April 15, 2004 | Read Time: 5 minutes
Once heralded by nonprofit leaders as the best way to increase saving rates among the poor, so-called individual
development accounts have yet to catch on with many institutions that would finance them. That has forced many charity and foundation officials to consider new strategies for reaching the estimated 40 million people in the United States who are eligible for the accounts.
Introduced as a concept in the early 1990s by Michael Sherraden, director of the Center for Social Development, a research organization in St. Louis, individual development accounts are designed to help low-income people build assets with the money they have left after paying bills. Typically, employers, government agencies, or grant makers match the savings amounts, sometimes up to four times the amounts saved. The savings must be earmarked for a specific purchase that will lead to greater self-sufficiency, such as that of a house, a car, or college tuition.
Mr. Sherraden and others have argued that tax incentives that encourage people from the middle and upper classes to save — such as tax-deferred retirement accounts subsidized by employers, the mortgage-interest tax deduction, and higher-education savings plans — are usually beyond the reach of those with meager incomes. Individual development accounts, most of them backed by the federal government, have been offered as a way to address the inequity.
About 20,000 such accounts have been created nationwide, and most have been financed with the help of foundation grants, Mr. Sherraden says. “The demonstration period has been very productive, largely because of the philanthropic community,” he says. “They have effectively put the idea on the table.”
Federal Matching Funds
While the federal government has paid $25-million over the past five years to match amounts saved by low-income people, foundations have made grants largely to start programs that can promote and administer the accounts. The Ford Foundation, in New York, for example, has made more than $13-million in grants to such programs since 1996, while the Charles Stewart Mott Foundation, in Flint, Mich., has made more than $7-million available to organizations that administer the accounts.
One of the first programs in the country, run by the Community Action Project of Tulsa, has opened nearly 1,100 accounts for low-income Oklahoma workers in the past decade. Although the accounts aren’t for every low-income family, particularly those who need to pay off high-interest loans before attempting to save, “we’ve seen some successes,” says Steven Dow, the organization’s executive director. “The goal of IDAs is to bring low-income families into the economic mainstream. If you offer people some financial education, then give them incentives to move up the wealth ladder, then they’ll find ways to save.”
But some observers say those savings programs won’t lead families to behave as those further up the economic ladder do. Kirsten S. Moy, director of the economic-opportunities program at the Aspen Institute, a research group in Washington, says that many individual development account programs lump their participants’ savings into one account instead of allowing individuals to run their own. “I’m not so sure what that teaches people about running an account,” Ms. Moy says.
More problematic, she says, is that the IDA movement will probably be stalled until someone figures out a way to negate the high cost of managing the accounts and the lack of donors willing to put up matching funds. “Our research shows that these programs aren’t scalable — that you can’t roll them out to millions of people,” Ms. Moy says. “This is a product that does not pay for itself.”
Financing Levels Flat
The popularity of the programs among some grant makers and organizations has not yet been matched by banks or other foundations. Financing by the federal government in the near future is likely to remain flat at best, observers say. A bill pending in Congress that would offer $450-million in tax credits to banks that manage individual development accounts and provide matching amounts of money appears to have only a slim chance of passing.
Some foundations, including Ford, have shifted the emphasis of their grant making from helping create programs that offer accounts to supporting organizations that lead advocacy campaigns designed to expand government support for the programs. Ford, Mott, and other grant makers are also providing money for research and advocacy to groups that encourage employers to offer individual development accounts and match the savings of their employees.
“The broader vision is for everyone to have an account of some kind,” says Benita D. Melton, a program officer at Mott. Getting private financial institutions to back the accounts, perhaps with the help of a federal tax-credit law like the one being proposed, is paramount, she adds. “As we look to scale up, the question is: How do we get the Fidelitys of the world involved in this?”
Accounts for Newborns
Other grant makers agree that the pool of potential account holders should not be limited by income. Ford is backing advocacy campaigns that call for a federally subsidized savings account for each child born in the United States. “IDAs are for the work-ing poor, but our long-term goal is to help establish a universal savings system, which would be financed by public and private means,” says Frank F. DeGiovanni, director of economic development at Ford.
Ford and the Corporation for Enterprise Development, an advocacy and research group in Washington, are two of the proponents of a savings account that would start for each child on the day he or she is born. The Corporation for Enterprise Development, with support from Ford, the Charles and Helen Schwab Foundation, in San Mateo, Calif., and others, has begun pilot programs in nine cities around the United States.
“The goal is to develop the savings-account tool and to push the policy,” says Robert E. Friedman, general counsel at the Corporation for Enterprise Development. “For a $4-billion investment, you could put $1,000 into each child’s account each year.”
Those who believe that individual development accounts have been successful in getting people free tax preparation, financial-literacy programs, and credit counseling say they welcome new approaches to building wealth.
“We realize that there’s no silver bullet to all this,” says Mr. Dow. He adds that while the original IDA concept may be attractive, it needs to be updated so programs can eventually reach all of those who could benefit from them.
“What we have now is a DOS-based version,” says Mr. Dow. “We need Windows, or something.”
