1. Policy Approaches for Saving and Asset Building by Low-Income Americans FDIC Advisory Committee on Economic Inclusion March 19, 2008 Ray Boshara New America Foundation Washington, DC 202-986-2700 boshara@newamerica.net boshara@newamerica.netboshara@newamerica.net www.newamerica.net

2. Goals for Today To convey the most important research findings for low-income persons to save and build assets To convey the most important research findings for low-income persons to save and build assets To articulate a forward-looking public policy agenda for low-income persons to save and build assets To articulate a forward-looking public policy agenda for low-income persons to save and build assets To offer specific recommendations for the FDIC To offer specific recommendations for the FDIC

3. I. Key Research Findings Low-income persons can save and build assets Low-income persons can save and build assets Low-income persons have multiple savings needs, not just for savings that lead to productive assets Low-income persons have multiple savings needs, not just for savings that lead to productive assets Individual characteristics – education, employment, welfare receipt, and even income – matter little in predicting savings and asset accumulation by low-income persons Individual characteristics – education, employment, welfare receipt, and even income – matter little in predicting savings and asset accumulation by low-income persons Program or “institutional” characteristics matter a lot in predicting saving and asset accumulation by low-income persons Program or “institutional” characteristics matter a lot in predicting saving and asset accumulation by low-income persons Holding assets appears to lead to positive social, behavioral, psychological, civic and other outcomes for children and adults Holding assets appears to lead to positive social, behavioral, psychological, civic and other outcomes for children and adults

4. IDA Monitoring Research: Can the Poor Save in IDAs? Number of Accountholders: 2,364. Mean participation: 24.5 months Schreiner et al., 2002 Savings Performance Savings Performance Average monthly deposit: $19 net, $40 gross Average monthly deposit: $19 net, $40 gross With average match of 2:1, total savings was $700 per year With average match of 2:1, total savings was $700 per year Withdrawals: Withdrawals: 46% home purchase/repair46% home purchase/repair 23% microenterprise23% microenterprise 18% small business18% small business 64% made unmatched withdrawals 64% made unmatched withdrawals 51 cents was saved for every dollar that could have been matched 51 cents was saved for every dollar that could have been matched Regression Results Regression Results Income not correlated with saving Income not correlated with saving Each dollar increase in monthly savings match cap is associated with a 40-50% increase in average savings Each dollar increase in monthly savings match cap is associated with a 40-50% increase in average savings Total amount matched (match cap) matters more than match rate (e.g., 1-1 vs. 2-1) Total amount matched (match cap) matters more than match rate (e.g., 1-1 vs. 2-1) Financial education is correlated with greater savings, but only up to 10 hours Financial education is correlated with greater savings, but only up to 10 hours Participant characteristics matter little Participant characteristics matter little

5. IDA Experimental Research: What’s the Effect of IDAs on Savings and Asset Accumulation? Sample size: 840 (412 treatment, 428 control). Time: 48 months Mills et al., 2004 Homeownership Significant positive effect, esp. for African Americans Real assets and total assets Positive effect for subgroups that experienced increases in homeownership Retirement savings Positive for African Americans Liquid assets Negative (due to acquiring other assets) Liabilities Net worth No measured effect (but this finding is disputed) Educational attainment Significant positive effect (whether one had taken a non-degree course)

6. Institutional Determinants of Savings Focus of assets field has evolved: Program  Product  Plan Focus of assets field has evolved: Program  Product  Plan Institutional Determinants of Savings (Sherraden et al.) Institutional Determinants of Savings (Sherraden et al.) Access (is a savings plan offered)Access (is a savings plan offered) Information (financial education)Information (financial education) Incentives (tax break or match)Incentives (tax break or match) Facilitation (someone does it for you)Facilitation (someone does it for you) Expectations (match caps or savings goals)Expectations (match caps or savings goals) Restrictions (contribution limits, limits on uses)Restrictions (contribution limits, limits on uses) Security (is the money safe)Security (is the money safe) Convergence with behavioral economics Convergence with behavioral economics

7. The Effect of Savings Plans and Defaults Auto 401(k): Auto 401(k): Employee Opt-in Opt-out Females35% 86% Hispanic19% 75% Under 20K13% 80% Auto Escalation: “Save More Tomorrow” trial was shown to lead to a substantial increase in contribution rates over time Auto Escalation: “Save More Tomorrow” trial was shown to lead to a substantial increase in contribution rates over time IRA participation (voluntary): 5-15% IRA participation (voluntary): 5-15% 401(k) participation (structured savings plan): 75% 401(k) participation (structured savings plan): 75% Split Refunds experiment: Participants saved $606, or 47% of their refunds Split Refunds experiment: Participants saved $606, or 47% of their refunds The one-fourth with prior savings saved $924 – a 90% increase in their savingsThe one-fourth with prior savings saved $924 – a 90% increase in their savings Those three-fourths with no prior savings saved $479Those three-fourths with no prior savings saved $479

8. Research on Asset Effects Summarized by Sherraden, 2005 Holding assets at 23 is associated with later positive outcomes such as better labor market experience, marriages, health and political interest. (Bynner & Paxton, 2001) Holding assets at 23 is associated with later positive outcomes such as better labor market experience, marriages, health and political interest. (Bynner & Paxton, 2001) The presence of the asset appears to matter more than the monetary value of the asset. (Bynner & Paxton, 2001) The presence of the asset appears to matter more than the monetary value of the asset. (Bynner & Paxton, 2001) The presence of small wealth at critical times can have “transformative” effects on the life course. (Shapiro, 2004) The presence of small wealth at critical times can have “transformative” effects on the life course. (Shapiro, 2004) Parental wealth is positively associated with cognitive development, physical health, and socio-emotional behavior of children – even in very poor families. (Williams, 2003) Parental wealth is positively associated with cognitive development, physical health, and socio-emotional behavior of children – even in very poor families. (Williams, 2003) Wealth seems to be a better predictor of well-being as children grow older, while income is a better predictor when they are younger. (Williams, 2003) Wealth seems to be a better predictor of well-being as children grow older, while income is a better predictor when they are younger. (Williams, 2003) Low-income, single mothers’ assets are positively associated with children’s educational attainment. (Zahn and Sherraden, 2003) Low-income, single mothers’ assets are positively associated with children’s educational attainment. (Zahn and Sherraden, 2003) Income is associated with educational achievement when assets are not in the model. However, income becomes non- significant when assets are included. (Zahn and Sherraden, 2003) Income is associated with educational achievement when assets are not in the model. However, income becomes non- significant when assets are included. (Zahn and Sherraden, 2003) Assets lead to positive attitudes and behaviors, and positive attitudes and behaviors lead to assets may be a glimpse of a “virtuous cycle” wherein household development is a reinforcing feedback loop. (Yadama and Sherraden, 1996) Assets lead to positive attitudes and behaviors, and positive attitudes and behaviors lead to assets may be a glimpse of a “virtuous cycle” wherein household development is a reinforcing feedback loop. (Yadama and Sherraden, 1996)

9. II. Policy Agenda – Lessons and Guidance Small changes to existing products and systems can generate significant new savings and assets for low-income persons Small changes to existing products and systems can generate significant new savings and assets for low-income persons Operate on a two-track agenda: Pursue low-cost ideas aggressively, while laying the foundation for enacting bolder policies as opportunities arise Operate on a two-track agenda: Pursue low-cost ideas aggressively, while laying the foundation for enacting bolder policies as opportunities arise To achieve scale and sustainability, saving and asset accumulation by low-income persons must be profitable for financial institutions To achieve scale and sustainability, saving and asset accumulation by low-income persons must be profitable for financial institutions Make saving easy, automatic, and frequent – ideally in “plan” structures Make saving easy, automatic, and frequent – ideally in “plan” structures

10. Policy Agenda (see Assets Agenda for details) Establish lifelong savings and asset- building accounts at birth Establish lifelong savings and asset- building accounts at birth Promote products and plans for flexible savings Promote products and plans for flexible savings Improve access to wealth-building financial services and effective financial education Improve access to wealth-building financial services and effective financial education Connect tax refunds to transaction, savings and asset accumulation products and plans Connect tax refunds to transaction, savings and asset accumulation products and plans Promote matched savings for the working-poor for higher education, small business development, homeownership, and retirement Promote matched savings for the working-poor for higher education, small business development, homeownership, and retirement Rebuild the U.S. Savings Bond program Rebuild the U.S. Savings Bond program Encourage progressive state-based “529” college savings plans Encourage progressive state-based “529” college savings plans Revise or eliminate asset limits in public assistance programs Revise or eliminate asset limits in public assistance programs Improve established micro-enterprise, post-secondary education, homeownership, and retirement security programs Improve established micro-enterprise, post-secondary education, homeownership, and retirement security programs Strengthen laws to protect assets; distinguish “good” debt from “bad” debt Strengthen laws to protect assets; distinguish “good” debt from “bad” debt

11. Lower-Cost Policies Realize the full potential of Split Refunds and Auto401(k)s Realize the full potential of Split Refunds and Auto401(k)s Split Refunds: $82 billion/yr. in refunds for AGI < $30,000Split Refunds: $82 billion/yr. in refunds for AGI < $30,000 Auto401(k): $75 billion/yr. increase in savings by low-income workersAuto401(k): $75 billion/yr. increase in savings by low-income workers Enact the New Savers Act Enact the New Savers Act Improves access to wealth-building financial servicesImproves access to wealth-building financial services Creates Young Savers AccountsCreates Young Savers Accounts Gives Savers Credit for contributions to 529s and CoverdellsGives Savers Credit for contributions to 529s and Coverdells Revives and promote Savings BondsRevives and promote Savings Bonds Improves transparency and progressivity of 529sImproves transparency and progressivity of 529s Promotes financial education, savings and asset accumulation at tax timePromotes financial education, savings and asset accumulation at tax time Enact the Automatic IRA Act Enact the Automatic IRA Act Encourages employers not offering a 401(k) to facilitate automatic payroll deposits from employees into IRAsEncourages employers not offering a 401(k) to facilitate automatic payroll deposits from employees into IRAs Revise asset limits in the Food Stamp Program (Farm Bill) Revise asset limits in the Food Stamp Program (Farm Bill) Excludes IRAs, 529s and indexes/raises existing limit to inflationExcludes IRAs, 529s and indexes/raises existing limit to inflation

12. Savings Accounts for Children United States In Congress: ASPIRE Act Plus Accounts Baby Bonds Young Savers Accounts 401Kids In States: 529s at birth Matched 529s Commissions/Task Forces Commercial Young Americans Bank Research/Policy Initiative: SEED Initiative Around the World Established in Law/National Policy: Child Trust Fund (UK) Child Trust Fund (UK) Canada Education Savings Program Canada Education Savings Program Baby Bonus, CDAs (Singapore) Baby Bonus, CDAs (Singapore) Child Development Accounts (Korea) Child Development Accounts (Korea) Commercial Financial Institutions: Hatton Bank (Sri Lanka) Hatton Bank (Sri Lanka) Children’s Mutual (UK) Children’s Mutual (UK) Barclays (Uganda, Ghana) Barclays (Uganda, Ghana) Equity Bank (Kenya) Equity Bank (Kenya) Banco Estada (Chile) Banco Estada (Chile) ICICI (India) ICICI (India) ANZ (Australia, New Zealand) ANZ (Australia, New Zealand) HSBC (Sri Lanka) HSBC (Sri Lanka) XacBank (Mongolia) XacBank (Mongolia)

13. III. Recommendations for the FDIC – Part One Provide Clarity Complete work to clarify FDIC insurance coverage for individuals in pooled and non-traditional accounts, particularly with prepaid productsComplete work to clarify FDIC insurance coverage for individuals in pooled and non-traditional accounts, particularly with prepaid products Tie CRA credit to offer and take-up of meaningful savings productsTie CRA credit to offer and take-up of meaningful savings products Work with other regulators to promote greater transparency in disclosures of terms, fees, and charges of traditional banking products and new products coming on lineWork with other regulators to promote greater transparency in disclosures of terms, fees, and charges of traditional banking products and new products coming on line Promote and Research Innovations Utilize existing alliances, such as the eight Alliance for Economic Inclusion Regional Initiatives, to deliver or pilot savings initiatives in states or communitiesUtilize existing alliances, such as the eight Alliance for Economic Inclusion Regional Initiatives, to deliver or pilot savings initiatives in states or communities Promote sweep account products that automatically move money into a higher yielding savings vehicles (after a certain balance is met)Promote sweep account products that automatically move money into a higher yielding savings vehicles (after a certain balance is met) Focus attention on the nature of, restrictions on, and usage of the savings accounts tied to small-value loan products in the FDIC pilotFocus attention on the nature of, restrictions on, and usage of the savings accounts tied to small-value loan products in the FDIC pilot Revive and promote a modern version of the “Credit Builder Account,” which builds savings, establishes a credit score, and leads to a reasonably priced mortgageRevive and promote a modern version of the “Credit Builder Account,” which builds savings, establishes a credit score, and leads to a reasonably priced mortgage

14. Recommendations for the FDIC – Part Two Promote savings and asset accumulation, especially through automation At tax timeAt tax time At the workplaceAt the workplace Tied to consumptionTied to consumption Tied to shorter-term loansTied to shorter-term loans Tied to mortgagesTied to mortgages Promote savings accounts for children Encourage banks to expand and promote savings programs for kids, especially in schoolsEncourage banks to expand and promote savings programs for kids, especially in schools Encourage Congress to authorize Young Savers Accounts (Sen. Baucus)Encourage Congress to authorize Young Savers Accounts (Sen. Baucus) A “Kids Roth” – a lifelong, tax-benefited product that allows parents and others to contribute to a child’s YSA (contributions governed by parents’ earned income) A “Kids Roth” – a lifelong, tax-benefited product that allows parents and others to contribute to a child’s YSA (contributions governed by parents’ earned income) Permissible, penalty-free withdrawals already include first-time home purchase and post-secondary education, in addition to retirement Permissible, penalty-free withdrawals already include first-time home purchase and post-secondary education, in addition to retirement Contributions to YSAs from low-income households qualify for the Savers Credit Contributions to YSAs from low-income households qualify for the Savers Credit YSAs fully excluded from determining eligibility from all means-tested programs YSAs fully excluded from determining eligibility from all means-tested programs

15. Selected References Sherraden, M., and Boshara, R (forthcoming). Learning from Individual Development Accounts. In Lusardi, A. (ed). Improving the effectiveness of financial education and savings Programs. Chicago: University of Chicago Press. Boshara, R., Cramer, R., and O’Brien, R. (2007). The assets agenda. Washington: The New America Foundation. Boshara, R. (2005). Individual Development Accounts. Washington: The Brookings Institution. Beshears. J., Choi, J., Laibson, D., & Madrian, B. (2005). The importance of default options for retirement savings outcomes: evidence from the United States. Turin: Sixth annual conference of The Center for Research on Pension and Welfare Policies. Bynner, J.B., & Paxton, W. (2001). The asset effect. London: Institute for Public Policy Meyer, J., Zimmerman, J., Boshara, R.. (forthcoming). Global trends in child savings accounts. Washington: New America Foundation. Mills, G., Patterson, R., Orr, L., & DeMarco, D. (2004). Evaluation of the American Dream Demonstration, final evaluation report. Cambridge, MA: Abt Associates. Schreiner, M., Clancy, M, & Sherraden, M. (2002). Saving performance in the American Dream Demonstration, research report. St. Louis: Center for Social Development, Washington University. Shapiro, T. (2004). The hidden costs of being African-American. New York: Oxford University Press. Sherraden, M. (2005). Testimony for Hearing on “Building Assets for Low-Income Families” Subcommittee on Social Security and Family Policy. Washington: Senate Finance Committee. Williams, T. (2003). The impact of household wealth and poverty on child outcomes: Examining asset effects, doctoral dissertation, Washington University in St. Louis. Yadama, G., & Sherraden, M. (1996). Effects of assets on attitudes and behaviors: Advance test of a social policy proposal, Social Work Research 20(1), 3-11. Zhan M., & Sherraden, M. (2003). Assets, expectations, and children’s educational achievement in single- parent households, Social Service Review 77(2), 191-211.