Over the course of the last two decades, a community of academics, policy wonks, and practitioners has been busy developing and testing ideas for helping ordinary people to save more and build their assets. Here are a few of the signature proposals of what has come to be known as the asset-building movement.
Make Childhood Savings Accounts Universal. Government should open a savings account for every child at birth. To promote equality of opportunity, government may also endow the accounts of children from low-income families with an initial deposit, or may do so for all children. The United Kingdom has tried one model. It issued vouchers (popularly known as “baby bonds”) to every newborn, which could be redeemed for Child Trust Funds at participating financial institutions. The city of San Francisco is pursuing another model, opening an account for every kindergartner who enters the city’s public schools.
Public policy should also encourage parents to contribute to their child’s account, and allow relatives and others concerned with a child’s welfare to do so as well. The ASPIRE Act, introduced previously with bipartisan support in Congress, proposed offering $500 to every child, and would enable others to make tax-sheltered contributions of up to $2,000 per year. Use of the funds building up in childhood accounts is typically restricted to specific purposes, such as post-secondary education, first-time home buying, or retirement income.
Get Students Savings for Post-secondary Education. Nearly half of students who enroll in college do not obtain a degree and are often trapped under a mountain of student loan debt when they drop out. Among those who do graduate, the average encumbrance of debt exceeds $25,000. A better idea is to get students savings for college ahead of time. Not only would this reduce debt burdens, but research has shown that kids who have saved up money in their own accounts to fund college are more likely to graduate. (See Dana Goldstein, “The ‘Assets Effect’ ”.)
Currently, the so-called “529” college savings plans offer tax breaks for school expenses, but primarily benefit higher-income families. All students, regardless of how much or whether they have taxable income, should have equal opportunity to take advantage of federal support for college savings. Governments should also match the contributions low-income families make to college savings plans. Additionally, college savings can be linked to Pell Grants, one of the largest sources of funds to help students afford to pay for their education. Instead of applying for a Pell Grant at the time of enrollment, students could apply as early as middle school and have the resources deposited into their savings accounts.
Get Behind AutoIRAs. The Obama administration has committed to dramatically expanding access to long-term savings plans through its proposal to create “AutoIRAs.” If enacted, the policy would require employers who do not currently offer 401(k)s or other retirement plans to offer automatic enrollment in an Individual Retirement Account to all their employees. This change would benefit the half of the workforce (more than seventy million families) whose employers do not offer such other retirement plans. An employee would be automatically enrolled in an IRA at a default rate of 3 percent of the employee’s compensation unless the employee opts out. Employers that offer an automatic IRA would be eligible to receive a temporary business tax credit of $25 per participating employee, up to a total of $250 per year for six years. Small employers—those with fewer than ten employees—would initially be exempt, but could still use their payroll systems to help their employees make deposits to their accounts.
Make Saving Easy and Automated. Far more than rationality, what most explains people’s savings patterns is inertia. If we have to make a decision to move funds from our checking account to a savings account, and then find the time to do it, we’ll save less than if a portion of our income is saved automatically without our having to think about it.
In addition to incentives to save, everyone should be able to arrange with employers to have a portion of his or her paycheck automatically deposited into a savings account. Today’s information technology makes “AutoSave” easy to do, and the findings of behavioral economics confirm that when our personal finances are handled with such a default setting, we will tend to save more. The New America Foundation and the social policy research firm MDRC are testing this approach with an AutoSave pilot in which banks and employers partner and use payroll systems to make automatic deposits into employees’ savings accounts.
Create a Saver’s Bonus. Federal policies designed to encourage saving and asset accumulation cost the Treasury more than half a trillion a year, yet most of the money goes to the top 20 percent of all income earners, most of whom don’t need help in acquiring more assets. Correcting the inequity and inefficiency of such policies is long overdue, and here is one example of a policy that would contribute to that end: create a saver’s bonus to reward families who save at tax time.
Every dollar deposited in a designated savings product would be matched with an additional dollar from the federal government, up to a $500 annual maximum. The ability to access the bonus could be limited to people of modest means, such as those who qualify for the Earned Income Tax Credit. A wide range of savings products could be eligible for such a bonus, including retirement, college savings accounts, savings bonds, and short-term CDs.
Bank the Unbanked. Most banks are not interested in handling the accounts of small-scale savers. And most poor people have a hard time paying for all the fees banks typically charge for maintaining even a traditional checking account. The result is that a huge portion of today’s poor and working poor are “unbanked.” When they need to conduct basic financial services, they are forced into the arms of the fringe financial sector, made up of payday lenders and check cashers, who make money by stripping assets away from aspiring families.
There are many ways we could do more to “bank the unbanked.” One old-fashioned idea would be to bring back the old postal savings system, which survived in the United States until the 1960s and still exists in many countries, such as Germany and Japan. Another idea comes from the SaveUSA demonstration (a pilot based on a similar program in New York City), which works with banks to create savings accounts at free tax preparation sites so that lower-income households can deposit a portion of their refunds into savings with an additional match to reward the savings. It turns out that tax time can be the right time to connect people with basic financial services and even jumpstart the savings process.
Revamp Public Assistance so It Is a Safety Net and a Springboard Back to Independence. The Great Recession has made clear the value in having a network of public assistance programs that catch families facing hard times and help them get back on their feet. Yet the confusing array of eligibility rules and requirements undercut the effectiveness of these safety net programs. Many states still employ rules that ask families to spend down all of their resources before they are able to receive assistance. Some of these asset limits were set decades ago, before welfare added work requirements and time limits, and were never raised with inflation. Instead of maintaining policies that discourage savings and financial planning, we should raise the asset limits for many public assistance programs to $10,000 for households. Public assistance programs should encourage families to save and develop sound financial practices that promote self-sufficiency and long-term economic stability through asset building.
Furthermore, everyone getting support should be connected to a bank account where they can build up resources to facilitate their move back to independence. For instance, all families receiving rental housing assistance should have an asset account where a portion of their rent can be diverted. Currently, as their earnings rise, so does their rent; this decreases work and work effort. An alternative approach, called the Rental Assistance Asset Account, would allow them to build up savings as their earnings increase. Promote Responsible Homeownership. For many families, homeownership is a key wealth-building strategy. It forces savings by paying down a mortgage, and opens up opportunities for appreciation, leverage, and access of neighborhood amenities. But homeownership is not for everybody and also brings risk, especially when conjoined with predatory lending.
The answer lies not just in more rigorous regulation of mortgage markets and underwriting practices. It also requires fostering networks of support organizations dedicated to opening up pathways to responsible homeownership. Such organizations provide financial education and connect families to appropriate mortgage products in a fair and transparent manner. An important example is the Community Advantage Program in North Carolina described here. Such programs help make homeownership work for a broad range of American families, even those with low incomes and few resources.
Save to Win. In 2009, eight Michigan credit unions collaborated on a novel idea: combine the excitement of the lottery with the certainty of saving. The credit unions declared that for every $25 someone saved, the saver would earn an entry into a drawing for a $100,000 prize one year later. Meanwhile, credit unions gave out lesser monthly prizes of up to $100, all the while protecting the principal deposits and offering modest interest rates. The results were stunning. At the bottom of the recession, more than 11,000 residents of one of the country’s hardest-hit states opened accounts through the contest, collectively saving $8.6 million in 2009.
Wouldn’t it be wonderful if state lotteries, to help undo the tremendous damage they cause to the savings of ordinary Americans, offered similar “save to win” programs? As my colleague Anne Stuhldreher has written, “Imagine going to the corner store, picking up a quart of milk, and buying a ticket that would let you save $20 while still scratching it off to see if you won big.” This isn’t a pie-in-the-sky idea. Such a lottery is up and running in many countries around the world. I have a cousin in Britain who recently won, and she used her winnings to buy a home.