Can the poor save? Yes, but...
A recent two-day conference in Washington, DC, celebrated the 21st anniversary of Michael Sherraden’s Assets and the Poor, which first proposed individual development accounts (IDAs, savings accounts offering match funds for specified uses) and other asset-based antipoverty strategies. The Assets@21 convening brought together policy researchers and advocates to assess progress and look ahead.
A mixed story emerged. Yes, there have been legislative victories (the Assets for Independence Act, providing federal grant funding for state and local IDA projects) and behaviorally informed innovations (such as the IRS’s Form 8888, enabling low-income tax filers to precommit a portion of their federal tax refund to the purchase of US savings bonds). But research to date has yielded limited supportive evidence—enough to sustain asset-building as a field of policy development, but not enough to convince skeptics. And efforts to further advance asset-building are now more difficult in an increasingly partisan, deficit-constrained environment.
The question posed by Sherraden and others two decades ago was, “Can the poor save?” The answer depends on how poor a target population one has in mind. Those with annual incomes chronically below the poverty level have little capacity to save, as their incomes never rise enough to provide the necessary budget slack. Fortunately, among those who become income-poor, only a small fraction remains so chronically. An analysis of 1968-89 data from the Panel Study of Income Dynamics concluded that only 5 percent of those who enter a poverty spell then remain chronically poor throughout the ensuring ten years. The typical experience is episodic poverty, with 30 percent never having another below-poverty year within the ten-year horizon and another 26 percent experiencing poverty again in only one or two of the following years. For the episodically poor, the opportunity to save comes when they have above-poverty income. If they manage to avoid major emergencies, the savings accumulated in their less-poor years can offset their dissaving (asset drawdown) in other years.
So the poor can save, as long as they are not always poor. Asset-building programs use this dynamic by extending their income eligibility thresholds (measured at program intake) to 150 or 200 percent of the poverty level. The favorable evidence on homeownership among IDA participants (including a randomized control trial under an early Tulsa program) suggests that program effects are concentrated among those in the higher ranges of income eligibility. Only a subset (30 to 40 percent) of IDA participants makes any matched withdrawals. This tends to be the near-poor, in keeping with the notion that a consistent savings habit is possible only during times when a household’s annual income exceeds the poverty level.
Asset-building programs should thus be viewed not as approaches to lift people out of chronic poverty, but as ways to promote upward mobility for the episodically poor and to prevent the near-poor from falling back into poverty. The latter role for asset-building—to provide emergency savings as protection against unplanned spending needs or income drops, and to avoid the high cost of credit from predatory lenders—was prominently mentioned at the Assets@21 meeting. Assets are thus important for both self-investment and self-insurance: for both offense and defense.