IDAs—A New Birth of Economic Freedom

By Bob Friedman, Carl Rist, Ray Boshara and Heather Sabrie, Corporation for Enterprise Development

A majority of American households are asset poor. With less than $1,000 in investable assets, many working Americans are locked out of the economic mainstream because they lack a few thousand dollars for a down payment on a house, college tuition, or a small business start-up.

The distribution of assets in this country is even more alarming than the widely recognized income disparity. While the highest earning 20% of all Americans command 43% of earned income, this same group controls 86% of net financial assets. The top 1% of wealth holders control more assets than the lower 80% combined. Asset poverty rises to even more shocking levels in minority communities and among children.

Assets matter. As Michael Sherraden noted in his seminal book, Assets and the Poor, "Income may feed people’s stomachs, but assets change their heads." Even small savings provide a buffer against the everyday incidents and illnesses that perpetuate the poverty cycle. As assets grow, there is reason to imagine an economic future better than the present. There is reason to plan, prepare and invest in one’s self and one’s children. Assets are hope in concrete form.

Recognizing the need to address asset poverty, more than 200 communities, 44 states, a growing number of financial institutions and the federal government have begun to invest in Individual Development Accounts (IDAs) for low-income people.

IDAs are matched savings accounts used for investment in high-return assets like home ownership, postsecondary education or business capitalization. A typical IDA program matches the savings of working poor savers at rates from 1:1 to 4:1 using public and private sources and requires savers to participate in personal finance training. Although the movement is young, already thousands of low-income people are proving that — given proper incentives and facilitation — even the very poor can and will save in order to build stable, long term economic independence.

States have led the way in establishing IDA programs:

• Most states have taken advantage of provisions in the new welfare reform legislation to protect TANF eligibility and benefit levels of welfare recipients saving in an IDA, and several provide TANF and Welfare-to-Work funds for IDA matches.
• A dozen states have combined state, federal, and private funds to support large-scale IDA demonstrations.
• Eight pioneering states—AR, HI, IA IN, ME, MO, OH, OR—have passed multi-million dollar tax credit legislation to support IDA programs for low-income savers.

To sustain IDA programs long-term, states must work to harness the power of the tax system to provide incentives for asset-poor households equivalent to incentives currently provided to the non-poor. Such incentives can boost individuals and communities on the margins of our economy into the mainstream and generate returns estimated to be as high as five times greater than the original investment.

For more information, call Carl Rist at CFED at (919) 688-6444 or visit www.cfed.org. An IDA state policy handbook will be available soon. To reserve your copy call CFED at (202) 408-9788.