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

Ray Boshara

New America Foundation

Washington, DC

202-986-2700

boshara@newamerica.net

www.newamerica.net

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

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

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

   Savings Performance
        - Average monthly deposit: $19 net, $40 gross
        - With average match of 2:1, total savings was $700 per year
        - Withdrawals:

46% home purchase/repair

23% microenterprise

18% small business
        - 64% made unmatched withdrawals
        - 51 cents was saved for every dollar that could have been matched

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

IDA Experimental Research: What’s the Effect of IDAs on Savings and Asset Accumulation?Sample size: 840 (412 treatment, 428 control).  Time: 48 months Mills et al., 2004
| Homeownership                | Significant positive effect, esp. for African Americans                   |
|------------------------------|---------------------------------------------------------------------------|
| Real assets and total assets | Positive effect for subgroups that experienced increases in homeownership |
| Retirement savings           | Positive for African Americans                                            |
| Liquid assets                | Negative (due to acquiring other assets)                                  |
| Liabilities                  | Negative (due to acquiring other assets)                                  |
| Net worth                    | No measured effect (but this finding is disputed)                         |
| Educational attainment       | Significant positive effect (whether one had taken a non-degree course)   |

Institutional Determinants of Savings 
        - Focus of assets field has evolved:  Program  Product  Plan
        - Institutional Determinants of Savings (Sherraden et al.)

Access (is a savings plan offered)

Information (financial education)

Incentives (tax break or match)

Facilitation (someone does it for you)

Expectations (match caps or savings goals)

Restrictions (contribution limits, limits on uses)

Security (is the money safe)
        - Convergence with behavioral economics

The Effect of Savings Plans and Defaults
        - Auto 401(k):

	Employee   	Opt-in    Opt-out

	Females	35%	  86%

	Hispanic	19%	  75%

	Under 20K	13%	  80%
        - Auto Escalation: “Save More Tomorrow” trial was shown to lead to a substantial increase in contribution rates over time
        - IRA participation (voluntary): 5-15% 

     401(k) participation (structured savings plan): 75%
        - Split Refunds experiment: Participants saved $606, or 47% of their refunds

The one-fourth with prior savings saved $924 – a 90% increase in their savings

Those three-fourths with no prior savings saved $479

Research on Asset EffectsSummarized by Sherraden, 2005
        - Holding assets at 23 is associated with later positive outcomes such as better labor market experience, marriages, health and political interest. (Bynner & Paxton, 2001)
        - The presence of the asset appears to matter more than the monetary value of the asset. (Bynner & Paxton, 2001)
        - The presence of small wealth at critical times can have “transformative” effects on the life course. (Shapiro, 2004)
        - Parental wealth is positively associated with cognitive development, physical health, and socio-emotional behavior of children – even in very poor families. (Williams, 2003)
        - Wealth seems to be a better predictor of well-being as children grow older, while income is a better predictor when they are younger.  (Williams, 2003)
        - Low-income, single mothers’ assets are positively associated with children’s educational attainment.  (Zahn and Sherraden, 2003)
        - Income is associated with educational achievement when assets are not in the model.  However, income becomes non-significant when assets are included.  (Zahn and Sherraden, 2003)
        - Assets lead to positive attitudes and behaviors, and positive attitudes and behaviors lead to assets may be a glimpse of a “virtuous cycle” wherein household development is a reinforcing feedback loop.  (Yadama and Sherraden, 1996)

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

Policy Agenda(see Assets Agenda for details)
        - Establish lifelong savings and asset-building accounts at birth
        - Promote products and plans for flexible savings
        - Improve access to wealth-building financial services and effective financial education
        - Connect tax refunds to transaction, savings and asset accumulation products and plans
        - Promote matched savings for the working-poor for higher education, small business development, homeownership, and retirement
        - Rebuild the U.S. Savings Bond program
        - Encourage progressive state-based “529” college savings plans
        - Revise or eliminate asset limits in public assistance programs
        - Improve established micro-enterprise, post-secondary education, homeownership, and retirement security programs
        - Strengthen laws to protect assets; distinguish “good” debt from “bad” debt

Lower-Cost Policies
        - Realize the full potential of Split Refunds and Auto401(k)s

Split Refunds: $82 billion/yr. in refunds for AGI < $30,000

Auto401(k): $75 billion/yr. increase in savings by low-income workers
        - Enact the New Savers Act

Improves access to wealth-building financial services

Creates Young Savers Accounts

Gives Savers Credit for contributions to 529s and Coverdells

Revives and promote Savings Bonds

Improves transparency and progressivity of 529s

Promotes financial education, savings and asset accumulation at tax time
        - Enact the Automatic IRA Act

Encourages employers not offering a 401(k) to facilitate automatic payroll deposits from employees into IRAs
        - Revise asset limits in the Food Stamp Program (Farm Bill)

Excludes IRAs, 529s and indexes/raises existing limit to inflation 

Savings Accounts for Children

United States

In Congress:
        - ASPIRE Act
        - Plus Accounts
        - Baby Bonds
        - Young Savers Accounts
        - 401Kids

In States:
        - 529s at birth
        - Matched 529s
        - Commissions/Task Forces

Commercial
        - Young Americans Bank

Research/Policy Initiative:
        - SEED Initiative

Around the World

Established in Law/National Policy:
        - Child Trust Fund (UK)
        - Canada Education Savings Program
        - Baby Bonus, CDAs (Singapore)
        - Child Development Accounts (Korea)

Commercial Financial Institutions:
        - Hatton Bank (Sri Lanka)
        - Children’s Mutual (UK)
        - Barclays (Uganda, Ghana)
        - Equity Bank (Kenya)
        - Banco Estada (Chile)
        - ICICI (India)
        - ANZ (Australia, New Zealand)
        - HSBC (Sri Lanka)
        - XacBank (Mongolia)

III.  Recommendations for the FDIC – Part One

Provide Clarity

Complete work to clarify FDIC insurance coverage for individuals in pooled and non-traditional accounts, particularly with prepaid products

Tie CRA credit to offer and take-up of meaningful savings products 

Work with other regulators to promote greater transparency in disclosures of terms, fees, and charges of traditional banking products and new products coming on line

Promote and Research Innovations

Utilize existing alliances, such as the eight Alliance for Economic Inclusion Regional Initiatives, to deliver or pilot savings initiatives in states or communities

Promote sweep account products that automatically move money into a higher yielding savings vehicles (after a certain balance is met)

Focus attention on the nature of, restrictions on, and usage of the savings accounts tied to small-value loan products in the FDIC pilot

Revive and promote a modern version of the “Credit Builder Account,” which builds savings, establishes a credit score, and leads to a reasonably priced mortgage

Recommendations for the FDIC – Part Two

Promote savings and asset accumulation, especially through automation 

At tax time

At the workplace

Tied to consumption

Tied to shorter-term loans

Tied to mortgages

Promote savings accounts for children

Encourage banks to expand and promote savings programs for kids, especially in schools

Encourage Congress to authorize Young Savers Accounts (Sen. Baucus)

A “Kids Roth” – a lifelong, tax-benefited product that allows parents and others to contribute to a child’s YSA (contributions governed by parents’ earned income)

Permissible, penalty-free withdrawals already include first-time home purchase and post-secondary education, in addition to retirement

Contributions to YSAs from low-income households qualify for the Savers Credit

YSAs fully excluded from determining eligibility from all means-tested programs

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