Individual Development Accounts (IDA’s)
What are IDAs?
Individual Development Accounts (IDAs) are emerging as one of the most promising tools that enable low-income and low-wealth American families to save, build assets, and enter the financial mainstream. Based on the idea that all Americans should have access, through the tax code or through direct expenditures, to the structures that subsidize homeownership and retirement savings of wealthier families, IDAs encourage savings efforts among the poor by offering them 1:1, 2:1, or more generous matches for their own deposits. IDAs reward the monthly savings of working-poor families who are trying to buy their first home, pay for post-secondary education, or start a small business. These matched savings accounts are similar to 401(k) plans and other matched savings accounts but can serve a broad range of purposes.
IDA programs are implemented by community-based organizations in partnership with a financial institution that holds the deposits, and funded by public and private sources. Similar to 401(k)s, IDAs make it easier for low-income families to build the financial assets they need to achieve the American Dream. Populations that have benefited from participation in IDA programs include former welfare recipients, youth in disadvantaged urban and rural schools, recent refugees, and the working poor.
Federal and state governments and/or private sector organizations and individuals can match deposits for low-income families. There is potential for creative program design and partnerships among the public, private, and nonprofit sectors, in cooperation with account holders themselves. The savings and financial literacy components of IDAs are attracting the financial community to be involved in IDA programs. Several financial institutions across the U.S., including community banks and credit unions, are currently running IDA programs, and many other financial institutions are funding IDA programs and holding accounts.
For further information about the IDA program, connect with the NH Community Loan Fund at NH IDA
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IDAs Nationwide
Over 500 IDA initiatives exist in communities across the country. Overall, at least 10,000 people are currently saving in IDAs.
- 30 states included IDAs in their state Temporary Assistance for Needy Families (TANF) plans (as allowed by the 1996 welfare reform law), which excludes counting IDAs as assets for the purpose of qualifying for benefits.
- 34 states, Washington, D.C., and Puerto Rico have passed some form of IDA legislation. Only six states have no known IDA activity.
- Several national foundations have supported the American Dream Demonstration (ADD), a 4-year, 14-site IDA policy demonstration.
- IDAs are expected to reach an additional 30,000 to 40,000 working-poor Americans by the year 2003 though the federal Assets for Independence Act of 1998 (AFIA).
- The Savings for Workings Family Act of 2002 (SWFA), introduced in both the U.S. Senate and U.S. House of Representatives, proposed billions in tax credits for financial institutions and private sector investors to match and support IDAs. Although SWFA did not pass in 2002, it may be reintroduced during the 2003 session.
- The Office of Refugee Resettlement has also established an IDA program for organizations across the country assisting refugee population.
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IDAs Do Work
Low-income families can save
The American Dream Demonstration (ADD), a 14-site IDA program, has proven that low-income families, with proper incentives and support, can and do save for longer-term goals. In ADD, average monthly net deposits per participant were $19.07, with the average participant saving 50% of the monthly savings target and making deposits in 6 of 12 months. Participants accumulated an average of $700 per year including matches. Importantly, deposits increased as the monthly target increased, indicating that low-income families' saving behavior, like that of wealthier individuals, is influenced by the incentives they receive.
Financial literacy creates savers and savvy consumers
Key to the success of IDAs is the economic education that participants receive. Information about repairing credit, reducing expenditures, applying for the Earned Income Tax Credit, avoiding predatory lenders, and accessing financial services helps IDA participants to reach savings goals and to integrate themselves into the mainstream economic system. The encouragement and connection to supportive services keep early withdrawals to a minimum and overcome obstacles to saving Banks and credit unions benefit from these new customer relations, and states benefit from decreased presence of check-cashing, pawnshop, and other predatory outlets.
Assets change lives
More than income enhancement, asset accumulation affects individuals' confidence about the future, willingness to defer gratification, avoidance of risky behavior, and investment in community. In families where assets are owned, children do better in school, voting participation increases, and family stability improves. Reliance on public assistance decreases as families use their assets to access higher education and better jobs, reduce their housing costs through ownership, and create their own job opportunities through entrepreneurship.
Communities benefit from homeownership, entrepreneurship, and educational attainment
Twenty-eight percent of ADD "graduates" bought a home, 23% started or expanded their own business, and 21 % pursued higher education. The rest used their savings for home repair, job training, or retirement. This represents a substantial investment in low-income communities and a significant stabilizing effect on the local economy. There is evidence from IDA initiatives that poor people, with proper incentives and supports, will save regularly and acquire productive assets. For example, 2,364 low-income families participating in ADD had accumulated $36,481,498 (including matching funds) as of December 2001. Monthly deposits typically ranged from $30-$75 per month. Also, research summarized by the Center for Social Development (CSD) demonstrates many beneficial aspects of assets:
- They promote economic household stability and educational attainment
- Decrease the risk of intergenerational poverty transmission
- Increase health and satisfaction among adults
- Increase local civic involvement
Economy of scale makes IDAs cost effective
While start-up costs for an IDA program are significant, approximately $70 per participant per month, these costs decrease over time. Average program expenses after start-up in ADD were less than $45 per participant per month. In Kansas, we benefit from the experience that Heart of America Family Services has with administering an IDA program. Local financial institutions know how and are willing to manage participant accounts. We have access to tested financial education curricula. We can pool systems for managing client data.
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Why invest in IDAs?
Significant as current IDA efforts are, they cannot meet the growing demand for IDAs. Many Americans who do not own assets (one-third of all Americans and two-thirds of African-Americans are asset-poor) and others who do not have bank accounts (as many as one-fifth of Americans are "unbanked") are not currently benefiting from IDAs. Greater public and private investment is needed to make IDAs more widely available.
While returns on IDA investments are difficult to calculate, the Corporation for Enterprise Development (CFED) estimates that each federal dollar invested in IDAs would yield a return of approximately five dollars to the national economy in the form of new businesses, additional earnings, new and rehabilitated homes, reduced welfare expenditures, and human capital associated with greater educational attainment.
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Asset-building is Not a New Idea
The Homestead Act, GI Bill, IRAs, 401(k)s, and the home-mortgage interest deduction are good examples of how government has helped millions of American families acquire assets and achieve economic independence. By expanding IDAs, government can also help America's working-poor families save, acquire assets, and participate more fully in the economy.
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