Mercedes White, Courtesy Opportunity Savings Fund
When Regina Berrios, a 34-year-old single mother of two girls and a boy, talks about her dreams for her family, her eyes sparkle and her smile gets wide. The Redwood City, Calif., resident would like to finish college and get a master's degree in social work, open up her own business and buy a home for her family.
Until recently, Berrios wasn’t optimistic she'd achieve any of these goals. Dreams cost money, something Berrios doesn't have much of. She supports her kids working full-time at a flower shop where she earns around $16,000/year ($1,200/month). To put in perspective how meager her income is, the Department of Health and Human Services pegs the poverty line at $23,500/year ($1,900 a month) for a family of four. Just buying groceries and paying her phone bill were tough.
Berrios is what economists call asset poor, meaning she does not have sufficient savings to sustain life for three months at her current consumption rate. One in five American households fit into this category, according to a report from the Corporation for Enterprise Development (CFED), a progressive nonprofit group based in Washington, D.C. Minorities are particularly vulnerable to asset poverty, according to CFED reports. African-American families are 2.7 times more likely than whites to have no savings whatsoever. Hispanic families are two times as likely as white families to be living without any money in reserve.
Without anything to fall back on, many asset-poor households are just one unexpected cost away from financial ruin. A trip to the doctor or expensive medication can throw these families into a financial tailspin that is hard to escape, according to Harvard sociologist Matthew Desmond. But savings could help insulate these families from the fall from an emergency expense or losing a job.
But as anyone who has ever put money aside knows, saving is easier said than done. Berrios knew saving could help her achieve her long-terms goals and protect her family in the case of an emergency, but given her tight budget she wasn't sure where the money would come from.
There is hope for people like Berrios, however, in the form of an innovative program called an Individual Development Account (IDA), which is basically a fancy term for a savings account. Low-income families who qualify commit to saving a certain amount of money every month. The money participants save is matched dollar for dollar, and often more, by the organization sponsoring the IDA.
In California, where Berrios lives, Opportunity Fund runs one of the largest and longest running IDA programs in the state. For every dollar their participants deposit into a IDA account, Opportunity Fund kicks in two dollars.
When Berrios initially heard about the program, she thought it sounded too good to be true. But as she looked into the program and spoke with Opportunity Fund representatives, she saw that this was a legitimate opportunity for her to change her spending habits and create a little nest egg for herself and her family.
Berrios reviewed her budget and goals with an Opportunity Fund case worker. Together they determined that by cutting back on occasional trips to Starbucks and changing a few things on her phone plan, she could save $42 per month. For the last three years she's been depositing that sum into her IDA account. During this time she has accumulated nearly $1,500 in savings, and that is before Opportunity Fund's contribution, which will triple her account balance.
This still may not be enough to pay for a college education or buy a house, but it's more money than Berrios has ever had in the bank. “I feel like I am finally on the path to something better,” she said. Even though money is tighter now than it was before she started saving, she feels less stress. "I'm less worried about money now that I have my savings," she said. "It is a really happy and peaceful time for us."
Why the poor have trouble saving
In order to understand the need for programs like Opportunity Fund, experts on IDAs like Washington University professor of social work Michael Sherraden say it is important to understand some of the barriers low-income families face when trying to save. The answers, according to Sherraden, aren’t about behavior or income but are caused by structural issues.
Lack of incentives are a big part of the reason low-income Americans don’t save as much as they could, according to Sherraden. The three largest asset-building programs in the United States (the mortgage interest deduction, the property tax deduction and preferential rates on capital gains) basically don’t apply to the poor, Sherraden said. Forty-five percent of these subsidies go to the “1 percent,” or households with an income that exceeds $1.25 million, according to a 2010 report from the Corporation for Enterprise Development. By contrast, the bottom 60 percent of households only receive 3 percent of the benefits of these subsides.
“Wealth inequality in this country isn’t happenstance,” Sherraden said. “The government encourages asset development for the middle and upper income earners through tax incentives.” During his career, Sherraden says he has been saving for retirement. "I am possessive of that money," he said, "as most people are about their savings, but what we often forget is that we'd all had enormous public assistance [in the form of tax credits] to save that money."
It also is a misconception that the poor don’t save. According to research done by the Urban Institute, they just have difficulty hanging on to those savings long-term. People living near the poverty line generally are employed in part-time and temporary jobs and because of that those workers are the most susceptible to reduced hours and layoffs. Since their income is unpredictable, the working poor actually need to save, knowing that sometime in the not too distant future they will need it to pay for essentials like car repairs, groceries or medicine, according to Urban Institute research. These are immediate needs that can’t easily be put off, which makes accumulating savings for larger purchases, say a down payment on a home, extremely difficult.
Benefits of saving
Having assets, including tangibles like savings accounts or personal property, and intangibles, like education or access to credit, improves economic well-being, according to a 2010 report from the New America Foundation. Of those surveyed, nearly 80 percent said that money is a source of stress in their home. Families who reported they had enough in savings to cover three months of expenses in the event of job loss, regardless of their income level, reported considerably lower levels of economic stress.
Households with savings also tend to be more stable. Illness, job loss and divorce can lead to sudden income shortfalls, said Sherraden. “A stock of assets can help bridge these periods of financial need and reduce the chances of household disruption,” he said. The family will be less likely to have to move because they can’t pay their rent, less likely to go without food and less likely to have utilities turned off for failure to pay.
Having assets may also help people think more about the future. Saving money gives people a sense of security. “When people are secure in the present, they look to the future,” said Sherraden. His research shows that people with assets are more optimistic about their ability to suceed, regardless of income levels. Sherraden reasons that part of this mindset may be related to the fact that saving is difficult, and successfully accumulating a particular sum of money gives people a sense that they can do hard things.
Saving may also improve child welfare, according to Sherraden. When parents accumulate assets, they pass that wealth on to their children. In this way, saving may actually help to reduce intergenerational poverty because instead of passing on debt to their children, parents pass on their assets. Children who have savings accounts in their name are six times more likely to go to college. Sherraden also has found that saving is positively correlated with marital stability.
The end of poverty?
Sherraden sees asset development programs as an important but overlooked part of any anti-poverty programs in America. These programs are “not a cure all, but there is convincing evidence that having a stock of capital can enable people to move themselves out of poverty,” he said.
A study of IDAs in New York City found that given the right incentives, people living well below the poverty line could find ways to save. Given a 2:1 match rate, savers accumulated an average of $561 over the course of the study, a significant amount of money, particularly considering that the average yearly income of participants hovered just under $18,000.
A 2011 follow-up study done by the Urban Institute showed roughly half of the households who participated would accumulate enough assets to escape poverty in 12 years.
The match is a crucial part of the program, according to Kim Manturuk, senior research associate at the UNC center for Community Capital. “Given the importance of encouraging savings, these programs offer insight and support for federal policy makers to implement such programs,” she said. “IDAs could help lower-income families build wealth in the same way that the mortgage interest deduction helps upper middle income families.”
But not everyone is as enthusiastic about IDAs. Critics say that only one-third to one-half of the people who enroll for IDAs actually save money. In his 2013 study of IDAs, Ray Boshara of the Brookings Institute argued that these programs appeal to a very particular segment of the poor: people who are motivated to improve their financial situation and those who have a steady job. He argues the programs may not reach the poor most in need of assistance, such as people with disabilities or health problems.
Boshara's study revealed that the average IDA costs $64 per month just to administer, considerably higher than the average 401(k) or IRA. "This high cost may have a sobering effect on the expansion of IDAs," he wrote in his 2013 summary of findings. He recommends further research to determine whether the benefits of IDAs exceed their costs or if other programs aimed at poverty alleviation deliver more benefits for the same or less money. He believes there just isn't sufficent evidence to embrace IDAs as the best use of scarce public funds for economic development.
But supporters of IDAs say the fact that the program doesn’t work for everyone doesn’t mean IDAs aren’t part of a strategy for alleviating poverty. Finding a way to incentivize savings among a group that was not saving is a meaningful feat. “The notion of living beyond our means has been demonstrated by the federal government and by middle- and upper-income families all across the country,” said Steve Dow, who runs a Tulsa, Okla. IDA program, in an interview with NPR. “Even in the fact of that as a national culture, poor people given the incentives could and would save. They are so eager to have a different future for themselves that they will do what the rest of us are not doing.”