Being poor is expensive. A winter heating bill that comes due before the paycheck arrives can compel a trip to a payday lender who charges 350 percent interest. It takes the entire paycheck to pay off that loan in a week—emptying out the bank account and requiring yet another visit to the lender. A child who is too sick to go to school for a week may need her single father to stay home with her, costing him a quarter of his monthly income. He’s overdue on the rent and the bills, so he’s responsible for late fees as well.
Even a few hundred dollars in a savings account could help low-income families weather such predictable but unavoidable crises—provided they have extra money to save. Their budgets are tight, and saving makes sense only if they’re not sacrificing food or child care in order to put money aside.
Anti-poverty advocates have long known there could be a relatively cheap, simple way to help people avoid such trade-offs if the government structured savings plans tailored to low-income families. Such plans have to strike the proper balance: They can’t require families to save so much that they’re not buying what they need but should be substantial enough to be useful. Experts have designed and studied many such programs; the most successful ones provide the beneficiaries with some seed money to start an account and boost the reward for saving by providing matching funds.
Over the years, not just liberals but conservatives such as Jack Kemp, Newt Gingrich, and Rick Santorum have endorsed creating government programs to help the poor save. With the poverty rate stuck at a ten-year high of 15 percent, finding new ways to move people toward financial stability becomes more and more urgent. What, then, could keep the idea from becoming national policy?
Poor families do get extra money once a year: tax time. Like many families, those with low incomes receive a refund when they file their taxes in April. If they work but make less than double the federal poverty line, which is $47,100 a year for a family of four, they can get back more than they paid in taxes—a sort of super refund known as the Earned Income Tax Credit, or EITC. The credit can bring them as much as $6,000, depending on how much money they made and how many children they have. An estimated 26 million households claimed the EITC this year, roughly 75 percent to 80 percent of the families that qualified. The EITC raises families’ incomes so much that it would have lifted five million people out of poverty in 2012 if it were accounted for when the official poverty rate was calculated.
For the most part, however, families don’t save this money. Some make the major purchases they’ve deferred. They buy clothes for their children, pay registration fees for their cars, and make trips to cheap warehouse stores to stock up on goods. For others, the money provides a way to climb out of the financial holes they’ve dug themselves into: the months of overdue bills and their late fees, the payday loans that need settling, the professional licensing fees that allow them to keep working. It’s a chance to settle accounts, but since the money is usually gone within a month or two, the cycle starts again until the next year’s refund arrives.
For decades, academics and activists have floated ideas about how to help families automatically save part of this windfall at tax time. Evidence suggests that starting a savings account with a lump sum of money makes it easier to continue saving throughout the year—partly because few people imagine that putting $50 or so away a month will ever add up to anything worth the hassle. New York City, under the Michael Bloomberg administration, began such a program in 2008. Families that qualified for EITC could ask that some of their refund—at least $100 at first, later changed to $200—be deposited into a savings account before they ever saw it. The program contributed 50 cents for every dollar each family saved for an entire year, up to $250 at first, later changed to $500, with funding coming from the Rockefeller and Ford foundations. If the families withdrew money from their accounts before the year was up, they wouldn’t receive the matching funds.
The city recruited workers at neighborhood tax-preparation sites, where accountants help low-income families file their taxes at no cost, to enroll people in the plan. Billy Garcia worked for three years at sites in the Bronx, in poor, mostly black and Latino neighborhoods like Mott Haven and Morrisania. “A lot of people would say, ‘I don’t want to participate because this money is already spent,’” Garcia says. “I understood that.”
A number of Garcia’s clients who had opted to open accounts returned to tell him their success stories. While some had saved money and used it for small purchases or to keep on top of bills, others had planned for things they wouldn’t be able to afford with their normal salaries. One woman wanted her kids to meet their grandparents in the Dominican Republic—she put away $1,000 for a whole year, which was matched by another $500, and saved an additional $1,000, also matched, in the following year. With $3,000 in savings, her family was able to make the trip.
A few families were not able to save the money for an entire year. “They would come to me, and they would be a little disappointed, as if I would be disappointed in them,” Garcia says. One client needed to wire money to Uruguay because of a family emergency. Garcia told him: “We did actually help you save that money, because you held it for six months. You can’t help the things that come up in life, but at least you had that money and it was there for you to use.”
In the program’s first three years, 2,600 filers participated, taking up every available spot. (Admissions to the program were limited by the amount of matching funds the foundations had donated.) Eighty percent of the families saved for the entire year and received matching funds—for a total of $2.3 million in savings and matching funds—and 70 percent continued to save after the year was up. “They were successfully saving money, even though on average they were making $18,000 a year, and this was when the economy was all falling apart, and they were living in a city like New York,” says Jonathan Mintz, commissioner of the New York City Department of Consumer Affairs, which runs the program through its Office of Financial Empowerment. “The odds were really against them.”
Impressed by the success of the New York effort, the Obama administration directed $5.7 million in federal funds to New York’s program, which helped build satellite programs in Newark, San Antonio, and Tulsa. The program was designed as a pilot study and will end in February 2014. While all the data and analyses aren’t in yet, these cities also had successes in the first year: Nearly 1,500 people saved and received matching funds, which totaled almost $1 million.
Congressman José Serrano, a Democrat who represents some of the Bronx neighborhoods where the savings program is in place, has introduced a bill that would create a nationwide initiative. Serrano’s measure—the Financial Security Credit Act—would allow EITC families to put part of their refunds into accounts in which federal funds would supplement their savings in the same ratio, and up to the same limits, that the New York and pilot programs set. The New America Foundation has estimated that the annual cost of the program would be roughly $4 billion.
Helping families save is nothing new for the government, but until now, federal programs have seldom targeted the poor. Parents get tax incentives to put aside money for their children’s college education, and employees receive tax deferrals on 401(k) retirement plans. The 401(k) benefit costs the government roughly $140 billion a year. Middle- and upper-income families receive tax breaks for long-term financial investments that help them build wealth, particularly the deduction on the interest they pay on home mortgages. Most of the money goes to households with incomes that put them in the top 20 percent.
Ron Haskins, a conservative who co-directs the Center on Children and Families and Budgeting for the Brookings Institution, says a lot of evidence has been built over the years that poor families can save money. No evidence, he warns, yet demonstrates that it helps them move out of poverty, but he thinks that these kinds of programs should be tried. “I like the provision,” he says. “Savings do produce great impacts, and a lot of middle-class people found that out because that’s how they got to be in the middle.”
Serrano’s bill, which has 24 Democratic co-sponsors, is sitting in the House Ways and Means Committee, where it has no chance of getting out. In the past, an inexpensive program that had already been tested could have been swept into a broader bill. With the House under Republican control, however, budget cutting is the order of the day, even though conservatives in Congress championed the idea of helping the poor save during the 1996 debates over welfare reform. At the time, many Republican lawmakers wanted to include an option for states to establish individual development accounts, which would help families set aside funds for big-ticket items like homes or small businesses. Thirty-three states have IDA programs for low-income families, but they’re small and have never received much federal assistance. None helps families put aside funds for routine financial emergencies.
Wisconsin Republican Paul Ryan, who heads the House delegation negotiating next year’s budget with the Senate, is a self-proclaimed apostle of former Congressman Kemp, who famously insisted that Republicans needed to concern themselves with the plight of the poor. As the House battled over how much money to cut from the food-stamp program this summer, Ryan said he was turning his attention to the issue of poverty. “We’ve got the 50th anniversary of the war on poverty coming up next year,” he said on MSNBC’s Morning Joe. “We don’t have much to show for it.” What he failed to mention is that the EITC—which President Ronald Reagan once called “the best anti-poverty, the best pro-family, the best job-creation measure to come out of Congress”—would likely be reduced if his budget prevailed.
Correction: An earlier version of this piece stated that the New America Foundation helped to fund an early version of the New York City savings program. It did not.