Working Poor Build Wealth

During the election campaign of 2004, I remember several liberals and Democrats scoffing at Bush's idea of an Ownership Society. I, of course, am a big believer that with ownership comes wealth and the more the government allows us to own the wealthier we become as people. Then a couple of days ago I read this story in the WSJ.

In recent years, a growing number of state governments, nonprofit groups, foundations and private companies have been running pilot programs to induce poor and working-class Americans to save. The results, they say, are surprising: When participants get the right incentives and financial counseling, many open savings accounts, arrange for payroll deductions, and begin accumulating assets.
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The programs are drawing support from both the left and the right. Advocates say they could become productive successors to liberal anti-poverty programs of the 1960s and conservative welfare reforms of the 1990s.

But proponents acknowledge it is difficult to persuade many poor people that they can afford to save, even with financial incentives. And rolling out such a program nationally would be expensive, costing about $40 billion over 10 years, according to one estimate.

Ms. Simmons says she was a "hope-to-die dope fiend" living in cardboard boxes on the streets of Los Angeles when she was arrested in 1998 for prostitution. Freed from prison after one year, she returned to her hometown, Philadelphia, and found low-paying work. With the help of a nonprofit agency that helps administer Pennsylvania's Family Savings Account Program, she got financial advice and opened an individual development account, or IDA.

The program offers to match participants' savings of up to $2,000 over three years with state and federal funds. Households with incomes of no more than twice the poverty level (about $40,000 for a family of four) are eligible. They must save at least $10 a week and attend a series of financial-planning classes. IDA savings must be used for college, job training, buying a home or starting a business.

By 2003, Ms. Simmons had saved $1,007. The program matched that amount, producing enough for the down payment on a $50,000 home from Habitat for Humanity.

There are more than 500 asset-building projects across the country, whose participants have opened more than 20,000 savings accounts. Thirty-three states support such programs on a small scale, using state funds and federal welfare-to-work subsidies for savings matches, and contracting with nonprofits to run the programs. Demonstration projects have also spread around the world from Canada to China. Great Britain last year became the first country with a national program of savings accounts for each child at birth.
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Advocates of asset-building programs concede it is difficult to get low-income people to save. "The biggest hurdle is just getting them to believe they can save," says Chris Krehmeyer, executive director of a St. Louis nonprofit social agency, Beyond Housing/Neighborhood Housing Services. Given "the struggles of keeping the utilities on, paying your bills, keeping the car running and just dealing with life," he says, even $10 a week is a huge amount.

In Washington, support for a bigger federal role in asset-building programs for low-income Americans ranges from conservative Republicans such as Sen. Rick Santorum of Pennsylvania, former housing secretary Jack Kemp and former House Speaker Newt Gingrich, to left-of-center Democrats and potential 2008 presidential candidates Hillary Clinton and John Edwards.

Thus far, budget deficits and partisan politics have stymied advocates of a nationwide policy. During his 2000 presidential campaign, George W. Bush advocated fighting poverty "by building the wealth of the poor." He proposed a $1 billion tax credit for banks that match some savings deposits of low-income workers. As president, he didn't make the proposal a priority, and it died in the House, in part for reasons unrelated to the proposed credit.

In 2001, Congress created the Saver's Credit, the only federal savings incentive designed for low- and middle-income households. It reduces taxes on savings of up to $2,000 a year for people making less than $50,000 a year. But Americans who don't owe income taxes aren't eligible. About 40% of Americans don't earn enough to have an income-tax liability, according to the Retirement Security Project, an academic venture sponsored by the Pew Charitable Trusts.

The government spends about $150 billion a year on tax breaks to encourage retirement savings, which mainly benefit the affluent. About 70% go to the top one-fifth of earners, the Pew project concluded. Many simply shift existing savings into tax-favored accounts. The 40% of Americans who don't have tax liabilities do not qualify for these breaks. And most low-income workers do not have jobs that offer 401(k) retirement plans.
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Numerous ideas have been floated for encouraging low-income workers to save more. Making enrollment in 401(k) plans automatic for new hires is one. Giving taxpayers the option of saving all or part of their annual tax refunds -- sometimes by offering them a financial incentive -- is another. Tests of that concept in Tulsa, Okla., by a community and academic team, and in St. Louis, by H&R Block and the Retirement Security Project, showed that some people were willing to save a portion of their refunds.

It's pretty clear that these programs designed to get poor people to save can and do work. The key, I believe, is getting financial counseling. I've long felt that personal finance should be a core class in high school curriculums across the country. Also, government sometimes works to provide disincentives to save.

One-third of U.S. households have no financial assets. An additional one-fifth have insignificant holdings. But households with about $2,000 or more in assets, including retirement savings, are ineligible for basic welfare programs, which provides a disincentive for the poor to save.

GWB didn't really push for the tax credit for banks to match low income savers' savings, but I'm sure the Democrat's argument would have gone something like, "this is a tax credit for the rich...trickle down economics doesn't work...give the tax credit to the poor". Those are fine arguments but GWB would have been villified for the proposal.

I hope that these programs get much bigger and affect many more poor households. The key to alleviating poverty is giving people ownership over their lives instead of living off government handouts such as government housing, food stamps and welfare. The talking points should be jobs, home ownership and savings.