A shift toward asset-based policy seems to be underway in the United States. This can been seen in the introduction and growth of 401(k)s, 403(b)s, IRAs, Roth IRAs, the Federal Thrift Savings Plan, Educational Savings Accounts, Medical Savings Accounts, Individual Training Accounts, College Savings Plans in the states, and proposed individual accounts in Social Security. Some of these are public and some are “private,” but it is important to bear in mind that even the “private” plans are typically defined by public policies and receive substantial tax subsidies. All these asset-building accounts have been introduced in the United States since 1970; they are the most rapidly growing form of domestic policy. Asset accounts may become a primary form of domestic policy during the 21st century.
Asset-based policy, however, is considerably more regressive than the social insurances and means-tested transfers that were the mainstays of social policy in the 20th century. The reasons are twofold: first, the poor often do not participate in asset-building programs; and second, asset-building policies operate primarily through highly regressive tax expenditures that benefit the poor little, if at all. Sixty-seven percent of retirement tax benefits go to households with incomes over $100,000; 93 percent go to households with incomes over $50,000.
Homeownership policy, a central way of encouraging asset accumulation, is almost as regressive. Homeowners can receive interest deductions on mortgages up to a million dollars and on mortgages for second homes. These deductions can exceed $25,000 per year for a single individual. Fifty-four percent of home mortgage interest tax benefits go to households with incomes over $100,000; 91 percent go to households with incomes over $50,000.
Asset Building for the Poor
Extending asset building to the poor makes sense for two reasons. First, fairness. The extraordinarily regressive federal tax expenditures to individuals are estimated at over $500 billion in 2000. If these massive benefits were distributed equally among the population, each adult in the country could receive over $2,000 per year, enough for a fully funded IRA. If the benefits were distributed progressively (more for the poor), they could provide every low-income person in the country with a decent home and health insurance coverage, plus a fully-funded IRA.
Second, assets are a key to family and community development based on capacity rather than maintenance. Welfare policy for the poor has focused on income-for-consumption, which is essential but not enough. In order to develop capacity, families and communities must accumulate assets and invest for long-term goals. Public policy should focus on both income support and asset building.
Unfortunately, means-tested transfer policies for the poor, with “asset limits,” have done just the opposite; they have discouraged saving and asset accumulation among the poor. This double standard in public policy – large asset subsidies for the wealthy, but discouraging asset accumulation by the poor – is misguided. The goal should be to bring everyone into asset-building policy, with adequate resources for social protections and household development.
Toward Progressive Asset-Based Policy
Individual development accounts (IDAs) were created as a step in this direction. IDAs are matched savings accounts for the poor, to be used for homeownership, education, small business, or other development purposes. IDAs first began in community organizations in the early 1990s, including housing organizations, community action agencies, microenterprise programs, social service agencies, and community development financial institutions. Today at least 200 IDA programs exist, and hundreds more are being planned.
Several prominent organizations have established IDA networks. AmeriCorps VISTA has IDA volunteers working at community development credit unions and other community organizations. The Eagle Staff Fund of the First Nations Development Institute has begun IDAs on several Native American reservations. United Ways in Atlanta and St. Louis have funded multi-site IDA programs, and the Neighborhood Reinvestment Corporation has started its own IDA program.
At least 27 states have passed IDA legislation for welfare recipients and/or other low-income residents. Five states have passed legislation for other asset-building initiatives for education or job training, and almost all states have raised asset limits for welfare. Altogether, there is some type of IDA policy or initiative in 44 states, typically with broad bipartisan support.
At the federal level, IDA legislation also has bipartisan support. Two important IDA provisions were included as state options in the federal “welfare reform” act of 1996. First, states can use Temporary Assistance to Needy Families (TANF) funds to match savings in IDAs. Second, assets accumulated in an IDA are exempt from asset limits for all federal means-tested programs – in other words, in IDAs the welfare poor can save without penalty. Another federal IDA initiative, the Assets for Independence Act of 1998, provides $125 million for IDA demonstrations over five years. At this writing, the Savings for Working Families Act of 2000 has been introduced in the House and Senate; it would create over one billion dollars in tax credits to financial institutions and others who support IDAs.
This legislative interest in IDAs appears to be warranted. A large demonstration project on IDAs, funded by eleven foundations, finds that participants are saving an average of $33 per month, matched at an average of 2:1 for accumulations of about $100 per month. Interestingly, very low-income households are saving almost as much as households who are not as poor, and saving a larger proportion of their incomes.
IDAs have demonstrated that low-income, low-wealth households can save and accumulate assets if they have similar opportunities and incentives to the non-poor. This can lay the groundwork for inclusive, progressive asset-based policies now emerging.
Emerging Policy Directions
Sen. Bob Kerrey (D-NE) has proposed Children’s Savings Accounts (CSAs), with federal deposits for all children from birth through age 18, to be used for education and later retirement security. Every economically advanced nation except the United States has some form of monthly payment to families with children, designed for consumption support. Western European countries spend an average of 1.8 percent of GDP on child allowances. That much of the United States’ GDP would be more than enough to deposit $2,000 per year into CSAs.
Michael Stegman, former Assistant Secretary for Policy Development and Research at HUD and currently public policy professor at University of North Carolina at Chapel Hill, has proposed incorporating IDAs in Electronic Funds Transfer (EFT). At present, a large portion of the poverty population is “unbanked,” i.e., they have no mainstream financial services. Instead, they pay high prices for financial services in check cashing outlets, pawn shops, and the like. The transition to EFT presents an unusual opportunity to provide a full range of financial services, not merely transaction accounts, for nearly all Americans. As Stegman proposes, this could include matched saving in the form of IDAs.
In his 1999 State of the Union Address, President Clinton proposed using 11-12 percent of the budget surplus – an estimated $38 billion per year at the outset – to create progressive Universal Savings Accounts (USAs) for retirement. The federal government would make annual deposits plus matching deposits into low- and middle-income workers’ accounts – covering most of the working population – on a progressive basis, i.e., the largest subsidies would be at the bottom. Some have described this as a 401(k) available to all workers.
In the 2000 State of the Union Address, Clinton proposed Retirement Savings Accounts (RSAs), a scaled-down version of USAs, estimated at $5.4 billion per year. RSAs could also be used for homeownership, education, and other goals. In making these proposals, Clinton mentioned the early success of IDAs in showing that the poor can save.
Homeownership for the Poor
In America, homeownership is a high priority for most families, including many low-income families. Fifty-five percent of participants in the “American Dream Demonstration” prefer to use their IDAs for homeownership.
Interest in homeownership for low-income households has grown markedly over the past decade. Current policy initiatives include the Section 8 Homeownership Program, Fannie Mae’s homeownership initiatives, and the Community Reinvestment Act’s regulatory provisions. Indeed, home mortgage lending to low-income households has increased substantially in recent years.
However, there is a long way to go, and housing advocates should not be satisfied with tinkering at the edges of homeownership policy. The federal government is passing out a great deal of money for homeownership, and poor people are not getting much of it. A better policy would promote homeownership across a broader population with progressive, or at least equal, benefits to enable more low-income, low-wealth families to become homeowners.
The popular wisdom is that tax benefits for homeownership are an almost untouchable political issue. But current housing policy is so regressive that it is unjust to the majority of U.S. households. When the majority’s interests are at stake, it should be possible to mobilize support for policy change. A good first step would be to cap the home mortgage interest tax deduction to loan amounts no higher than $200,000 (why should the government support above-average housing?) and use the additional resources to subsidize homeownership among the poor.
As asset-building policy continues to expand, inclusion of the poor is the greatest challenge. Homeownership, as the fundamental American Dream, should be at the center of asset-building policy and community development.