Helping low-income families save: Lessons from tax-time savings accounts
With the tax season now over, it’s a good time to point out that tax-time matched savings programs are among the more promising approaches to boost low-income savings. In these programs, tax filers are encouraged to deposit some of their tax refund—primarily from the earned income tax credit (EITC)—into a savings account. Those deposits are then supplemented with match funds. One successful example is New York City’s $aveNYC Program, run through participating Volunteer Income Tax Assistance (VITA) sites. The program pays a 50 percent match on amounts up to $1,000 held in a $aveNYC account for a full year. In 2008-2009, the initial years of the program, 79 percent of participants received match funds. Of these accountholders, 71 percent re-upped the following year.
A just-released report by UNC-Chapel Hill’s Center for Community Capital provides insights on low-income savings behavior based on in-depth interviews with 48 $aveNYC participants—mostly African-American and Hispanic women between 25 and 50 years old. Consistent with other research, the study highlights the fact that children provide the strongest motivation for low-income workers to save because of the obligation to meet kids’ basic living needs, the instinct to serve as a role model for them, and the desire to provide them a better environment for growing up. To be realized, these impulses to save must be combined with confidence in one’s ability to save and a sense of trust in the financial institutions that hold one’s savings. And low-income households often lack that confidence and trust.
The basic message from this recent research—and the emerging body of work in behavioral economics—is that savings interventions need to nurture the intention to save and also make the act of saving easier. Whether someone is able to save (given that they can afford to) depends on a complex tug-of-war between their current impulses and their future plans. Savings tools such as precommitment, default-in/opt-out decision framing, and envelope budgeting are ways to enable our better selves to prevail.
Community-based savings collaboratives, such as savings circles where people pool their savings, have had some success helping the very poor save in developing countries. Is there a scalable way to do something similar in urban America? Can the motivational influence of one’s children be more effectively harnessed?
One possible untested approach is setting up a virtual savers’ club comprised of parents whose children share the same birthday. Parents could create a savings account on their child’s behalf and set a savings goal to be reached by the child’s next birthday. Members would receive periodic savings reminders and could compare their progress with the progress of other club members. This kind of self-induced competition has worked in energy conservation initiatives.
As with $aveNYC, the financial incentive to save could be strengthened by match funds—in this case, funds directed to a child’s account through donations from other family members or friends (or even a noncustodial parent). If this virtual savers’ club were widely marketed, other people who share the same birthday might be interested in making charitable donations of match funds to a child’s account.
In each of these cases, the necessary focus for savings interventions is clear: nurture the intention to save and enable the act of saving.