#106 Jul/Aug 1999

Rewarding Savings

Selina and Duane Darden of Washington, DC, thought they were doing the best they could on their combined earnings, which were below 150 percent of the federal poverty line. They […]

Selina and Duane Darden of Washington, DC, thought they were doing the best they could on their combined earnings, which were below 150 percent of the federal poverty line. They were getting by and paying their bills and somehow managing to raise their four children. Saving money, or owning a home, didn’t seem possible, so they didn’t even think about it.

But then Selina, who works as a beautician, heard about something called Individual Development Accounts (IDAs) from a family friend and made an appointment with the Capital Area Asset Building Corporation (CAAB), which was running a citywide IDA program with a partner right in the Dardens’ own Marshall Heights neighborhood. Shortly thereafter, Selina and Duane enrolled in CAAB’s financial skills building course, opened an IDA, and began saving for their first home. Just over a year later, with enough money in the IDA to make a downpayment, the Dardens began looking for a home of their own in Marshall Heights.

IDAs – which are spreading fast throughout the U.S. and have created a “buzz” among policymakers, foundations, and financial institutions – are designed to reward the monthly savings of working-poor families hoping to buy their first home, pay for post-secondary education or training, or start a small business. This reward or incentive is provided through the use of matching funds derived from both private and public sources. To further enable families to move into the economic mainstream, IDA accountholders receive financial education and counseling while they are saving.

“We learned how to save money. I never saved, but I have a bank account today,” explains Selina. “My husband and I, we are out to reach a goal. It was a dream at first, but it’s a dream that is coming true.” In the beginning the Dardens were able to save only $25 a month, then increased it to $50, and now they are saving $100 every month – something they never even thought they could do prior to enrolling in the IDA program. Somehow, the presence of a savings account, support from a local non-profit, and the real chance to own a home all made saving possible. It’s what Michael Sherraden, author of Assets and the Poor, says about assets: “They’re hope in concrete form.”

CAAB’s economic education classes, coupled with one-on-one counseling, have allowed the Dardens to learn how to budget money more effectively. As Selina said at a recent National Press Club Policy Forum, where she sat alongside Senators Joseph Lieberman (D-CT) and Rick Santorum (R-PA) in their collective effort to further expand IDAs nationwide: “We cut back on clothing costs. We catch sales. We cut coupons out. We take rain checks.” They have also taken courses on establishing and managing credit (another source of savings), preparing for homeownership, and planning for the long-term, through, for example, life insurance policies and retirement savings.

Selina believes the IDA program has really changed her and her family’s lives. “After I learned how to save, I got a bank account and told my kids they need to get a can, a jar, or something and save, so that when they need something they will be able to afford itso they started putting their pennies in the jars.” Her 15-year-old son, Reynaud, saves the most pennies every month. “He wants to go to college, so he wants to put his money in an account,” Selina proudly proclaims.

The Dardens are excited about their future, as are many of their family members, friends, and salon clients who have since joined CAAB’s IDA program. “They see the joy from me, that I’m so excited going through the program that they want to go too. It’s really contagious. It rubs off because I see them now in the program and they are happy that their family is happy.”

Designing IDA Programs

Partnerships are a hallmark of all successful IDA programs. CAAB is a nonprofit umbrella organization created in 1996 to implement IDA programs throughout the Washington, DC, area. CAAB raises funds for matches, provides economic education training, technical support, fiscal management, and program evaluation to its member organizations, all of whom have been working in low-income neighborhoods in the city for many years. Currently, CAAB partners are: Community Family Life Services; Latin American Youth Center; Manna; Marshall Heights Community Development Organization; Wider Opportunities for Women; The Washington Project (a coalition of Enterprise Development International and several D.C. churches); National Child Day Care Association; and Gospel Rescue Ministries.

CAAB’s member organizations have designed their own IDA programs to fit within the overall CAAB criteria, ensuring the “best fit” for the needs of the population and purpose they serve. The target population for CAAB’s member organizations are those individuals and families that live in D.C. and have an income at or below 200 percent of the federal poverty guidelines. However, families of up to four members saving for homeownership may have an income at or below the HUD very low-income housing level for the D.C. metropolitan area (50 percent of the area median income).

Each member organization recruits and selects the IDA participants, as well as advertises its IDA program by dispersing brochures and flyers in the area. Word-of-mouth is also one of the most effective recruiting practices, as clearly exemplified by the Dardens.

All IDA participants receive “asset training,” counseling, and assistance in purchasing their asset from member organizations. Thus, with the exception of new CAAB economic education courses, which began this June and will continue until December, member organizations complete all hands-on work with IDA participants.

CAAB’s match rates vary according to the member organization, asset type, the amount the target population is projected to be able to save each month, and the cost of the asset. The Community Family Life Services, Latin American Youth Center, and National Child Day Care Association have a 3:1 match rate for homeownership; Marshall Heights Community Development Organization’s match rate is 2:1; Wider Opportunities for Women’s rate is 4:1; and Manna’s rate is 5:1.

CAAB’s funding partners are The Moriah Fund, The Annie E. Casey Foundation, Citibank, The Morris and Gwendolyn Cafritz Foundation, The Eugene and Agnes Meyer Foundation, The Enterprise Foundation, and The Wendling Foundation. Citibank, also CAAB’s banking partner, offers typical banking services, including an interest-bearing commercial checking account, a money-market account, and a securities account. In addition, CAAB is one of 13 organizations participating in the national Downpayments on the American Dream Policy Demonstration (ADD), a foundation-funded, 2,000-account IDA demonstration organized by the Corporation for Enterprise Development (CFED) and Center for Social Development (CSD).

IDAs as Asset Builders

The successes of CAAB’s IDA program and the Darden family are not isolated. Already, there is encouraging evidence from IDA programs across the country that low-income families, with proper incentives and supports, will save regularly and acquire productive assets. For example, 913 low-income families participating in ADD saved $165,225 as of December 31, 1998, and these savings leveraged another $342,775 in matching funds. Monthly deposits usually range from $30 – $70 per month.

Also, recent research compiled by CSD at Washington University in St. Louis – which is directed by Michael Sherraden and is the other lead organization in the IDA field – shows many beneficial aspects of assets. For example, assets: promote economic household stability; promote educational attainment; decrease the risk of intergenerational poverty transmission; increase health and satisfaction among adults; and increase local civic involvement.

IDA programs are spreading rapidly throughout the U.S. To date, IDA programs exist in about 150 communities around the country, and another 150 are in the developmental stages. Twenty-six states have passed some form of IDA legislation, seven states have created IDA pilot programs, and five states have IDA legislation pending. Overall, CFED estimates that about 3,000 people are actively saving in their IDAs, and that there is IDA policy or practice in all but seven states.

And the numbers are likely to increase: in October 1998, President Clinton signed into law the Assets for Independence Act (AFI), sponsored by Senators Dan Coats (R-IN) and Tom Harkin (D-IA) and Representatives Tony Hall (D-OH) and John Kasich (R-OH). AFI authorizes the Department of Health and Human Services to conduct a 5-year, $25 million per year IDA demonstration, through which grants will be made to nonprofit organizations on a competitive basis. AFI received a $10 million “start up” appropriation for FY 1999; CFED and others are pushing for the full $25 million for FY 2000. AFI builds on the IDAs authorized in the 1996 welfare overhaul law, which allows states to include IDAs in their TANF plans (which 25 have done thus far). IDAs are also likely to be more widespread following the May 3 draft ruling that IDAs will count toward Community Reinvestment Act (CRA) credit under a wide range of tests.

These policies are, however, only a start: CFED, CSD and others have forged a rather ambitious policy agenda for IDAs, going well beyond demonstration projects. Within ten years, they hope to see a universal asset-building policy, started at birth, funded throughout life from public and private sources, and available for first-home purchase, a small business, post-secondary education and training, and retirement. Others, too, have recently called for a national “stakeholder” policy. The list is impressive: Melvin Oliver and Thomas Shapiro, authors, Black Wealth/White Wealth; Michael Stegman of UNC-Chapel Hill; Richard Freeman of Harvard; Bruce Ackerman and Anne Alstott of Yale Law School; Robert Kuttner of The American Prospect; and former Labor Secretary Robert Reich have all, in varying degrees, argued for a shift in social policy toward savings and wealth accumulation for all American households.

And an ambitious policy is needed. Consider these facts:

  • Ten percent of all families control two-thirds of the wealth.
  • One-half of all American households have less than $1,000 in net financial assets.
  • One-third of all American households and 60 percent of African-American households have zero or negative net financial assets.
  • Forty percent of all white children and 73 percent of all black children grow up in households with zero or negative net financial assets.
  • Depending on the data set used, 13 to 20 percent of all American households do not even have a transaction account (no checking or savings account).

It’s important to note, however, that the U.S. already has an asset-development policy – but it fails to reach low-income Americans. In fact, one could argue that, with asset limits in public assistance programs, the U.S. has two distinct social policies: asset development for the non-poor, and asset denial for the poor. And, given the huge disparities in wealth between equally positioned whites and blacks (well documented by Oliver and Shapiro), it is fair to say that the U.S. has an asset discrimination policy as well.

For the non-poor, asset building occurs primarily through the tax code – what Christopher Howard calls the “hidden welfare state.” According to Sherraden’s analysis of estimated tax expenditures (published by the Joint Tax Committee), $288.5 billion will be expended in FY2000 to help individuals accumulate three categories of productive assets: homeownership, investments, and retirement. And such expenditures are highly regressive. For example, households with incomes over $50,000 received 91 percent of homeownership tax expenditures and 93 percent of retirement tax expenditures in FY1998.

The answer, however, is not income redistribution. The primary challenge, instead, is to expand the reach of the tax code so any American willing to work and save, regardless of income, has an opportunity to build assets. Congress is seriously considering two proposals to do just that: the Savings for Working Families Act (sponsored by Lieberman and Santorum) would provide approximately $5 billion in tax credits to financial institutions and private sector contributors to set up, match, and support IDAs for low-income people; and the President’s $38 billion per year Universal Savings Account (USA) proposal, which would use a combination of automatic and matching deposits to help low- and moderate-income working families save for retirement.

Building assets is not only good social policy; it’s also good economic policy. CFED, using the best available data and experience, has estimated the returns of a national investment in IDAs. The analysis assumes a national demonstration of 100,000 IDAs for low-income families (earning $25,000 a year or less), with a federal investment of $105 million to match the $186 million in resources from the savings of low-income families, private sources, and state and local governments. CFED calculates that this $291 million investment would produce net returns to the nation of $1.63 billion – more than five times the initial investment – in the form of new businesses, new jobs, increased earnings, higher tax receipts, and reduced welfare expenditures. Finally, IDAs will be a net plus for the national savings rate, since they target people with little or no savings.

In the end, by demonstrating that IDAs work, Selina Darden is doing much more than moving her and her family forward: she’s pioneering a new path for community development, and a new social policy for the U.S.


Richard Hall at the Capital Area Asset Building Corporation, 815 15th St. NW, Washington, DC 20005, 202-737-5771; [email protected].


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