Individual Development Accounts

For the million of working Americans who struggle just to pay rent and monthly bills, homeownership and college education may seem entirely out of reach. One in five adult Americans and one in three adult African Americans have zero net worth. For every dollar in assets in a white male-headed household, a female-headed household has 40 cents and a minority household has just six cents. In 2005, Americans spent more than they earned—the lowest savings rate since 1933.1

In 2003, federal asset policies cost $335 billion. Analysis of the largest spending categories shows that over a third of the benefits go to the wealthiest one percent of Americans—those who typically earn over $1 million a year. In contrast, less than five percent of the benefits go to the bottom 60 percent of taxpayers. At the same time the government encourages middle- and upper-income families to save, it requires the poor to deplete their assets in order to qualify for public assistance programs, such as Medicaid or food stamps. Just as federal policy reinforces asset inequality, so does state policy. California, for example, devotes $10 billion each year to subsidize asset-building, 80 percent of which benefits families that make over $100,000 per year.2 Individual Development Accounts can make asset-building policy more equitable.

IDAs encourage working poor families who are trying to buy their first home, pay for college education or job training, or start their own business to make monthly deposits to savings accounts. Account holders’ deposits are matched by a combination of public and private dollars, with matches typically ranging from one to three dollars for each dollar saved. Account holders also receive financial education and counseling. IDA programs typically have broad eligibility limits and allow families with incomes of up to 80 percent of the community median to participate. Many programs also reserve at least one-third of participation slots for households with incomes at 50 percent or less of the community median.

A study of pilot IDA programs found that 2,378 low-income families saved more than $838,000 and earned more than $1.6 million in matching funds. These figures are especially significant given that the average monthly contribution from IDA account holders is $40. Evidence shows that the poorest families save almost the same dollar amount as other families, making their savings rates proportionately higher. Within 200 existing IDA programs, at least $168 million has been invested in IDA asset purchases. That figure includes $14.6 million in personal savings, $22.5 million in matching funds, and $130.6 million in loans leveraged.3 On average, IDAs yield a five-fold return to the community. Every public dollar invested in IDAs generates $5—measured in new businesses and jobs, increased earnings, new and improved homes, higher tax receipts, reduced welfare expenditures, and increased educational achievements.4

For generations, government programs have encouraged asset building for moderate-income families. The Homestead Act is an early example, and today, millions of Americans are able to deduct mortgage payments from their taxes. The GI Bill doubled the number of college-educated Americans. Individual Retirement Accounts and 401(k) pension programs promote retirement security. However, low-income families can rarely utilize these asset-building programs. IDAs give low-income working families the help they need to build assets and put them on the road to economic self-reliance.

States have enacted policies to help households build wealth. This includes programs that promote homeownership (e.g. low-interest loans, down payment assistance, homestead exemptions), the growth and development of small businesses (e.g. technical assistance, low-interest loans) and higher education (e.g. scholarships, student loans). IDAs make sense as one part of a portfolio of asset-building tools.

The federal government, 34 states and the District of Columbia have passed IDA legislation. Twenty-five states (AZ, AR, CA, CO, CT, HI, ID, IN, IA, LA, ME, MD, MI, MN, MO, NJ, NM, NC, OK, OR, PA, TN, TX, VT, VA) and the District of Columbia currently operate state-supported programs. New Mexico launched its IDA program in 2006. Four states (FL, KY, RI, VT) have passed legislation but the program remains underdeveloped or on hold, and five states (GA, IL, KS, OH, SC) passed legislation that has since expired or was not reauthorized. At present, an estimated 10,000 low-income individuals in 400 communities are building assets through IDAs.5