Opportunity and Ownership: Individual Development Accounts (IDAs) / Savings Mechanisms

Based on our review and synthesis of the individual development account (IDA) literature, findings in this report include that IDA accounts (in the short-term, five years after program entry) help low-income families become homeowners, start or expand a business, or pursue secondary education. Studies to date have found no relationship between IDA program participation and net worth. The report reviews empirical evidence on the effect of IDA program participation and project design features on outcomes and highlights remaining gaps in the literature.

Today's weak economy, highlighted by job layoffs, high unemployment, and limited lines of credit, underscores the need for families to have savings to draw on during an emergency. Yet, the majority of low-income families have too few assets to weather emergencies. Even prior to the current recession, 57 percent of low-income families were liquid asset poor. This article discusses low-income families' asset holdings and promising policies aimed at addressing their short- and long-term needs. The package of proposals addresses the needs of families over the life course and considers the tension inherent in meeting families' short- and long-term asset-building goals.

This study provides the first evidence available on loan terms and foreclosure outcomes among individuals who purchased their home through individual development account (IDA) programs. Our results suggest that IDA homebuyers are more likely to receive government-insured loans and less likely to receive high interest rate or subprime loans than other low-income homebuyers. Further, we find that foreclosure rates for IDA homebuyers were one-half to one-third the rate for other low-income homebuyers in the same communities. Overall, the findings suggest that participation in an IDA program with its related services can improve homeownership outcomes for low-income households.

A primary goal of children's savings accounts (CSAs) is to provide children, especially in low-income families, a strong economic footing. The ability to do that, however, depends on how CSAs are designed and how much families contribute. This study uses projections from the Urban Institute's DYNASIM model to estimate the wealth building impact of CSAs under alternative scenarios that vary the design features. The results highlight three points relevant for any asset-building proposal or program: incentives make a difference, targeting can be difficult, and nontaxability matters for all subsidies.

Children's savings accounts (CSAs) are being promoted to improve financial literacy, increase the number of low- to moderate-income households that are banked, and encourage saving for education, homeownership, or retirement. This study uses projections from the Urban Institute's DYNASIM model to estimate the wealth building impact of CSAs. The results suggest that most CSAs will have small balances after accounting for inflation. Still, such accounts could help get children, particularly those in low-income families, into financial instruments that demonstrate the value of saving and of compound interest.