Building Assets and Fighting Poverty with Individual Development Accounts
February 2003
By Monica Kearns and Andrea Wilkins
Background
State policymakers have a new option in helping low-income families break the cycle of poverty. Asset development, as explained by Michael Sherraden of Washington University, emphasizes achieving self-sufficiency through savings and investment rather than through spending and consumption. In other words, the current emphasis on income-based assistance for the poor can be complemented with asset-based policies.
In the 1990s, some states began helping families build up financial assets through Individual Development Accounts (IDAs). These are savings accounts matched with public and private funds. They are dedicated to such things as a housing down payment, education or job training, or capitalizing a small business. IDA programs generally require account holders to participate in a financial education program.
National policies currently promote asset building for those who own homes through home mortgage interest tax deductions, for example, and for those who have retirement pension accounts through tax deferral. The human services and economic development policy realms can incorporate IDAs to bring asset-building advantages to low-income families. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) authorized states to create IDA programs using federal Temporary Assistance to Needy Families (TANF) dollars and disregard this asset in determining an applicant's eligibility for public assistance. Economic development efforts to encourage self-employment for those with low incomes (microenterprise) can use IDAs as a new strategy.
Elements of IDA Programs
IDAs target displaced workers, working-poor families, TANF recipients and immigrants, among others. Community organizations or public agencies manage the programs, which involves providing financial training to participants and authorizing their withdrawals of money. Participating organizations include community development corporations, credit unions, United Way agencies, housing agencies and religious institutions. Funds are deposited in banks, thrifts or credit unions. The traditional savings account generally is owned by the IDA participant. Matching funds are held and controlled by the managing organization. Matching rates usually range from $1 to $4 for each dollar saved.
State governments can contribute matching IDA funds in a number of ways, including direct appropriation, offering tax credits to IDA match contributors, providing refundable tax credits to IDA account holders, using welfare reform funds, and using federal Community Development Block Grant funds.
State Action
At least 31 states had an IDA program by July 2001, either with or without a match. Legislative appropriations may be part of the equation, but IDA programs work best when the state, banks and public and private supporting organizations collaborate to establish them. A cooperative approach increases participation and community support.
Minnesota policymakers have adopted a variety of asset-building strategies that includes an IDA program with a three-to-one match and a fully refundable state earned income tax credit. In addition, the state has the second highest income tax threshold ($25,600) for public assistance in the nation. Washington had appropriated more than $1 million by mid-2002 for IDAs, had included IDAs as a component of its welfare reform plan, and had an established state IDA program.
During the 2002 legislative session, policymakers in Idaho enacted legislation establishing IDA program requirements and guidelines. In addition to the typical allowable uses, program rules allow for emergency withdrawal under certain circumstances. The Virginia General Assembly authorized an asset-building program in 2002 requiring public assistance applicants to establish a savings account, not to exceed $5,000. The state will set guidelines governing permissible withdrawals.
Federal Action
The Assets for Independence Act of 1998 (AFIA) provides federal funding for the operation of IDA programs at the state and local level to build on those started under PRWORA. AFIA established the Assets for Independence Demonstration Program, a five-year, $125 million demonstration project that began in fiscal year 1999 and is administered by the U.S. Department of Health and Human Services.
Given the early promise of the initial IDA programs, efforts were made to increase the availability of IDA's through the Charity Aid, Recovery and Empowerment Act of 2002 (CARE). The 2002 act would have provided a dollar-for-dollar tax credit to banks and community organizations providing matching contributions up to $500 per account. The act passed the Senate Finance Committee but was not voted on by the full Senate prior to the end of the session.
Evaluation
The Center for Social Development at Washington University in St. Louis released an early stage evaluation of 13 IDA demonstration programs across the U.S. in 2001. Most of the 1,326 account holders had participated for about nine months by the time of the evaluation. Already they had saved more than $378,000 altogether and had accumulated more than $1.1 million including matching funds. The study reported that participants' income did not have a statistically significant effect on the amount saved. In fact, very poor households saved at a higher rate than less poor households. These results may be heartening to states that have supported IDAs.
Resources
Corporation for Enterprise Development. State Asset Development Report Card: Benchmarking Asset Development in Fighting Poverty. Washington, D.C., 2002. Edwards, Karen and Carl Rist. IDA State Policy Guide. Center for Social Development, Washington University in St. Louis, and the Corporation for Enterprise Development. Washington, D.C., 2001.
PriceWaterhouseCoopers. Are Assets Only for America's Wealthy? New York, N.Y., March 2002.
U.S. Senator Joe Lieberman Press Office. The Charity Aid, Recovery and Empowerment Act of 2002 Section-by-Section Summary. www.senate.gov/~lieberman/press/02/02/2002207716.html, February 2002.
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