Sacramento Head Start Alumni Association

A Tool for Building Savings

Sep 11, 2002




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A Tool for Building Savings
and Wealth

Individual Development Accounts, or IDAs, are emerging as one of the most promising tools to help low-income American families save money, build wealth, and achieve economic independence.

IDAs are designed to reward the monthly savings of working-poor families who are trying to buy their first home, pay for post-secondary education, or start a small business. This reward or incentive is provided through the use of matching funds that typically come from a variety of private and public sources. Similar to 401(k)s, IDAs make it easier for low-income families to build the financial assets that they need to achieve the American Dream. To further help them move into the economic mainstream, IDA accountholders receive financial education and counseling.

IDAs are spreading rapidly throughout America:

IDA programs exist in about 150 communities around the country.
25 states have included IDAs in their state TANF plans (as allowed by the 1996 welfare reform law).
26 states have passed some form of IDA legislation; seven states have created IDA pilot programs; and five states have IDA legislation pending.
Several national foundations are supporting the Downpayments on the American Dream Policy Demonstration, or ADD, a 2,000-account IDA demonstration in 13 sites across the country.
Through the recently enacted Assets for Independence Act (sponsored by Senators Dan Coats and Tom Harkin and Representatives Tony Hall and John Kasich), IDAs are expected to reach an additional 40,000 to 50,000 working-poor Americans over the next five years.
Already, there is encouraging evidence from IDA programs that poor people, with proper incentives and supports, will save regularly and acquire productive assets. For example, 913 low-income families participating in ADD saved $165,225 as of December 31, 1998, and these savings leveraged another $342,775 in matching funds. Monthly deposits ranged from $30 - $70 per month. Also, recent research compiled by the Center for Social Development shows many beneficial aspects of assets: among other outcomes, assets promote economic household stability; promote educational attainment; decrease the risk of intergenerational poverty transmission; increase health and satisfaction among adults; and increase local civic involvement.

Significant as existing IDA efforts are, they cannot meet the growing demand for IDAs, nor will they reach very many of the one-third of Americans (and two-thirds of African-Americans) who are asset-poor. Furthermore, a national investment in IDAs is likely to generate many positive returns. CFED estimates that a federal investment of $105 million in IDAs will leverage another $186 million in private and public matching funds, and this $291 million investment will yield net returns to the nation of $1.63 billion ?– more than 5 times the initial investment. Returns include, for example, 7,050 new businesses; $730 million in additional earnings; 12,000 new and rehabilitated homes; and 20,000 adults obtaining high school, vocational, and college degrees.

The Homestead Act, GI Bill, IRAs, 401(k)s, and the home-mortgage interest deduction are good examples of how government has helped millions of American families acquire assets and achieve economic independence. By expanding IDAs, government can also help America?’s working-poor families save, acquire assets, and fully participate in the American economy.



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