having

a house for myself and my three children. I was tired of throwing

my money away on rent and wanted something I could call my own

and one day pass on to my children. But I needed help.

At that time, my credit was, I like to say, tore up. I do not know

if anyone in here can understand that, but everyone has credit

issues. I will just explain it. You have good credit, then you have

fair credit, and poor credit. Well, mine was below poor. It was tore

up.

To fix my credit, I worked with a counselor at Acorn Housing.

That is a nonprofit housing council and agency that is in Philadelphia.

I paid off the small debts first and I wrote letters to the credit

bureaus to correct mistakes and negotiated payment plans with my

creditors to pay off the larger debts. It was a long, long process and

it took over a year, but I finally did it.

I also needed help saving towards a down payment. That was my

biggest issue. I had never saved before, and I learned about the

Family Savings Account program from Acorn Housing in April of

2003.

I went on to the IDA website, and that is how I did learn about

WORC, which is the Women’s Opportunity Resource Center. It is

a nonprofit organization in Philadelphia that serves low-income

women and their families through entrepreneurial training, and

they have family savings accounts and small business loans.

Their FSA—short for Family Savings Account—program would

help me to save towards a home and provide an incentive in the

form of matched funds. I learned I could save up to $2,000 over a

1- to 2-year period, and if I completed consistent savings and personal financial management classes, my savings would be matched

dollar for dollar. I thought, wow! Who is going to give you, for

every dollar you save, another dollar? I mean, I did not believe it.

So, the hard part for me was saving. I had never really saved before, like I said, and I needed something to discipline me. The perVerDate 11-MAY-2000 15:35 Apr 19, 2006 Jkt 095484 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 26852.000 SFINANC2 PsN: SFINANC2
8

sonal financial management classes at Women’s Opportunity Resource Center taught me to budget and track my funds. I thought

about unnecessary things that I was spending money on and started making small sacrifices towards a larger goal.

After a few months, it got easier. I began to get excited, determined, and disciplined. I saw my money grow and my credit score

rose. My confidence tipped the scales. It was the most beautiful

thing in the world to me and my children.

According to the action plan that I had developed with my program counselor at WORC, I saved $80 per month over a 15-month

period, and even deposited a lump sum from my Earned Income

Tax Credit to reach the $2,000 goal.

With the work I did on my credit, I was able to obtain a mortgage for $77,000, and with my $4,000 in savings and matched

funds, I was able to purchase my family’s first home in September

of 2004.

The most important thing is, this program has given me the opportunity to pass good budgeting and savings habits on to my children. While attending the program, I would take my children to

the grocery store and show them how they could save money when

shopping.

I would show them my bank statement so they could watch our

savings grow over time. I was able to teach them the difference between wants and needs, something I had learned, but did not use.

I also opened savings accounts in their names and they now

make regular deposits from their allowances and money they earn

from chores. The program got me thinking about other long-term

financial goals, such as retirement and my children’s college education.

I decided to start saving more in my 401(k) plan, and I also

opened college investment accounts for my children through Pennsylvania’s Tuition Account program. Pennsylvania’s State-wide

Family Savings Account program is very essential.

The program provided me with the structures, incentives, and resources to achieve my dream of home ownership and to secure a

sound financial future for my family. These are the keys to my

front door. Every time I turn these keys, my heart just overflows.

I am the one that Mr. Bunning quoted as saying, ‘‘It is the best

feeling in the world to know I own something.’’

Thank you for your time.

[Applause.]

Senator SANTORUM. Thank you, Dorothy. Terrific. Thank you.

[The prepared statement of Ms. Beale appears in the appendix.]

Senator SANTORUM. I thank both of you, and congratulations.

Now it is my pleasure to have Charles Palmer. He is the president of ISED Ventures, which is a nonprofit organization specializing in asset development and micro-enterprise development services for low-income individuals and families.

Mr. Palmer?

9

STATEMENT OF CHUCK PALMER, PRESIDENT, INSTITUTE

FOR SOCIAL AND ECONOMIC DEVELOPMENT (ISED), DES

MOINES, IA

Mr. PALMER. Thank you very much, Mr. Chairman, Senators. I

appreciate the opportunity to speak to this panel regarding building assets for low-income families.

I had the opportunity to serve as the director of the Department

of Human Services for the State of Iowa for 11 years, prior to coming into this job, during the 1990s when we worked so hard on welfare reform. I think we achieved a lot of successes, with the help

of Congress and the Senate.

With the help of Dr. Sherraden, who will speak later, I really

learned to appreciate the importance of asset-development strategies built into welfare reform, and Iowa was the first to build the

IDA into our waiver program back in the 1990s.

At that time, I talked a lot about, what we really needed to do

was to work to change the culture, both for clients, and, frankly,

for workers from a culture where there was a greater dependence

on welfare to really trying to provide opportunities and incentives

to move to economic self-sufficiency.

Well, across the country, welfare rolls dropped by half, and I am

afraid that a number of people declared victory and went home.

But victory has not really been achieved. There is the other half.

There is also the fact that I think there is an economic structural

gap that exists for low-income citizens between beginning wages for

people who are working very hard and what it is going to really

take to be economically self-sufficient.

That, I think, speaks to the emphasis on workforce strategies,

economic development strategies, job training, but it also speaks to

the importance of the asset-development strategies that you are focused on.

I understand that potentially a third of American households

have zero or negative assets. This can be as high as 60 percent for

African Americans. As you noted, Mr. Chairman, this means that

many, many American families are only one economic shock away

from returning to welfare or debilitating debt. We need to help

these families build their own safety net.

So, to stabilize and help low-income families improve their lives,

we must focus on asset-development strategies with matched savings accounts at the core. As noted, I am the president of ISED

Ventures, and now we have a sister organization, ISED Solutions.

We have been active in the asset-development field for many years,

and with IDAs since 1999.

We work with low-income citizens and have been very involved

in working with refugees. In Iowa alone, we have 1,300 account

holders. They have saved $1.6 million, with a majority of those dollars going to the purchase of homes, and about $10.3 million has

gone into the State economy for the purchase of homes.

The refugee program at this point has not been refunded, due to

budget problems. We believe that that is a very important program. With my experience in working in the field, I want to just

give you some things to consider and think about as you begin to

move into the next phase of asset-development strategies.

10

IDAs are critical, but I really think they have to be part of a

comprehensive set of other reinforcing strategies. We have already

noted the importance of financial literacy, the importance of moving people into relationships with mainstream financial institutions

and getting people banked, helping people avoid predatory lending

situations, helping people build credit with credit counseling, reinforced by financial literacy.

And in Iowa, the opportunity for people to get their full tax return based on their hard work through EITC has been a critical

reinforcer, an opportunity to jump-start some people’s IDA programs.

The programs need to be flexible and more individually tailored.

I think we need to look at expanding some of the asset options. We

have seen that in the refugee program, where people purchase vehicles to get jobs, to get more savings, to buy homes.

We need to expand the points of entry, not just human service

agencies, but other points of entry as well. If we are going to step

significantly into youth programs, then we need to look at extending the savings time period.

I think we need to focus on creating a culture of savings and a

culture of generations who really are financially literate. Thus,

greater focus on families and youth are really important, and we

are doing that and expanding our program in Iowa.

More partners need to come into the program. We need to provide incentives for banks and corporations to contribute matching

funds. I think we need to jump-start the opportunity for new Americans to get ahead with the reinstatement of the refugee IDA program, and I think it is important that we support continued technical assistance and program evaluation in a fast-growing field.

I thank you for the opportunity to make these comments, because I see this field as a critical next step in helping all hardworking Americans achieve economic self-sufficiency and build

safety nets.

Thank you, Mr. Chairman.

Senator SANTORUM. Thank you, Mr. Palmer. I agree with you

that it creates the next step. It is an important step, and I am,

again, happy that we are here to talk about that.

[The prepared statement of Mr. Palmer appears in the appendix.]

Senator SANTORUM. Now it is my pleasure to introduce Dr. Victoria Gonzalez-Rubio. You are the principal of Delmar-Harvard Elementary School in St. Louis. Thank you for being here today.

STATEMENT OF DR. VICTORIA GONZALEZ-RUBIO, PRINCIPAL,

DELMAR-HARVARD ELEMENTARY SCHOOL, UNIVERSITY

CITY, MO

Dr. GONZALEZ-RUBIO. Thank you. Good morning. I am here this

morning to tell you about a program called I Can Save. I Can Save

is a 4-year demonstration program at Delmar-Harvard School in

University City, MO, where I am the principal.

I Can Save is one of 13 sites in the SEED policy and practice initiative, a children’s savings program. I Can Save, now in its second

year at Delmar-Harvard, provides savings accounts, financial education, and incentives for all the kindergarten and first grade students that started last year at Delmar-Harvard.

11

The I Can Save program has a special place in my heart for two

personal reasons. The first one, I have been an educator for over

31 years. I have taught at all levels, from pre-school through college.

The joys of young parents with hope and expectations for their

children sometimes turn into heartbreak when their child becomes

a high school senior and there is no possible way for them to go

to college. Their dreams for a better life for their child are dashed

when they do not have the means or the resources to make it happen. I saw it over and over again.

Second, I bring to you firsthand my own personal experience of

how this program could make a difference. Both of my parents did

not make it past the fifth grade. My father died before I was born.

My family could not support, or even understand, my dreams for

higher education.

If I had had the I Can Save program, it may have lessened the

burden that I carried as I held down two to three jobs trying to

make ends meet, and also perhaps there would have been resources

available to figure out the financial options that may have been

available to me.

Education is my passion. I wanted my own children to attend college and graduate, and I have the same dreams for every child at

my school, and I communicate those dreams to them regularly.

The American dream is not about if you go to college, but when

and where you go to college. The American dream is a ticket for

many families to have a better lifestyle. When they do not have a

college degree, many of them are locked into low-paying jobs, as

one of my fellow panelists said, with no hope of advancing in their

careers.

Many of my students are not only poor, but also of color. With

programs like I Can Save, they can achieve academic success and

break the cycle of poverty. As one of my second grade girls astutely

said, ‘‘Well, if you don’t go to college, you don’t have a really good

job.’’

Why do we think it will make a difference if children have savings for college? In my school, there are many, many parents that

did not have the opportunity to go to college. Perhaps if they would

have had a program like I Can Save or a nest egg, it would have

been a possibility.

One of our students in I Can Save explained how money makes

a difference. She said she thought it would be hard to get enough

money for college because she would have to work so much. So we

asked her if she wanted to go to college, and she replied, ‘‘To get

smart, I do. But if it costs that much money, I don’t think I want

to go.’’

If this young student knew that she had a nest egg that would

help her pay for college, she probably would have responded quite

differently. In fact, another student in the program was more optimistic because she and her family have been saving regularly in

the I Can Save program. She said, ‘‘I think if I save a lot, then it

wouldn’t be that hard for me to go to college.’’

Some parents hesitated before joining I Can Save. Why? So many

thought, it sounds too good to be true. Some are skeptical of anything that sounds like it might be a scam, and others are just too

12

busy trying to make financial ends meet to investigate, or to explore, or even to read all of the things that we daily send home

with their children.

But we made the personal one-to-one contact that enrolled 74 out

of our 75 eligible students. It has been a great success. The students understand two things: that they are saving for college and

they express regularly that they are college-bound. It is heart

warming.

Parents tell me that I Can Save is a great program. They ask

other family members to help them put away money for their children’s accounts. Our children go weekly to Commerce Bank and deposit their pennies, their nickels, their dollars. These small deposits are adding up, but more than that, they are allowing these families to accomplish their dream and goal of college. At this time, families have invested over $27,000 into their I Can

Save accounts at Delmar-Harvard. It touches my heart when I see

parents, hardworking parents of very limited means, putting aside

money so their dream of college can be realized for their children.

I wish I had this program for every student at Delmar-Harvard,

but more so, I wish we had this program for every child in our Nation. Thank you.

[Applause.]

Senator SANTORUM. Thank you.

[The prepared statement of Dr. Gonzalez-Rubio appears in the

appendix.]

Senator SANTORUM. Our next witness is Ric Edelman. I just read

here that Ric was inducted into the Financial Advisors Hall of

Fame. Where is that located? Where is the Hall of Fame?

Mr. EDELMAN. As Red Buttons used to say, ‘‘I didn’t even get a

dinner.’’ It is sponsored by Research Magazine and there are about

75, so far, inducted over the last 10 or 15 years.

Senator SANTORUM. Is there a hall that you go to and walk

around?

Mr. EDELMAN. I keep looking for it.

Senator SANTORUM. Maybe we should see if we can get it in

Pennsylvania. [Laughter.] So, we can work on that. Ric, thank you

very much for being here.

Mr. EDELMAN. That is a bill killer. [Laughter.]

Senator SANTORUM. We look forward to your testimony.

STATEMENT OF RIC EDELMAN, EDELMAN FINANCIAL

SERVICES, INCORPORATED, FAIRFAX, VA

Mr. EDELMAN. Thank you, Mr. Chairman. I am very excited to

be here today to talk about this. In addition to being a financial

advisor, I am very heavily involved in financial literacy programs

and have written five books. I host radio and television shows,

websites, and do a lot of speaking around the country, trying to

help Americans learn the importance of personal finance and how

to achieve financial security and retirement security for themselves

and their families.

So I think that the idea that you have, Mr. Chairman, is absolutely brilliant. This is the best idea I have ever heard. I can say

that, because I have the very same idea. [Laughter.]

Senator SANTORUM. Maybe it is the Rick thing going on.

13

Mr. EDELMAN. It is the Ric thing. I think I can say that I thought

of it first. [Laughter.]

Senator SANTORUM. All right. When? [Laughter.]

Mr. EDELMAN. 1997. Does that beat you?

Senator SANTORUM. I will have to go back and look at the books.

We will see.

Mr. EDELMAN. We will have to look. My idea is a little bit different. I invented something called the Retirement InCome—for

Everyone Trust, RIC-E Trust. The RIC-E trust is a retirement

planning tool for children. It was inspired by a phone call that I

received on my radio show one day. I have the full history of it in

my written testimony for you.

What it comes down to is, there is no vehicle that exists today

that allows a child to save for retirement. We have the ability for

working people to save and married people to save through IRAs,

retirement accounts, spousal IRAs, et cetera, but there is no vehicle

that enables you to set aside money for a newborn specifically for

retirement purposes. We have the ability to save for college

through the 529 programs today, but there is no specific vehicle for

retirement.

So I invented the RIC-E Trust. It now has two patents. We

launched it in 1998, and about 2,800 children are now enrolled in

this program. Because it is in the private sector, the minimum account value is $5,000. It requires a minimum investment of $5,000,

typically given by a parent or grandparent.

The money grows on a tax-deferred basis until the child reaches

retirement age, minimum of 591⁄2. There are no taxes all along the

way, no trustee fees, no annual accounting fees.

On a tax-deferred long-term compounding basis, the child has the opportunity for $5,000. Assuming a 10 percent return, that will

grow to $2.4 million by age 65. That is certainly a pretty good way

to achieve retirement security.

The problem with the RIC-E Trust is pretty obvious, which is

why your version of the idea is so much better than mine. Rather

than $5,000 which is privately funded—I mean, how many Americans can afford $5,000 for a grandkid, and they typically have multiple grandkids, so you multiply the $5,000 times 3, 5, 7 kids—it

is simply not something that is realistically going to solve the problem for the millions of Americans so desperately needing this.

It is, frankly, an upper-middle-class to upper-class retirement

tool. It helps wealthy people get wealthier. Well, that is my job, I

am a financial advisor. But let us face it. If we take your version

of the idea, knock it down to $500 and automatically make it available for every child in America, wow. This is really pretty cool.

So your version of the program is far superior to mine, and because it will be tied into something based on the Federal Thrift

Savings Plan, the expenses get driven down much, much lower

than mine, because I have to have a profit motive, and I have to

admit, people make money on offering things. We do not have to

worry about that through the Federal program you have envisioned.

So your program is a dramatic improvement over the private sector model that I introduced a number of years ago, and I strongly

support the initiative that you are developing.

14

The only thing that I would prefer that you do in your version,

which is going to be contrary to what Dr. Gonzalez-Rubio would

prefer, is that I would prefer that this be limited strictly to retirement planning, not for use for education or housing.

I say that simply because we already have programs for education, we already have programs for housing. There is yet no program to allow children to save for their retirement. So simply because of its unique positioning, I would prefer that this be limited

to retirement.

The other reason that I argue for that—again, as a financial advisor, I have done counseling for thousands of Americans around

the country—if you give them the choice of saying you can leave

the money alone when you are 18 or you can use it for college, you

can continue to leave it alone until you are in your 20s, 30s, or 40s

and use it for housing, or you can leave it alone for retirement,

guess what?

They are going to spend the money because we all have financial

issues as we grow up. We are going to find the economic necessity:

job layoff, medical problem, family issues, the need to go to college,

the desire to buy a home.

By the time they reach 65, the money will be gone because of

more imperatives. So if we give them the access, they will, indeed,

spend the money. The real question will not be how much they

have in retirement. The real question will be, what color is the

sports car they buy at age 18? So my attitude is, it is strictly for

retirement, and let us focus on college and housing in other programs.

Thank you very much, Mr. Chairman. Anything I can do to support this, I am happy to.

Senator SANTORUM. Thank you very much, Ric. I appreciate your

comments.

[The prepared statement of Mr. Edelman appears in the appendix.]

Senator SANTORUM. Our final panelist for the first panel is Bernie Wilson. Bernie is the vice president for Business Development

and Community Outreach at H&R Block. Thank you very much for

being here, Mr. Wilson.

STATEMENT OF BERNARD M. WILSON, VICE PRESIDENT, OUTREACH AND BUSINESS DEVELOPMENT, H&R BLOCK, KANSAS

CITY, MO

Mr. WILSON. Thank you, Mr. Chairman, Senator Bunning.

Thanks for the invitation for H&R Block to share our experience

in helping low-income families save. We very much appreciate your

leadership in this area.

H&R Block serves nearly 20 million taxpayers at 11,000 offices

across the United States, including 490 in Pennsylvania and 199

in Kentucky, and through online and packaged tax preparation

software.

In our 50th year, we are evolving from a firm devoted to helping

families with their tax-filing responsibility to one that advises on

a broader range of financial issues, including the need to save for

retirement, home ownership, and education.

15

Our recent experience with the Retirement Savers Credit should

be of some interest to the subcommittee. Enacted in 2001, the credit provides a government match of up to 50 percent for contributions to 401(k)s, IRAs, and other retirement plans. It covers taxpayers with incomes up to $50,000 who have income tax liability.

Several features of the saver’s credit play an important role in

encouraging retirement savings. First, the credit relies on personal

responsibility. People cannot claim it unless they make a substantial commitment on their own to save.

Second, it uses tax time to promote savings. The tax filing proc- ess, fueled by refunds averaging $2,100, has become an annual financial check-up and an opportunity to turn good intentions and

savings advice into immediate action.

Third, it supports the existing private retirement system,

leveraging the well-known structure of IRAs, 401(k)s, and other vehicles, and encourages eligible taxpayers with low and moderate incomes to actually use them.

Fourth, the match rate of up to 50 percent provides a largeenough incentive to both strengthen savings and encourage firsttime savers to actually take action.

Finally, the higher match rate for those with lower incomes targets benefits to those who most need help in saving. Many of our

clients are eligible for the saver’s credit, but the polls taken shortly

after the enactment showed that 80 percent of Americans had no

idea what it was.

In response, we provided extra training and beefed up our technology to help our tax professionals. We also used a low-cost, lowminimum-deposit express IRA account that we have developed to

help our clients use the credit and save.

Our experience is that tax professionals can provide the pivotal

education, advice, and facilitation necessary to enable taxpayers to

benefit from the credit. As a result, over the last 3 years we have

helped over 3.6 million clients obtain the Savers Credit, about 25

percent of all of the credits received nationally.

Our clients received over $600 million in tax credits to help them

save. This resulted in average savings of $529 per client, with an

average tax credit of $167. By the way, this includes 57,000 Pennsylvanians who saved $9 million in tax credits. It also includes

21,000 Kentuckians.

While most use the Savers Credit to match contributions to an

existing 401(k), IRA, or other retirement plan that they had in

place, over 243,000 clients used an express IRA with H&R Block,

with an average tax savings of about $180.

Let me give you a quick snapshot of the typical express IRA client. Their average income is $27,000; about half are unbanked,

two-thirds are Earned Income Tax Credit recipients. Eighty-five

percent maintain their IRA account balances, and fully 80 percent

of them were first-time retirement savers.

Our experience shows that the credit, combined with the tax refund, a low-cost savings vehicle, and the help of a tax professional

can have a significant impact on retirement savings.

To build on this success, we encourage the Senate to consider extending the credit beyond 2006 and expanding it to include more

middle- and low-income tax payers. Because recent tax cuts have

16

increased the number of Americans who have no tax liability, including families of four with incomes up to $40,000, you may want

to consider making the credit refundable so it is available to these

families as well.

Mr. Chairman, we know from our experience that the Savers

Credit works. As your subcommittee discusses ways to boost savings among low- and moderate-income families, we encourage you

to consider making the credit permanent and expanding its reach.

Thank you.

Senator SANTORUM. Thank you very much, Mr. Wilson.

[The prepared statement of Mr. Wilson appears in the appendix.]

Senator SANTORUM. While you just finished speaking, let me just

direct the first question to you. That is, you talked about the Savers Credit. Can I ask you, if we were to put forth and pass an IDA

piece of legislation, is that something that you believe that your organization would be interested in getting involved in as another financial tool that you would make available to some of your clients?

Mr. WILSON. We would, most definitely.

Senator SANTORUM. I think the figure we have right now is a $50

tax credit per account. Do you believe that is adequate to administer the accounts? Do you want to comment on the adequacy of

that? Is that a big enough incentive for you folks to participate in

it?

Mr. WILSON. Well, one of the reasons that this is important to

H&R Block is because our reach is so significant in terms of scale.

The number of clients that we can actually help is significant. So

obviously as the scale grows, the need for account administration

costs would reduce.

But $50 is a pretty razor-thin administrative cost-coverage tax

credit, I guess, but we would certainly support that, as well as any

more that would help us get into this in a scaled way.

Senator SANTORUM. All right. That is a ringing endorsement for

a higher than $50 amount. I think that is what I was hearing.

Welcome, Senator Conrad. Thank you for being here.

Mr. Edelman, you expressed strong support for the KIDS Accounts, and I appreciate that, but limiting them to retirement only.

Now, Doctor, you have a similar program. Would you like to comment on the idea? Would your program be as successful, do you believe, for children if it was just a retirement-based program as opposed to something that is closer in time to them and to their

needs?

Dr. GONZALEZ-RUBIO. I think that what he is saying is very, very

valid, especially since I am going to be retiring next year. But I

think that we have many families that need to save money for

homes, they need to save money for college.

If our children are indeed our greatest asset, we need to make

sure that they have the funds available that will allow them to

have a better life than their parents’. I feel that ticket is college.

A good education is going to enable them to not only provide for

themselves, but for their families. So, while I do agree there is a

point here, I think that may be the long range. But an immediate

one would be college savings. It may be, as he said, two different

things, two different savings programs.

Senator SANTORUM. I will let you rebut.

17

Mr. EDELMAN. It is not so much a rebuttal, but a concession. I

recognize that if you go to college and get the education you need

which enables you to have the career which enables you to earn the

money, it enables you to buy the house, which enables you to build

equity in it, which enables you to tap into it for retirement. Therefore, college can lead to retirement security. They are not necessarily exclusive.

Both politically and pragmatically, it does make sense to keep

the three of a theme. College, home ownership and retirement do

fit together very nicely. Perhaps it could be left to the discretion

of the parent. When the child gets that $500 at birth, let the parent check a series of boxes. They decide, do they want the $500 to be used in

the future for the child’s education, housing, or retirement, and let

them demarcate where it is. Instead of us trying to make that decision for every child in America, let that child’s family make that

decision on their behalf, or split the money into three buckets.

They can use one piece for this, one piece for that, one piece for

another, or what have you.

But because I am so focused on financial literacy and long-term

retirement savings and the benefit of compound wealth, I just

think if we do not emphasize retirement security, we are going to

have lots of people entering retirement filled with regret over the

decisions they made when they were younger.

Senator SANTORUM. We attempt to do that, as you probably

know, in the legislation, which requires a certain amount of

money—I think $500—to stay in the account for longer term savings.

Mr. EDELMAN. Yes.

Senator SANTORUM. That is something we certainly are open to

looking at and working with. One of the concerns I have, and I

think the Doctor has is, if it is just long-term savings, if it is retirement, there may not be the incentive for people to contribute to the

accounts and participate in the accounts because the benefit looks

too far away for them.

Mr. EDELMAN. It is not exciting.

Senator SANTORUM. So I think we have to find some sort of balance here, but I appreciate your comments.

Just one additional question for you, Mr. Edelman. That is, with

KIDS Accounts, and looking at it, again, from the standpoint of retirement, what do you think of the idea of the accounts post-18

years of age being governed by the Roth IRA rules?

Mr. EDELMAN. That makes sense. There is no reason to create

yet a separate set of rules. We can clearly tap into them. The question then becomes, will they be roll-overable to the private sector

Roths that will be handled by the financial markets as they would

normally handle Roths, or would they remain in the TSP-type program that you are developing? I think that is a relatively trivial

detail.

But I do agree with you, there is no reason not to sustain the

use of the existing rules. We do not need to create a new set of

rules for this unique program.

Senator SANTORUM. All right. I think I have used my time.

Senator Conrad, thank you for being here.

18

Senator CONRAD. I thank the Chairman. I apologize to my colleagues and to the witnesses for being late, but the governor of my

State came to town, and we had a series of meetings critically important to my State that just concluded. So, I apologize. It was unexpected. We only found out yesterday that he would be here.

So, one of the things that I had asked my staff to do was to tell

me how much we are spending a year on incentives for private-sector savings. They came back with an answer that we are spending

$125 billion a year in incentives for private-sector savings.

I then asked them to find out for me, how much in private-sector

savings are we getting a year? They came back and said $85 billion. So, we have a problem here. We have a set of incentives, wellmeaning, that are clearly not very efficient in terms of delivering

what they are intended to deliver, which is an increase in privatesector savings and investment.

Can any of the panelists tell me, tell the panel here, why you

think that might be occurring? What is wrong with our system of

incentives, that we are spending more than we are getting?

Mr. Wilson? Mr. Edelman? Any of the witnesses. I would be interested in what could be done to improve the structure that we

have of incentives. Why is it not working as well as we might hope?

Mr. EDELMAN. Senator, some of the programs that I am familiar

with result in, rather than increasing the level of savings, it simply

moves money around. For example, look at IRAs. It encourages

people to put away a few thousand dollars into an account, but

does it encourage people to save who otherwise would not?

In fact, you are taking people who have money that is in a taxable account and enables them to move it to a tax-advantaged account, but it does not necessarily increase the amount of savings.

In other words, they are targeted people who already have

wealth to help them become wealthier, as opposed to programs that

are targeted to folks who would simply like to become wealthy in

the first place.

I think that that is one of the advantages of this proposal, that

it is really targeted to people who frankly have no opportunity to

set money aside for something as long-term as college, home ownership, and retirement.

So I think that is part of the problem, in that many of the programs we create simply manipulate money rather than getting people to increase the amount of money that they are saving.

Senator CONRAD. One of the things we found in this review that

we have just started is, where you have a program that requires

a person to opt in versus opt out, you get a much different level

of involvement.

That is, if you require somebody to opt in, you would have a

much lower rate of participation than if you just put them in automatically, but give them the chance to opt out. It is a very dramatic difference in participation that one gets just by making that

simple change.

Well, Mr. Chairman, I appreciate the time. I appreciate this

hearing. I think it is absolutely critically important as we try to do

a better job of providing incentives that are meaningful and that

work. Dr. Rubio?

19

Dr. GONZALEZ-RUBIO. I have one comment. I think sometimes we

give parents a lot of information, and the people who really need

the information are not aware of the information because of the

readability level of that information and the forms, the multitude

of forms for someone who may have a low educational background

or a low reading level. So, I think we need to look at that.

Like I said, at Delmar-Harvard, where we were able to enroll by

one-on-one contact, 74 of the 75 eligible students, that one-on-one

contact means enough. So, I think we need to reach out to those

community partners that have those contacts to be your sales people and explain to them why savings for college and savings for a

home are important, because people are somewhat skeptical. What

do you want to do with my money? But if you have someone that

they trust, then of course that trust filters down and you are going

to get it sold.

Mr. WILSON. Senator Conrad, I might add also to your question,

obviously the majority of that $125 billion is going to high wealth,

tax-free gains inside IRAs or 401(k)s.

We have focused a number of initiatives and pilots, some on our

own, some with a variety of nonprofit and outside groups, researchers, to understand the savings substitution if someone is getting an

incentive, a match, and it is our experience, people at low income

levels who have never saved before, are now starting to save. We

have less information about whether or not they were holding cash

at home somewhere, but at the very least we can now see that they

are using mainstream financial institutions and retaining those assets.

Somewhat anecdotally, but we are learning quantitatively that,

at low income levels, people will start to save and maintain that

savings, whereas, there is some evidence, at higher income levels,

it becomes a substitution. So, if someone gets an incentive, a tax

credit, a tax break, at higher income levels, they are just shifting

their savings, as Ric talked about.

Senator CONRAD. Thank you.

Senator SANTORUM. Jim?

Senator BUNNING. Thank you, Mr. Chairman.

Ms. Simmons and Ms. Beale, both of your statements today were

well-expressed and moving. Do you share with your children what

you learned in the Family Savings Account program? Do you think

that their knowledge and understanding of money management

has been impacted by your experiences?

Ms. SIMMONS. Yes, I have expressed the importance of saving

and budgeting with my children. As a matter of fact, when we first

moved into our home, for the first year we did not have cable. My

daughter could not understand why we could not have Nickelodeon.

I told her, ‘‘Because we have a mortgage now, and we have to save.

We have regular TV, and we will just have to catch the cartoons

on Channel 12.’’ This is one of the things I learned.

We did not go get name-brand soda, we got soda that was 50

cents at the Wal-Mart. They did not understand why we could not

get what they wanted. I said, ‘‘Well, if you want some money at the

end of the week to do something, then we have to budget like this.’’

These are the things I learned from my class which I transferred

to them in expression, so they did learn it too.

20

Senator BUNNING. So they are learning as you learned what it

means to budget.

Ms. SIMMONS. Exactly. My daughter gets an allowance and she

is not to spend her $15 on junk food or fast food. She had better

bring home some deodorant or a pair of socks, because you need

to start at 10 years of age.

My mother feels like that is a shame, I am making this 10-yearold child buy deodorant or socks, but that is what we had better

do. You are going to have to hold your own and you are going to

have to spend the money wisely, because that is what I was taught.

So they are getting taught really early to at least spend $5 at

the dollar store on some hair gel or something. I got that from the

FSA program, how to put down a $3 gel and get the $1 gel that

does the same thing. So, this is very plain and very simple stuff,

but it saves us a lot of money, which allows us to have a home and

pay my taxes at the end of the year.

Senator BUNNING. Ms. Beale?

Ms. BEALE. And also, I stated in my speech that I had opened

accounts for my children, savings accounts. They get an allowance

from different chores that they do, and they earn money. Every

week, we go to the bank. Someone mentioned Commerce Bank. I

think that is a wonderful bank.

But they have a change booth where you can put your change in

accounts, and it prints out a little thing. They have even gotten to

the point where they have taken their change, put it in the booth,

counting it out, and they will put it in the bank.

I have learned that children learn from their parents. We are examples. They are like little adults, really. They take on the same

habits that they see their mother or their father doing.

From us going to the program and me learning to differentiate

the wants from the needs, just like Michelle said, they learned that

when we go to Wal-Mart or Path-Mart, any store, we write out a

list and we stick to the list. Some things, you do not need. Some

things you want, but it is not a need. So, they learn to differentiate

their wants from their needs.

I have learned that from budgeting with the program and just

going to the different workshops. I even took my son to a workshop

one time when I went, and they have learned a lot from my examples.

Senator BUNNING. Good.

Dr. Gonzalez-Rubio, first, I want to commend your school and its

partners for all your success with the I Can Save program. I hope

that you will keep the committee up to date on the progress of that

program.

Could you tell us a bit more about the financial education aspects

of your program? Could you address this part of the program, both

in terms of the topics that the students and parents cover in the

program, and the challenges you face to attract participation in the

financial education classes?

Dr. GONZALEZ-RUBIO. We have two strands. We have a weekly I

Can Save club for children and classes in the regular school day

where teachers incorporate words like ‘‘credit’’ and ‘‘financial use.’’

Senator BUNNING. What age is it?

21

Dr. GONZALEZ-RUBIO. This year, they are first and second graders.

Senator BUNNING. First and second grade.

Dr. GONZALEZ-RUBIO. And so they make piggy-banks and they

earn money, and then when they go to Commerce Bank, that is

changed into real money. But they are learning about opportunities

and how you channel your resources.

Also, too, right now they are studying how to be entrepreneurs,

so they are imagining, if they were later in life, what type of businesses they might do. So we have had hair dressing businesses,

and ice cream. That is real——

Senator BUNNING. Popular.

Dr. GONZALEZ-RUBIO. They called it Ice Statics. So the children

are doing this. They are working on the projects as we speak. At

the end of the month, they are going to have a program for their

parents, where their parents can see it. It is a first step.

I mean, when you hear children talk about opportunities, what

they can do with their money, that they are saving it, it is just

heart-warming. It is heart-warming that our parents are buying

into it.

As one mother said, because her child lost his $3 that he brought

to school—but it was found—‘‘Dr. G.R., I know it is not a lot, but

it is a lot to me.’’ I told her, that is exactly what we want our families to do, to put a few dollars away each week, and it will build

up. And your child, Chase, will be going to college. You know what

I mean? Because he is hearing that from all his family members.

He is hearing it from me.

We make visits to the neighborhood college campuses. We have

a close partnership with Washington University. When I take the

kids on campus, I tell them, today you are visiting Washington

University. Tomorrow, you will be attending Washington University, or some university like it. But every chance that I can get, I

tell them.

They may be tired of hearing it, but they know that this is my

thing. I also tell my students that they are special to me all the

time. The other day, a little girl was making an announcement

from the rain forest, and she was a child of special needs. She

ended it with, ‘‘And like Dr. G.R. says, you are special to me.’’ So,

I just had to smile.

What do I want to be remembered for? I hope that I am remembered for, at the end of my retirement, that I really, really was not

just paying lip service, but that I did everything that I could to get

more of our children into college and planted that seed in them.

We even, for those classes that were not involved in it, recently

had a parent breakfast as part of our Dr. Seuss thing, where I

brought in our MOST representatives—that is our college saving

incentive program—to come and talk about it. Because even if the

parents are not a part of that two-grade cohort, the I Can Save cohort, I want them still to know that there are opportunities for

them to save money, and they need to start saving it now.

In my own case, my daughter started college this past year. She

shared with me recently when she bopped into the car, mom, so

and so’s parents had to take out another $11,000 loan. Thank you

so much. My kids, like you, think that deals in the dollar stores

22

are my favorite places to shop, and I buy nothing that is not on

sale. But there are a lot of things that we have realized.

Senator BUNNING. I have another question for Mr. Palmer, but

go right ahead.

Senator SANTORUM. Well, actually we need to move to the next

panel, if that is all right. If you have one question, go ahead.

Senator BUNNING. One question.

Mr. Palmer, you discussed briefly in your written testimony the

differences in allowable uses for money saved in the refugee IDA

program and the citizen’s IDA program. Can you comment more on

these differences and how participants in your programs have used

IDA funds?

Mr. PALMER. The differences are, in the refugee IDA program,

people are also allowed to invest money in a vehicle, a computer

to start a business or to further their education, and in housing rehabilitation. We saw a majority of people initially invest money in

purchasing a vehicle so they could get to work.

A second family member also invested in an IDA, and usually

with that they were focused on starting a business or in buying a

home. But for this group, the vehicle, as a way to get to work, to

establish themselves in this society, was a very high priority. The

majority did that, but then they continued in the program, moving

towards, in many cases, home ownership.

Senator BUNNING. Thank you.

Senator SANTORUM. I want to thank members of the panel.

Would you like to say something?

Ms. SIMMONS. I have one more thing I have a burning desire to

say. He asked me about my children and the saving. I am the

founder and director of Why Not Prosper, and there are 67 counties

in Pennsylvania. I go to the two State penitentiaries and all 59 of

the counties that have facilities for women, so not only are my children getting the budgeting that I have learned, it is going into the

prisons with me as I go and speak to the ladies. As they are coming

to my facility, they are getting the budgeting and they are getting

directly from where I got it from. Amen.

And then lastly for him, Senator Conrad, you said that you see

a difference in the money. Well, the money may be a little different, but the change in the lifestyle, that is the piece, the gap you

all are missing. Because you do not see the cash back, but for a

life like mine that was on a slippery slope to hell, these programs

kind of got me back on the right track.

So you are missing the money, but you have some new lives that

are being rebuilt, so that is taking up the gap of the money that

is missing.

Senator SANTORUM. Thank you very much, all of you. I appreciate it.

[Applause.]

Senator SANTORUM. Our second panel, if they will come forward,

is Dr. Michael Sherraden, Dr. Trina Williams Shanks, Mr. Fred

Goldberg, Ray Boshara; David John, and Mark Iwry.

Doctor, if you are ready to proceed. Dr. Sherraden is the author

of ‘‘Assets and the Poor,’’ and he is a professor at Washington University in St. Louis, MO.

Doctor, thank you for being here.

23

STATEMENT OF DR. MICHAEL SHERRADEN, AUTHOR OF ‘‘ASSETS AND THE POOR,’’ PROFESSOR, WASHINGTON UNIVERSITY, ST. LOUIS, MO

Dr. SHERRADEN. Thank you, Chairman Santorum and members

of the subcommittee, Senators Bunning and Conrad. I am honored

to present testimony today on inclusion in asset-building.

As we know, many Americans are asset-poor. Twenty-five percent of U.S. households do not have enough net worth to live for

even 3 months at the poverty line.

This suggests two things. One, that many U.S. households have

very little financial cushion to sustain them in the event of a job

loss, illness, or other shortfall of income. Two, development of these

households is limited by lack of assets for investing in education,

homes, businesses, and other strategies to get ahead.

Asset-based policy would shift social policy—and this committee

is very much about Social Security and family policy—from an almost exclusive focus on maintenance to a focus on development: development of individuals, families and communities.

This is not to say that there is no role for social insurance. Indeed, the right idea is to balance asset-building with social insurance. If there are to be individual accounts in Social Security, I believe they should be above and beyond the current Social Security

system.

The goal of asset-based policy should be inclusion. By inclusion,

I mean that policy should, one, bring everyone into asset-building;

two, make the policy lifelong and flexible; three, provide at least

equal public subsidies to everyone in dollar terms. Right now, we

provide most of the public subsidies through the tax system to people who are already well-off. Four, achieve adequate levels of asset

accumulation, given the purposes of the policy.

My insights into asset-building came in discussions with welfare

mothers nearly 2 decades ago, talking with them about why welfare—then it was called AFDC—was a trap. These women said to

me that it was very difficult to get anywhere in the current welfare

system. Those discussions led eventually to a proposal for Individual Development Accounts.

As originally proposed, Individual Development Accounts would

have been a kind of universal asset-building system where everyone has an account that was started as early as birth, with

matched savings for the poor, recognizing that in current policy we

provide tax benefits for asset accumulation in homes and retirement accounts, and not much of this reaches the poor.

IDAs would do matched savings for the poor, and indeed, that is

what they do. There could be multiple sources of matching deposits, accompanied by financial education, which you have heard a lot

about. These savings could be used for homes, business capitalization, education, and other purposes.

Since IDAs were introduced, we have made some policy progress,

as we have heard about today. There is the Assets for Independence Act, which is some Federal resources for IDAs. The Savings

for Working Families Act that Senator Santorum has talked about

is nearly ready to pass in the Congress, and we hope that it does.

And there have been other developments. More than 40 States

have some kind of IDA program at the State level. But honestly,

24

these are all fairly small programs at the present time, and we are

really a long way from a large policy that includes everyone in this

idea of asset-building for Americans.

The most important contribution, I think, today, is that this is

an active discussion. When we started this work 15 or 20 years

ago, there was really no discussion of asset-building for poor people, certainly not in the context of social policy.

Today, this is a very active discussion, and both Republicans and

Democrats use the language ‘‘asset-building,’’ ‘‘asset-based policy,’’

‘‘stakeholding’’ and ‘‘ownership society.’’ I think we have come a

long way.

We are learning a great deal from research. We find in IDA research that if we increase the matched cap—that is, how much people can save and be matched—$1, we get 40 or 50 cents more savings. This is a very strong effect.

We have other findings. We know that if we provide financial

education, we can increase savings for about the first 10 hours of

financial education, and after that, not much effect. This is important to know because financial education is expensive, and if we

are going to invest in it, we need to know how much is the right

amount.

We find, from talking with IDA participants, that they see IDAs

as an opportunity. These are people who mostly do not have access

to a retirement account at work. One IDA participant said, ‘‘Oh, I

get it. This is like a 401(k), only for me.’’ This is a person who

would not have access to a 401(k) otherwise.

We find that IDA participants like restrictions. They like the fact

that the money is put aside and they like the fact that it can be

used only for homes, or education, or business capitalization, because, as some of the discussion earlier has indicated, they feel the

money would just be spent if it were readily available. So this idea

of restrictions, we think, will play a role in future policy, or should.

Turning to the effects of IDAs, we find that asset-building has

positive effects; especially we know that home ownership has positive effects. I see my red light is blinking, so I will move to my conclusion.

There are a lot of positive effects for asset-building. The one

point that I would like to leave you with is that we believe that

asset-building in public policy ought to be in the form of a plan, a

plan that can be inclusive and reach out to include everyone.

Most people accumulate assets in a 401(k) plan, a thrift savings

plan, and that is why the plan features of the ASPIRE Act, for example, modeled after the Thrift Savings Plan, are so desirable.

The plan can offer a few simple investment choices. It can be

low-cost. We think, for long-term policy development that is really

going to include the whole population, this is the right way to go.

Thank you very much.

Senator SANTORUM. Thank you, Doctor.

[Applause.]

[The prepared statement of Dr. Sherraden appears in the appendix.]

Senator SANTORUM. Next, is Trina Williams Shanks, who is a

professor at the University of Michigan, Ann Arbor. Thank you.

Dr. Shanks?

25

STATEMENT OF DR. TRINA R. WILLIAMS SHANKS, PROFESSOR,

UNIVERSITY OF MICHIGAN, ANN ARBOR, MI

Dr. SHANKS. Thank you very much, Senator Santorum, for inviting me today, and Senators Conrad and Bunning. It is an honor to

be able to speak before you and share my thoughts.

I have spent much of my academic career thus far examining the

impact of household wealth on child development outcomes, and I

have approached this topic in two ways.

The first is using nationally representative data sets, like the

Panel Study of Income Dynamics, to test in a statistical way if

household wealth makes a difference for children.

Some of the things I found included that household wealth

helped us to better understand child outcomes, things like academic test scores and reported behavior problems. If you have information on household wealth, in addition to things like income or

parental educational levels, we can better understand what possible outcomes are going to be for children.

I have also seen that in many instances, growing up in households with even a small amount of net worth, seems to make a

positive difference for children. So, it does not have to be large

amounts. Even small amounts, particularly for low-income households, can make a difference.

But what I find most interesting is, having assets seems to really

benefit low-income households and children, particularly those of

African Americans and those that maybe face multiple disadvantages, perhaps having a head of household with less than a high

school education.

A second way that I will examine the impact of wealth and asset

accumulation on child outcomes is through this initiative you heard

a little bit about, the SEED initiative, Saving for Education, Entrepreneurship, and Downpayment.

I am a co-investigator for the impact-assessment portion of that

initiative, so we are going to have an experimental design where

there are 500 low-income families whose children are enrolled in

Head Start programs. They will be offered college savings plans

that are seeded with $1,000.

We also will be following, through interviews, a control group, so

that at the end of a 4-year period we will be able to say with some

confidence that those who were offered these accounts perhaps

turned out differently than these same type of families that were

not offered accounts. The results are not in yet, but we will be able

to give that answer as we gather data over time.

So, you have my written testimony. I would be more than happy

to talk to you about my research. But I would like to end with just

a few observations. Before I started doing academic research, I ran

a church-sponsored family mentoring program.

So, we offered tutoring and activities for children, we offered life

skills classes and access to mentors from one of the two congregations of families. I like to think we made a difference, but attendance was inconsistent. They really did not meet very many of their

economic goals.

Two years into this program, we started offering Individual Development Accounts, IDAs. These public housing residents that we

were working with started coming to the classes, bringing their

26

children, saving money, meeting their goals, and they also invited

their friends to be part of the program as well.

So, I see asset-building policies as an opportunity to provide a vehicle that supports individuals in a very concrete way to help them

work toward their own personal dreams and goals.

The image that comes to my mind is, we have a person standing

on a riverbank and they need to get to the other side. Someone

comes by and they have a boat and they can cross over easily.

Maybe some are strong enough to swim and beat the current and

make it to the other side.

But that other person is standing back, saying, I do not have a

vehicle to cross. So, maybe the community can decide to build a

bridge, so any time they want to cross over to the other side, they

can.

In my mind, that is kind of what asset-building policies are, because I think that most people would want to save and not go from

paycheck to paycheck, and have a little bit of financial security. I

think that most people would want to guide their children to a safe

and productive future.

But they come across obstacles, particularly those who are lowincome and face multiple disadvantages. So, these asset-building

programs are really the appropriate vehicle to help them to reach

their own goals. I would just say, if you would ask me what might

be the impact of having child savings accounts that begin as early

as birth and throughout elementary school, and allow parents and

their children to work together to focus on helping their children

meet goals of education and personal betterment using money in

these specially designated accounts, I can say, from my analyses

from longitudinal data, that household wealth can lead to better

outcomes for children.

But I would say the potential, at least, is that more young people

would have glimpses of hope rather than expectations of repeating

inter-generational experiences of failure, both academically and

economically. So if you ask my opinion, that would be the impact

of such accounts.

Thank you very much.

[Applause.]

Senator SANTORUM. Thank you, Dr. Shanks.

[The prepared statement of Dr. Shanks appears in the appendix.]

Senator SANTORUM. It is my pleasure to introduce Mr. Fred Goldberg, who is a lawyer at Skadden, Arps and is a former Commissioner, if I recall, of the Internal Revenue Service.

Mr. GOLDBERG. Yes, sir. And I am here to help you.

Senator SANTORUM. Thank you. [Laughter.]

Fred?

STATEMENT OF FRED GOLDBERG, SKADDEN, ARPS, SLATE,

MEAGHER & FLOM, LLP; FORMER COMMISSIONER OF THE

IRS UNDER PRESIDENT GEORGE H.W. BUSH, WASHINGTON,

DC

Mr. GOLDBERG. Thank you. It is a pleasure to be here today. I

would like to offer two brief observations and submit my written

statement for the record.

27

I will also note, having appeared before each of you many times

in my prior lives, I have never before attended a Senate hearing

where the witnesses have been applauded. I think it is a wonderful

tradition.

Senator SANTORUM. Do not expect that for you, Fred.

Mr. GOLDBERG. No, I do not. [Laughter.] Generally, it is boos,

Senator.

First, while more than 90 percent of all taxpayers have positive

tax liability over their lifetimes, more than 90 percent of us, when

you look at us over our lives, pay positive tax to the government.

Forty percent of us, 40 percent of all taxpayers, have no tax liability in any particular tax year. We are kidding ourselves to talk

about policies to promote asset-building among low- and middle-income families in the absence of refundable credits.

More broadly, in my judgment, the failure to provide a refundable Savers Credit, the phase-out of eligibility for traditional IRAs

and Roth IRAs, the grotesque array of savings incentives, make an

absolute mockery of our policies to promote asset-building.

This has nothing to do with the heated rhetoric that refundable

credits are welfare. It has nothing to do with the heated rhetoric

that says universal eligibility for IRAs is a give-away to the rich.

What tax policy justifies denying savings-based credits to families living in a small town in the Dakotas where their cost-of-living

adjusted-income is exactly the same as a family living in Philadelphia?

What tax policy justifies denying the benefits of IRAs to families

living in Philadelphia, when those families are living on the same

cost-of-living adjusted-income as families living in the Dakotas?

What tax policy justifies punishing millions and millions of families who try to save because their incomes fluctuate as the result

of a layoff, a family illness, taking time off to have a child, pursuing continuing education?

What tax policy justifies the grotesque array of so-called savings

incentives that do nothing for low- and middle-income families, are

beyond the comprehension of tax professionals, not to mention normal citizens?

And what tax policy justifies complex rules and phase-outs, in

the interest of soaking the rich, that undermines any incentive for

financial institutions and intermediaries to effectively market savings programs to low- and middle-income families?

There is no justification, on policy grounds, for the current system. Fundamental reform is long overdue. The IDA provisions of

the CARE Act and the recently introduced ASPIRE legislation represent a dramatic step in the right direction, because low-income

families and their children benefit without regard to their currentyear tax liability.

But more should be done. In addition to IDAs, in addition to

ASPIRE, Congress should scrap what is out there on a revenueneutral basis, enact the administration’s LSA, RSA, and ERSA proposals, and a robust refundable Savers Credit.

My second observation has to do with administrative and policy

infrastructure. Each of these areas has received far too little attention. By administrative infrastructure, I mean systems necessary to

implement measures under consideration by Congress.

28

Our country is blessed with a remarkable private and public financial infrastructure that can support universal asset policies

that were unthinkable 20 or 30 years ago: the administration’s

split refund proposal, IDAs, the CARE Act, the ASPIRE legislation,

restructured Savers Credit, personal retirement accounts that are

either part of, or are an add-on to Social Security.

The fact is, we can make these policies work, and work well. In

my view, the keys to successful and durable policy infrastructure

are universality, simplicity, and appeal to shared values. The most

important feature of your ASPIRE legislation is that it creates a

truly universal savings infrastructure for all Americans.

With all due respect to the witnesses who have commented, the

most important aspect of the ASPIRE provision is not the money.

The importance is, it creates a universal platform where individuals can build and individuals can assume personal responsibility

for their own well-being.

It is clear that the existing administrative structure makes it

possible to implement these policies that satisfy the criteria. It is

clear that these objectives can be accomplished in ways that are fiscally responsible in light of massive deficits. It is clear that we

have many policies to choose from. What is unclear, is whether the

political process will make those choices.

Thank you.

Senator SANTORUM. Thank you, Fred.

[The prepared statement of Mr. Goldberg appears in the appendix.]

Senator SANTORUM. It is now my pleasure to introduce Ray

Boshara. Ray is the director of the Asset-Building Program at the

New American Foundation.

Ray, thank you for being here.

STATEMENT OF RAY BOSHARA, DIRECTOR, ASSET-BUILDING

PROGRAM, NEW AMERICA FOUNDATION, WASHINGTON, DC

Mr. BOSHARA. Thank you, Senator Santorum, Senator Conrad,

Senator Bunning. I have dedicated my professional life thus far to

this idea, and it is great to be here. This is a great moment, and

I commend all of you for your leadership, for your efforts to expand

savings and ownership for all Americans.

I would also like to thank the foundations that have made my

work possible for the last 10 years: the Ford Foundation, the

Charles Stuart Mott Foundation, Casey Schwab, and Citigroup

Foundation. None of us would be here if it was not for their support.

So what would I do? I would propose three things to Congress.

First, things that really do not cost any money, very low-cost ideas:

splitting refunds on tax returns, automatic 401(k)s, and an idea

that Peter Tufano of the Harvard Business School gave us—putting

savings bonds back on tax returns. It is a great idea, something

that we should look more into.

Second, I would support matched savings accounts for the working poor, including the Savers Credit and IDAs. I was going to cite

the research about IDAs, but I think Michelle and Dorothy did it

better than I could.

29

I commend you, Senator Santorum, for reintroducing the Savings

for Work and Families Act yesterday with Senator Lieberman. I

spent 5 years on that bill, and I would love to see it become law.

The third thing I would propose, no surprise to anybody, is KIDS

Accounts, the ASPIRE Act, which, of course, New America and the

field I work with have been promoting for some time now.

Let me give you three reasons why I think KIDS Accounts deserve favorable consideration by Congress. First of all, I think we

need to create a culture of savings and investing compared to the

culture of spending and consuming, and it especially needs to be

directed at kids. Also, as Ric Edelman and others will tell you, the

earlier we save, the better. Why miss the first 20 or 25 years of

accumulation? It makes no sense whatsoever.

Second, I think we have to increase national and household savings. There are all kinds of great macroeconomic arguments in

favor of targeting savings incentives to kids, and we should really

pay attention to that.

At some point, Asia is no longer going to finance our consumption and our deficits, and we need to find ways to increase savings

in the U.S. There is actually a fabulous report just put out by the

McKinsey Global Institute on this very point.

Finally, I would just note that we do absolutely nothing to help

poor kids build savings and assets. Right now, we have WIC, food

stamps, tax credits, and health insurance programs for kids—but

we do nothing to help them save. It is not surprising then that onequarter of all white kids, and half of all other kids, grow up in

households with zero or negative assets for investment.

A couple of questions I would like to address. First, why are

KIDS Accounts relevant to retirement security? There is a lot of

talk about retirement security. Why do we need to think about

KIDS Accounts in this context?

As Fred said, we need to create a permanent lifetime platform

for saving, wealth accumulation and retirement security. Over the

long term, we can solve our pervasive problem of the unbanked.

And, when you die, you can pass this money on to your heirs. I

think we have to think about asset-building as from birth to death.

Also, these accounts can be used for two purposes which are very

relevant to retirement security, buying your home and going to college. Certainly those are the major components of my economic security at retirement.

We do have programs for going to college and buying homes, but

they are inadequate. Too many kids do not buy homes and do not

end up going to college. So, I think we have to think about these

elements together.

The way the ASPIRE Act is written, the account becomes a Roth

IRA at age 18, meaning that you can use it tax-free and penaltyfree for buying your first home, going to college, and, of course, for

retirement.

One final question I will close with. Would KIDS Accounts be

worth the cost? The answer is yes. In an era of growing deficits and

mounting pressures on entitlements, I think we have to enact ideas

that will reduce the need for government over the long term. We

have to spend money in each generation to save even more money

in future generations.

30

When Michelle said that she is now a homeowner and a taxpayer, there you are. That is how a program like KIDS Accounts

and IDAs will save money for this government over the long term.

Also, I think we have some examples to learn from. Britain, as

you know, has enacted its Child Trust Fund. Two million accounts

were set up already this year. Two million kids in Britain now

have their own Child Trust Fund, and they are saving for their future. Canada has Learning Bonds for education established at

birth, and New Zealand just proposed something called the Kiwi

Account.

So, I think this is happening, and I hope the U.S. plays a real

strong leadership role in establishing KIDS Accounts at birth for

every child in America.

Thank you.

[Applause.]

Senator SANTORUM. Thank you, Ray.

[The prepared statement of Mr. Boshara appears in the appendix.]

Senator SANTORUM. It is my pleasure to introduce David John,

who is a research fellow at the Heritage Foundation.

David?

STATEMENT OF DAVID JOHN, RESEARCH FELLOW, THE

HERITAGE FOUNDATION, WASHINGTON, DC

Mr. JOHN. Thank you for having me. Thank you also for holding

a hearing on this important issue.

Lincoln said that a house divided against itself cannot stand.

And while the situation is vastly different, we do have a wealth

gap in this country and a wealth gap that is only growing. We

found over the years that income-transfer programs simply do not

work. They do not provide what might end up being a permanent

solution to this.

However, proposals such as the ones mentioned here, IDAs,

ASPIRE, KidSave, SEED accounts, et cetera, can expand the opportunities for people to grow out of low-income situations. They

expand the opportunities for savings, home ownership, and full

participation in the economy.

Now, as Ray just mentioned, this is not just a U.S. concern. We

have had significant conversations with an Australian Labor Party

Senator by the name of Nick Sherry who is one of the architects

of their mandatory Retirement Savings Plan.

What he said was, as a Labor Union official, the reason he got

involved with this type of an effort—savings, asset-building—was

that he sat and watched upper-income people become wealthier because they had assets and they could watch those assets grow.

What he wanted was to see his members and low-income Australians have the same opportunities.

IDAs, ASPIRE, KidSave, SEED, et cetera, are investment programs, and they pay much more than just financial benefits. For

instance, various studies, one of them by the gentleman at the far

end of the table there, showed that people with assets are much

more future-oriented, prudent, confident in their prospects, and

connected with their communities.

31

Other studies show that, in the event of auto workers affected by

plant closings, that people who owned houses were much less likely

than renters to suffer from depression or alcoholism, even after

taking into account differences in income.

These also apply to the next generation. Various studies have

shown, and this applies to the first panel here, that the savings

habits of families are more important than family income in predicting teen-aged savings behavior.

So, a history of a family that saves will likely continue into future generations. Likewise, the children of homeowners are more

likely to stay in school than those of renters.

Last, but not least, increased levels of home ownership among

low-income families lead to higher rates of high school graduation

and college attendance in the children of those families.

Now, in addition to the other fine programs that have been mentioned here, let me also mention KidSave, which was developed

originally by Senator Bob Kerrey and was co-sponsored by, I believe, the Senator from Pennsylvania back in 2000.

Now, this is a program that was specifically structured to provide

savings for retirement, and it is one that would work very effectively. It has been most recently introduced into the House by Representative Jerry Weller, a Republican from Illinois, and Representative Sherrod Brown, a Democrat from Ohio. I would recommend it also to your consideration.

Now, a key factor in all of these programs that have been mentioned is that they are not new entitlements. We seem to have

more than enough problem with the entitlements that we have at

the moment. These are a hand up. This is the way that families

and communities have always helped each other, and it is a very

appropriate way to help low-income families to build assets and to

help close the wealth gap in this country.

Thank you.

Senator SANTORUM. Thank you. Appreciate it.

[Applause.]

[The prepared statement of Mr. John appears in the appendix.]

Senator SANTORUM. Our final panelist is Mr. Mark Iwry, who is

a nonresident senior fellow at The Brookings Institution.

Mr. Iwry?

STATEMENT OF J. MARK IWRY, NONRESIDENT SENIOR

FELLOW, THE BROOKINGS INSTITUTION, WASHINGTON, DC

Mr. IWRY. Thank you, Mr. Chairman. I am Mark Iwry. I am here

today on behalf of the Retirement Security Project, which is supported by the Pugh Charitable Trusts and is a partnership between

Georgetown University and The Brookings Institution.

The Retirement Security Project is dedicated to working on a

nonpartisan basis to make it easier for lower- and middle-income

working families to save, particularly for longer-term needs for a

secure retirement.

Our private pension system has accumulated what is perhaps the

largest pool of investment capital in the history of the world, some

$11 trillion.

Senator Conrad, you have noted that we spend about $125 billion

a year—that is the Joint Committee on Taxation estimate—on our

32

private pension system: defined benefit, defined contribution,

401(k), Keough, IRA plans.

The benefits, however, are more skewed toward the top than

they should be, and one reason has to do with the question you

asked. Why is our taxpayer investment of $125 billion a year apparently not generating adequate money’s worth for the taxpayers

in terms of increased national saving?

The answer is fairly clear. The way our tax preferences are structured is essentially upside-down. The amount that someone gets by

way of tax preference for saving is proportional to their tax bracket, and this is consistent with what Fred Goldberg was talking

about, and others in the previous panel.

We have a deduction-based system. If you are in the 35-percent

bracket and you contribute a dollar to a 401(k), it costs you 65

cents, the dollar minus the 35-cent deduction. If you are in a 10-

percent tax bracket, that dollar of saving costs you 90 cents instead

of 65 cents.

As Fred Goldberg said, again, this is irrational. What we need

to do is target our efforts to the three-quarters of Americans who

are in the 15-, 10-, or 0-percent bracket who pay payroll taxes but

do not necessarily pay income taxes in a given year because they

do not have income tax liability that year.

The way to do that is quite simple: tax credits instead of tax deductions. What is the difference? As you know, a tax credit would

provide an incentive that is based on how much you contribute,

how much you save, rather than how much you earn, rather than

what your income is.

The Savers Credit is a tax credit that we developed at Treasury

several years ago when I headed up the pension policy and regulation there in order to address the very problem that all of you have

raised, how best to improve asset accumulation and savings for

moderate- and lower-income people.

It levels the playing field between those who have a high tax

bracket and those who, in any given year, have a low- or 0-percent

tax bracket. It is the first, and so far the only, major Federal legislation actually enacted that is directly targeted to promoting retirement savings for the majority of the working population, that is,

those whose bracket is 15 percent or less.

It simply provides a tax credit of 50 percent for every dollar that

one puts into a 401(k), other employer plan, or IRA if one’s income

is $50,000 or less as a family. It was used by 5.3 million taxpayers

in 2002, and again in 2003, and it costs only about 1 percent of

that $125 billion that we spend, Senator Conrad, that you cited, on

the whole tax-favored pension and IRA system.

Unfortunately, during the legislative process, the Savers Credit

was truncated drastically. As a result, it is set to expire at the end

of 2006. It does not help most of the people it was intended to help.

Five million is a lot, but the number of people it was intended to

help runs to the many tens of millions.

We know from the evidence, such as what Bernie Wilson of H&R

Block discussed very effectively in the first panel, that the Savers

Credit works. It gets lower-income people to save.

It can have a huge positive effect on savings if we extend it,

make it refundable, and extend the 50-percent credit rate to everyVerDate 11-MAY-2000 15:35 Apr 19, 2006 Jkt 095484 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 26852.000 SFINANC2 PsN: SFINANC2
33

one who earns $50,000 or less. Right now, it is nominally 50 percent, but really it is 10 percent for most of the relevant people.

Employer plans are a proven and powerful vehicle for accumulating assets for lower-income people, for a variety of reasons that

I go into in my written testimony.

By way of comparison, IRAs have a take-up rate of less than 1

out of 10 people who are eligible; 401(k)s, 2 out of 3, and that has

dropped from 3 out of 4 a few years ago. We can do better. One

out of three are leaving money on the table, and the balances of

people in 401(k)s are grossly inadequate compared to what they

really need.

A lot of people do not participate simply because they do not get

around to signing up. They look at the investment choices and they

are daunted, dazzled. They do not know which to invest in. They

might not even be able to decide exactly how much they ought to

be investing of their pay.

Fortunately, there is a disarmingly simple approach that can address this participation gap in the employer plan system, basically

automatically enrolling people. It has been mentioned before.

We can change the default so that if you do not sign up, you are

in the plan. If you want out of the plan, you sign something and

you opt out. You are in the plan at some default contribution rate

at some reasonable investment that makes sense for regular American working people, and if you want to change that, you can

change at any time.

When I was at Treasury, we decided to approve this automatic

enrollment and automatic 401(k)s, and to promote it because it was

voluntary, on condition that people get an advance written notice

of what the default is and get to opt out at any time, opt out to

whatever they want, including nonparticipation in the plan.

How well does this work for lower-income people? A recent study of a 401(k) plan where people earning less than $20,000 were participating at a 13-percent rate in that plan, using regular enrollment where you have to sign up in order to get in, showed that

when the plan converted to automatic enrollment, so people were

automatically in unless they opted out, the participation rate went

up from 13 percent to 80 percent.

We can do this in our 401(k)s across the board. Together with

many of the other good ideas that have been suggested today, we

can make a dramatic impact in savings and asset accumulation for

lower-income people.

Thank you.

Senator SANTORUM. Thank you, Mr. Iwry. I appreciate that. I am

actually working on a piece of legislation to do just that, so I agree

with your idea of the opt-out versus the opt-in.

[The prepared statement of Mr. Iwry appears in the appendix.]

Senator SANTORUM. Just a couple of questions. I know we are

running late here. There have been different thoughts in the previous panel and this panel with respect to some of these ideas out

there and putting limits on how this money can be spent, either

from the standpoint of just retirement, the standpoint of retirement

or education.

I think some of the savings proposals that were mentioned, I

know by Mr. Goldberg, have no limitation as to what that money

34

can be spent on. Do you have a feeling as to how we should be

structuring these savings accounts? It is a free-for-all.

Mr. IWRY. I will start off. I think it is important to bear in mind

that our existing vehicles for retirement saving, the IRAs, the

401(k)s, in particular, actually are not limited to retirement.

Let us recall that there is not much difference between them and

many of the proposals that are being discussed today. There is a

special exception for getting your money out penalty-free from

401(k)s for college tuition, for financial hardships, for purchase of

a home.

IRAs let the money out under all circumstances, but with a 10-

percent penalty that does not apply for higher education, for purchase of a home, and for various other pressing needs. So when

people talk about retirement, in many cases they are really talking

about many of the same long-term investments in one’s future that

everyone here is talking about.

Dr. SHERRADEN. If I could just add another word. I fully agreed

with Dr. Gonzalez-Rubio’s comments, and Ray Boshara’s comments, that education and owning a home really are about retirement security.

So, while I do not feel these plans should be opened up to any

possible use, I think that the important uses for long-term investment, such as education and home ownership, ought to be included.

Mr. GOLDBERG. Senator, I think the elegance of the administration’s LSA and RSA proposals is, it is some of each, and let the people choose. I think that the most important point is a universal

platform.

One concern I would have about, for example, the ASPIRE proposal is that, if you give every child in the country a $500 account

that all of them can use for education, I would be concerned that,

as an economic matter, that will disappear into the pockets of the

universities very quickly through adjustments in scholarship programs.

A caution I would have on savings policies generally is, to the extent universities alter their scholarship policies in response to children’s assets, I think we have accomplished absolutely nothing.

Mr. BOSHARA. Just a brief comment. I think we should structure

savings for long-term asset accumulation—buying homes, going to

college, and retirement, in particular.

But I also think there is something right about LSAs, which is

that poor people, in particular, also need to save money to fix the

car and the washing machine, and there is some benefit in the government supporting savings for emergencies and fixing the car in

addition to long-term asset accumulation. So I think we should

have a suite of savings policies for people, not just one.

Senator SANTORUM. Anybody else?

[No response.]

Senator SANTORUM. All right. I am told we have a vote, so I am

going to pass on to Senator Conrad, if you have any questions you

would like to ask. Jim, would you?

Senator BUNNING. I just have one for Dr. Shanks.

Your analysis of the impact of wealth and asset accumulation on

child development is extremely interesting.

35

Can you talk a little bit more about what your findings show regarding the impact of specialty-designed savings on parents’ expectations of their child’s future, and the impact that those expectations can have on a child’s attitude, or children’s attitudes?

Dr. SHANKS. Well, from long-term developmental psychology

studies, we know that expectations by parents and in the minds of

children as early as first and second grade can be very predictive

of things like going to college as they go through high school and

make decisions about college; thus, we have included questions

about expectations in our survey, the experimental design I was

telling you about as part of the SEED demonstration, so we could

try to capture that effect.

So I cannot say for sure what such accounts will do, but we know

from developmental psychology that expectations as early as first

and second grade can be quite predictive of what happens when the

children actually get old enough to go to college.

So, that is why we are asking those questions about parental expectations and the child’s expectations in this experimental design

with SEED.

Senator BUNNING. Thank you.

Senator CONRAD. Can I just ask the panel, one of the things that

strikes me is, there are so many different things out here, it is very

hard for people to follow. We have HOPE scholarships, we have

IRAs, we have Keough plans, we have 401(k)s, we have KidSave,

we have so many proposals, RSAs, LSAs.

I think one of the problems, frankly, that we have, is that there

are so many different things, that it just confuses people. Confusion

prevents people from acting. I do not know if it was Mr. Iwry or

Mr. John who was referencing, people are faced with this weltering

number of choices and they get frozen.

How much of our effort here should be to simplify and streamline?

Dr. SHERRADEN. If I could just add a word. Most of these assetbuilding programs, in particular, are relatively new in terms of

public policy, all of them since 1970, essentially. So, I think it is

a relatively young area that has not really consolidated.

But I think what makes sense in the long term is that these programs are folded in, if not into one large system with different

choices and maybe a partition for home ownership and a partitioned amount for retirement, then certainly into a simpler system

than exists today. I think what you are thinking about makes a lot

of sense.

Mr. GOLDBERG. Senator, as you know as a former tax administrator, it is impossible. I think none of us can get our heads around

how screwed up the system is right now.

To me, the concept of ASPIRE is you have a universal platform,

some form of save-it-for-whatever-purpose-you-need, and some form

of put-it-away-until-you-retire-or-you-pass-on-and-leave-it-to-yourheirs. That is all you need. I think that moving in that direction

is essential because it just is not working the way it is.

Senator CONRAD. I would just like to make this comment. I agree

with you. I think, now, we have such a welter of plans out there,

we are just confusing people. We have to find a way to simplify and

36

streamline, because to have a message that resonates and kind of

pierces the veil, simplicity has to be a key part of it.

Mr. Boshara?

Mr. BOSHARA. I would just add that, in the drafting of the

ASPIRE Act, we felt very strongly, Senator Corzine, Senator

Santorum, and others, that we should work with what is on the

books already and not create new products. So, these accounts become Roth IRAs at 18, and you have the option of rolling them into

a 529, period.

Mr. IWRY. Senator, it is, in part, more confusing for those of us

who are looking at legislative alternatives than it necessarily is for

a given individual. Lower-income people are lucky if they have one

or two realistic options that are in fact available to them. I think

that is what everyone on both of these panels is talking about.

There is a lot of convergence here. There are different names, different bills, different genealogies of these proposals, but we are

converging quite a bit on universal proposals that are targeted in

particular to the people who need the help the most. I think that,

while there sort of seems to be a welter of alternatives, we can

prune the irrationality from the system without getting rid of the

things that work.

One of the things that works is the employer system. Sixty-five

million people are covered. We have lots of moderate- and lowerincome people who have gotten meaningful benefits, and we can reform that to make it more rational, to go more to tax credits, away

from deductions, and add a universal base for those who are not

in employer plans. I would not replace employer plans, I would expand on them.

Senator SANTORUM. Go ahead, Mr. John.

Mr. JOHN. I would also agree that simplicity is a key factor and

is going to be very important as time goes on. The one concern I

have with the whole idea of one platform or one account, and this

is true whether it is ASPIRE or whether it is some of the existing

savings accounts, is that there is a tremendous temptation

throughout a person’s working life to meet their immediate needs,

whether it is repairing the house or something along that line, at

the expense of their future needs, which is saving for retirement.

This is one of the values to the President’s plan with the LSAs

and the RSAs, in that they are separated out into two different

programs. Keeping retirement in a separate program, to the extent

that you can, at least ensures that there is going to be a certain

level of assets available when an individual retires rather than

having to turn around and sell the house.

Mr. GOLDBERG. The elegance of a single platform for everybody,

for everybody in this room, from Bill Gates’ kid on down, is you can

use that as your plumbing. That is your infrastructure, and the

plumbing matters.

We cannot tell people how to live their lives, but as long as they

have that infrastructure, that platform, the individual can choose

between saving for current needs and saving for retirement. I agree

with Dr. John, you want to offer both of those.

Also, having spent a lot of time on this, you can get there in a

revenue-neutral basis. This is not about spending more money. If

you look at the whole array of programs that are on the books right

37

now, you can take that and say, within that framework, we are

going to have a system that benefits everybody dramatically more

than we are benefitting folks today.

So it is not a question of, cut more taxes, spend more money. It

is a question of, the Federal Government impacts savings too, and

is doing a terrible job. So you can get where you are talking about,

Senator Conrad, and not do damage to the deficit.

Senator SANTORUM. Well, I think Senator Conrad and I would

both say that we look forward to working with the members of this

panel, and others, to do exactly what you have just suggested,

which is to try to be more efficient in how we promote savings, and

also be more universal in those who will benefit from the government expenditures. I think we heard a lot of good ideas here today

and look forward to working with you to see if we can make that

happen. Thank you.

We are adjourned.

[Whereupon, at 12:37 p.m., the hearing was concluded.]

(39)

A P P E N D I X

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199