SAVINGS AND PERSONAL DISCOUNT RATES IN A MATCHED SAVINGS PROGRAM FOR LOW‐INCOME FAMILIES

I. INTRODUCTION The empirical evidence on savings suggests that while poor families can and do save, lower income families are less likely to save and report lower rates of savings than do higher income families (Bucks et al. 2009). Meeting basic needs consumes most of a low-income family's household income. As a result, such families are more likely to save, if at all, only for very short-term goals (especially regular household needs) and for emergencies than are higher income households who are more likely to be saving for retirement (Bucks et al. 2009; Dunham 2001). In the last 10 years, advocates and community organizations in the United States have created new programs and policies intended to help low-income families save and to build durable assets. Michael Sherraden effectively disseminated the model for asset building in his book, Assets and the Poor (1991) where he posited that poor families are impoverished not only by having very low incomes, but also by lacking the economic and social benefits of asset ownership. His prescription was the creation of opportunities like matched savings programs that support savings and wealth-building. These programs provide the institutional structure and incentives for families to save toward assets like education, home ownership, and small business development. Since then, federal, state, and local governments and nonprofits have all contributed toward creating Individual Development Account (IDA) matched savings programs. Experience with IDA programs suggests that, while they can provide some families with a vehicle for increasing savings, they are not a panacea for the difficulties in saving or for family disadvantage. One rationale for matched savings programs is that the regular savings patterns they promote overcome a natural time inconsistency experienced by many individuals. An individual with time inconsistent preferences may want to save, but when the time comes to actually put money away, the desire for current consumption trumps the previous commitment to save. While higher income families have access to the commitment mechanisms offered by employer-based retirement savings, direct deposit, and home mortgages, lower income families often lack similar opportunities. Hence participation in matched savings programs may provide a self-commitment mechanism to help low-income individuals save. Understanding how time preferences are related to savings behaviors can help inform the design of matched savings programs or other asset-building initiatives for low-income individuals. In this article, we use data from a local matched savings program to assess the ability of low-income families to save within an IDA program and, more specifically, the influence that individual time preferences have on savings. We approach the problem of measuring the latent construct of time preference with factor analysis which may offer a novel way of addressing concerns of confounding factors such as risk attitudes. We find that responses to survey questions designed to elicit discount rates (implicit interest rates for future consumption) are best summarized by a single latent factor and cannot easily be used to otherwise distinguish among subgroups of participants. We find no strong evidence that discount rates were much affected by experience in the matched savings program. Consistent with expectations, participants with higher discount rates saved less, on average, in the first year of the program and were less likely to complete the savings program. II. LITERATURE REVIEW A. Time Preferences and Discount Rates The basic choice to save implies trading-off present for future consumption. Time preference is the desire for immediate over delayed consumption, and the discount rate measures the rate at which individuals are willing to make these intertemporal trade-offs. In spite of the importance of this parameter to the many intertemporal decisions we make--financial investing, education, our use of natural resources--until a decade ago there was little discussion in the economics literature about how discount rates are formed and whether and how they vary across individuals or over time. …