Wednesday, January 11, 2006

Helping the poor save

Fantastic front-page WSJ article. No, it's not available online (full-text access is for subscribers only).

I'm going to quote liberally, and hopefully, that won't violate copyright. (Thanks to Dogwood, my source for great WSJ pieces ... :)).
Americans are rotten at saving. To encourage thrift, the government hands out billions in tax breaks, mostly to the nation's wealthiest half. The other half, it's long been assumed, either cannot or will not save.

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.

A Pennsylvania state program helped Michelle Simmons, 37 years old, to go from living on the streets to owning her own home, and inspired Dorothy Beale, 36, to clean up her debts and qualify for a mortgage. Another program outside St. Louis helped Charlin Hughes, a 36-year-old single mother of five, to begin saving for a home. Both programs offer to match participants' savings, but only if they consistently save and agree to attend financial-planning classes.

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.
The savings programs have their roots in the work of Washington University professor and social worker Michael Sherraden. His 1991 book, "Assets and the Poor," argued that governments and charitable groups should move beyond traditional welfare's aim to provide the poor with income to meet immediate needs. The broader goal, he wrote, should be to help the poor save money, which can provide them a stepping stone to escaping poverty.

He proposed that the federal government provide IDAs for every child at birth, regardless of family income, tapping public and private funds for initial deposits. The poor would get bigger initial deposits, and also matches for their personal savings, up to a limit. He argued that the accounts, coupled with financial education, would promote long-term savings for college, job training, buying a home or starting a business.

To Mr. Sherraden's surprise, his book was widely discussed by economists and others, and he became well-known in the anti-poverty world. Some critics, mainly from the political left, expressed skepticism that the poor would be able to save, given their struggles just to make ends meet. But Mr. Sherraden's proposals drew interest from community groups, governors, members of Congress, and from the first Bush and Clinton administrations. Private foundations stepped in with funds for testing the approach. Led by the Ford, Charles Stewart Mott and Annie E. Casey Foundations, philanthropic groups continue to provide much of the money for such programs. Mr. Sherraden says he is frustrated that the programs have yet to expand beyond experimental projects.

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.
After Ms. Simmons was released from a California prison, she found work in Pennsylvania as a telemarketer. She wanted to start a halfway house for women newly released from prison, so she took a self-employment course run by the Women's Opportunities Resource Center, a local social-service agency. She learned there about the savings-match program, and signed up. To save money, she shopped at thrift stores and went without cable television, a cellphone or manicures.
Today, she owns a three-story townhouse in Norristown, just north of Philadelphia, which she bought in 2003. She has regained custody of two daughters, who have their own bedrooms. Not far away stands the halfway house she opened. In three years, she has housed 33 women fresh from jail and "graduated" 17 to jobs and housing, she says. She urges residents to open IDAs. "I sell it," she says. "I tell them, 'This is an investment, y'all.' "
Not quite the same thing, but I'm reminded of a piece that appeared in the Atlantic Monthly a while back advocating a 21st- century Homestead Act, giving each American child that is born a $6000 savings account. Here it is.


Anonymous said...

I talked with a good friend of mine on the subject.

After our conversation, he sent an email regarding the article to a good friend of his who is an Episcopal priest in Haiti. He wondered if it would be possible for the community members to save $1/week for a year and they would receive matching funds that would be used toward purchasing equipment or acquiring a microloan.

Thus a community of 300 adults that each saved $52 can receive a match and have $104 each to help finance and/or purchase materials to improve their lives. To support such a program for 300, one would have to raise $15,600 annual in the United States. Not an unreasonable fundraising goal.

If interested on the feedback, I will be happy to keep you informed.



Gashwin said...

Dogwood, that sounds like a neat idea. If your'e asking if we can implement it at our favorite parish ... well ... get somene to coordinate this, and then, sure! :)

Ordinary Citizen said...

Anyone really interested in the "wealth of the poor" should check out the new executive summary of the most recent World Resources Report:

The 24-page document is available free online.