Policy Approaches for Saving and Asset Policy Approaches for Saving and Asset Building by Low-Income Americans Building by Low-Income Americans

FDIC Advisory Committee on Economic InclusionFDIC Advisory Committee on Economic Inclusion

March 19, 2008March 19, 2008

Ray BosharaRay Boshara

New America FoundationNew America FoundationWashington, DCWashington, DC

202-986-2700202-986-2700 boshara@newamerica.netboshara@newamerica.net

www.newamerica.netwww.newamerica.net

Goals for TodayGoals for Today

To convey the most important research To convey the most important research findings for low-income persons to save and findings for low-income persons to save and build assetsbuild assets

To articulate a forward-looking public To articulate a forward-looking public policy agenda for low-income persons to policy agenda for low-income persons to save and build assetssave and build assets

To offer specific recommendations for the To offer specific recommendations for the FDICFDIC

I. Key Research FindingsI. Key Research Findings

Low-income persons can save and build assetsLow-income persons can save and build assets

Low-income persons have multiple savings needs, not just for Low-income persons have multiple savings needs, not just for savings that lead to productive assetssavings that lead to productive assets

Individual characteristics – education, employment, welfare receipt, Individual characteristics – education, employment, welfare receipt, and even income – matter little in predicting savings and asset and even income – matter little in predicting savings and asset accumulation by low-income personsaccumulation by low-income persons

Program or “institutional” characteristics matter a lot in predicting Program or “institutional” characteristics matter a lot in predicting saving and asset accumulation by low-income personssaving and asset accumulation by low-income persons

Holding assets appears to lead to positive social, behavioral, Holding assets appears to lead to positive social, behavioral, psychological, civic and other outcomes for children and adultspsychological, civic and other outcomes for children and adults

IDA Monitoring Research:IDA Monitoring Research:Can the Poor Save in IDAs?Can the Poor Save in IDAs?

Number of Accountholders: 2,364. Mean participation: 24.5 monthsNumber of Accountholders: 2,364. Mean participation: 24.5 monthsSchreiner Schreiner et alet al., 2002., 2002

Savings PerformanceSavings Performance

Average monthly deposit: $19 Average monthly deposit: $19 net, $40 grossnet, $40 gross

With average match of 2:1, total With average match of 2:1, total savings was $700 per yearsavings was $700 per year

Withdrawals:Withdrawals:• 46% home purchase/repair46% home purchase/repair• 23% microenterprise23% microenterprise• 18% small business18% small business

64% made unmatched 64% made unmatched withdrawalswithdrawals

51 cents was saved for every 51 cents was saved for every dollar that could have been dollar that could have been matchedmatched

Regression ResultsRegression Results

Income not correlated with savingIncome not correlated with saving

Each dollar increase in monthly Each dollar increase in monthly savings match cap is associated savings match cap is associated with a 40-50% increase in with a 40-50% increase in average savingsaverage savings

Total amount matched (match Total amount matched (match cap) matters more than match cap) matters more than match rate (e.g., 1-1 vs. 2-1)rate (e.g., 1-1 vs. 2-1)

Financial education is correlated Financial education is correlated with greater savings, but only up with greater savings, but only up to 10 hoursto 10 hours

Participant characteristics matter Participant characteristics matter littlelittle

IDA Experimental Research: IDA Experimental Research: What’s the Effect of IDAs on Savings and Asset Accumulation?What’s the Effect of IDAs on Savings and Asset Accumulation?

Sample size: 840 (412 treatment, 428 control). Time: 48 months Sample size: 840 (412 treatment, 428 control). Time: 48 months Mills Mills et alet al., 2004., 2004

HomeownershipHomeownership Significant positive effect, esp. for Significant positive effect, esp. for African AmericansAfrican Americans

Real assets and total assetsReal assets and total assets Positive effect for subgroups that Positive effect for subgroups that experienced increases in experienced increases in homeownershiphomeownership

Retirement savingsRetirement savings Positive for African AmericansPositive for African Americans

Liquid assetsLiquid assets Negative (due to acquiring other Negative (due to acquiring other assets)assets)

LiabilitiesLiabilities Negative (due to acquiring other Negative (due to acquiring other assets)assets)

Net worthNet worth No measured effect (but this finding is No measured effect (but this finding is disputed)disputed)

Educational attainmentEducational attainment Significant positive effect (whether Significant positive effect (whether one had taken a non-degree course)one had taken a non-degree course)

Institutional Determinants of SavingsInstitutional Determinants of Savings

Focus of assets field has evolved: Focus of assets field has evolved: Program Program Product Product Plan Plan

Institutional Determinants of Savings (Sherraden Institutional Determinants of Savings (Sherraden et alet al.).)• Access (is a savings plan offered)Access (is a savings plan offered)• Information (financial education)Information (financial education)• Incentives (tax break or match)Incentives (tax break or match)• Facilitation (someone does it for you)Facilitation (someone does it for you)• Expectations (match caps or savings goals)Expectations (match caps or savings goals)• Restrictions (contribution limits, limits on uses)Restrictions (contribution limits, limits on uses)• Security (is the money safe)Security (is the money safe)

Convergence with behavioral economicsConvergence with behavioral economics

The Effect of Savings Plans and DefaultsThe Effect of Savings Plans and Defaults

Auto 401(k):Auto 401(k):

EmployeeEmployee Opt-inOpt-in Opt-outOpt-outFemalesFemales 35%35% 86% 86%HispanicHispanic 19%19% 75% 75%Under 20KUnder 20K 13%13% 80% 80%

Auto Escalation: “Save More Tomorrow” trial was shown to lead to a substantial Auto Escalation: “Save More Tomorrow” trial was shown to lead to a substantial increase in contribution rates over timeincrease in contribution rates over time

IRA participation (voluntary): 5-15% IRA participation (voluntary): 5-15% 401(k) participation (structured savings plan): 75%401(k) participation (structured savings plan): 75%

Split Refunds experiment: Participants saved $606, or 47% of their refundsSplit Refunds experiment: Participants saved $606, or 47% of their refunds• The one-fourth with prior savings saved $924 – a 90% increase in their savingsThe one-fourth with prior savings saved $924 – a 90% increase in their savings• Those three-fourths with no prior savings saved $479Those three-fourths with no prior savings saved $479

Research on Asset EffectsResearch on Asset EffectsSummarized by Sherraden, 2005Summarized by Sherraden, 2005

Holding assets at 23 is associated Holding assets at 23 is associated with later positive outcomes such with later positive outcomes such as better labor market as better labor market experience, marriages, health and experience, marriages, health and political interest. (Bynner & political interest. (Bynner & Paxton, 2001)Paxton, 2001)

The presence of the asset appears The presence of the asset appears to matter more than the to matter more than the monetary value of the asset. monetary value of the asset. (Bynner & Paxton, 2001)(Bynner & Paxton, 2001)

The presence of small wealth at The presence of small wealth at critical times can have critical times can have “transformative” effects on the “transformative” effects on the life course. (Shapiro, 2004)life course. (Shapiro, 2004)

Parental wealth is positively Parental wealth is positively associated with cognitive associated with cognitive development, physical health, and development, physical health, and socio-emotional behavior of socio-emotional behavior of children – even in very poor children – even in very poor families. (Williams, 2003)families. (Williams, 2003)

Wealth seems to be a better Wealth seems to be a better predictor of well-being as children predictor of well-being as children grow older, while income is a better grow older, while income is a better predictor when they are younger. predictor when they are younger. (Williams, 2003)(Williams, 2003)

Low-income, single mothers’ assets Low-income, single mothers’ assets are positively associated with are positively associated with children’s educational attainment. children’s educational attainment. (Zahn and Sherraden, 2003)(Zahn and Sherraden, 2003)

Income is associated with Income is associated with educational achievement when educational achievement when assets are not in the model. assets are not in the model. However, income becomes non-However, income becomes non-significant when assets are significant when assets are included. (Zahn and Sherraden, included. (Zahn and Sherraden, 2003)2003)

Assets lead to positive attitudes and Assets lead to positive attitudes and behaviors, and positive attitudes behaviors, and positive attitudes and behaviors lead to assets may and behaviors lead to assets may be a glimpse of a “virtuous cycle” be a glimpse of a “virtuous cycle” wherein household development is wherein household development is a reinforcing feedback loop. a reinforcing feedback loop. (Yadama and Sherraden, 1996)(Yadama and Sherraden, 1996)

II. Policy Agenda – Lessons and GuidanceII. Policy Agenda – Lessons and Guidance

Small changes to existing products and systems can generate Small changes to existing products and systems can generate significant new savings and assets for low-income personssignificant new savings and assets for low-income persons

Operate on a two-track agenda: Pursue low-cost ideas Operate on a two-track agenda: Pursue low-cost ideas aggressively, while laying the foundation for enacting bolder aggressively, while laying the foundation for enacting bolder policies as opportunities arisepolicies as opportunities arise

To achieve scale and sustainability, saving and asset To achieve scale and sustainability, saving and asset accumulation by low-income persons must be profitable for accumulation by low-income persons must be profitable for financial institutionsfinancial institutions

Make saving easy, automatic, and frequent – ideally in “plan” Make saving easy, automatic, and frequent – ideally in “plan” structuresstructures

Policy AgendaPolicy Agenda(see (see Assets Agenda Assets Agenda for details)for details)

Establish lifelong savings and asset-Establish lifelong savings and asset-building accounts at birthbuilding accounts at birth

Promote products and plans for Promote products and plans for flexible savingsflexible savings

Improve access to wealth-building Improve access to wealth-building financial services and effective financial services and effective financial educationfinancial education

Connect tax refunds to transaction, Connect tax refunds to transaction, savings and asset accumulation savings and asset accumulation products and plansproducts and plans

Promote matched savings for the Promote matched savings for the working-poor for higher education, working-poor for higher education, small business development, small business development, homeownership, and retirementhomeownership, and retirement

Rebuild the U.S. Savings Bond Rebuild the U.S. Savings Bond programprogram

Encourage progressive state-based Encourage progressive state-based “529” college savings plans“529” college savings plans

Revise or eliminate asset limits in Revise or eliminate asset limits in public assistance programspublic assistance programs

Improve established micro-enterprise, Improve established micro-enterprise, post-secondary education, post-secondary education, homeownership, and retirement homeownership, and retirement security programssecurity programs

Strengthen laws to protect assets; Strengthen laws to protect assets; distinguish “good” debt from “bad” distinguish “good” debt from “bad” debtdebt

Lower-Cost PoliciesLower-Cost Policies

Realize the full potential of Split Refunds and Auto401(k)sRealize the full potential of Split Refunds and Auto401(k)s• Split RefundsSplit Refunds: $82 billion/yr. in refunds for AGI < $30,000: $82 billion/yr. in refunds for AGI < $30,000• Auto401(k):Auto401(k): $75 billion/yr. increase in savings by low-income workers $75 billion/yr. increase in savings by low-income workers

Enact the Enact the New Savers ActNew Savers Act• Improves access to wealth-building financial servicesImproves access to wealth-building financial services• Creates Young Savers AccountsCreates Young Savers Accounts• Gives Savers Credit for contributions to 529s and CoverdellsGives Savers Credit for contributions to 529s and Coverdells• Revives and promote Savings BondsRevives and promote Savings Bonds• Improves transparency and progressivity of 529sImproves transparency and progressivity of 529s• Promotes financial education, savings and asset accumulation at tax timePromotes financial education, savings and asset accumulation at tax time

Enact the Enact the Automatic IRA ActAutomatic IRA Act• Encourages employers not offering a 401(k) to facilitate automatic payroll Encourages employers not offering a 401(k) to facilitate automatic payroll

deposits from employees into IRAsdeposits from employees into IRAs

Revise asset limits in the Food Stamp Program (Farm Bill)Revise asset limits in the Food Stamp Program (Farm Bill)• Excludes IRAs, 529s and indexes/raises existing limit to inflationExcludes IRAs, 529s and indexes/raises existing limit to inflation

Savings Accounts for ChildrenSavings 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 WorldAround the World

Established in Law/National Policy:Established in Law/National Policy: Child Trust Fund (UK)Child Trust Fund (UK) Canada Education Savings Canada Education Savings

ProgramProgram Baby Bonus, CDAs (Singapore)Baby Bonus, CDAs (Singapore) Child Development Accounts Child Development Accounts

(Korea)(Korea)

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

III. Recommendations for the FDIC – Part OneIII. Recommendations for the FDIC – Part One

Provide ClarityProvide Clarity• Complete work to clarify FDIC insurance coverage for individuals in pooled Complete work to clarify FDIC insurance coverage for individuals in pooled

and non-traditional accounts, particularly with prepaid productsand non-traditional accounts, particularly with prepaid products• Tie CRA credit to offer and take-up of meaningful savings products Tie CRA credit to offer and take-up of meaningful savings products • Work with other regulators to promote greater transparency in disclosures of Work with other regulators to promote greater transparency in disclosures of

terms, fees, and charges of traditional banking products and new products terms, fees, and charges of traditional banking products and new products coming on linecoming on line

Promote and Research InnovationsPromote and Research Innovations• Utilize existing alliances, such as the eight Alliance for Economic Inclusion Utilize existing alliances, such as the eight Alliance for Economic Inclusion

Regional Initiatives, to deliver or pilot savings initiatives in states or Regional Initiatives, to deliver or pilot savings initiatives in states or communitiescommunities

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

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

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

Recommendations for the FDIC – Part TwoRecommendations for the FDIC – Part Two

Promote savings and asset accumulation, especially through Promote savings and asset accumulation, especially through automation automation • At tax timeAt tax time• At the workplaceAt the workplace• Tied to consumptionTied to consumption• Tied to shorter-term loansTied to shorter-term loans• Tied to mortgagesTied to mortgages

Promote savings accounts for childrenPromote savings accounts for children• Encourage banks to expand and promote savings programs for kids, especially Encourage banks to expand and promote savings programs for kids, especially

in schoolsin schools• Encourage Congress to authorize Young Savers Accounts (Sen. Baucus)Encourage Congress to authorize Young Savers Accounts (Sen. Baucus)

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

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

Contributions to YSAs from low-income households qualify for the Savers CreditContributions to YSAs from low-income households qualify for the Savers Credit YSAs fully excluded from determining eligibility from all means-tested programsYSAs fully excluded from determining eligibility from all means-tested programs

Selected ReferencesSelected 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.