Matched Microsavings: A tool for economic development?
Individual development accounts (or IDAs) are micro-savings programs aimed at encouraging financial literacy and asset-building amongst low income households. Used by over 20,000 individuals in the U.S., these programs typically partner with local banks, credit unions and non-profits to “match” deposits made by individuals to reach certain asset-building goals. To encourage savings, a sponsoring institution typically matches savings on a 1:1 or 2:1 basis (so that $10 saved results in a $20 or $30 savings account).
Approximately 530 community-based or state-funded IDA programs are currently operational in the US across all 50 states, with 33 states having some form of explicit law or policy that governs IDA operations. Eligibility criterions vary by state, but broadly, IDA programs require participant incomes to be lower than 200% of the prevailing federal poverty line for their household size. Some programs also mandate that participants attend financial education classes to increase their knowledge of investment strategies or financial management.
The most common IDA goal in the U.S. is homeownership with the Corporation for Economic Development estimating that over a third of IDAs were used for home ownership goals in 2010-11. Other IDA goals often include postsecondary education (26%), starting or expanding a small business (23%) and automobile, home repair or professional training.
In the United States, IDA programs are often funded by the federal government. The main funder is the Assets for Independence program, which requires a dollar-for dollar non-federal match and the Office of Refugee Resettlement. Several state and local agencies also fund IDAs, usually departments related to housing, community and economic development, commerce, health and human services, labor, workforce development and rehabilitation services. In addition, some programs are privately funded by philanthropy organizations and/or financial institutions.
Several research studies have identified the merits of IDAs in encouraging savings and financial literacy amongst economically vulnerable populations such as low-income families, single parents and recent immigrants. The best-known of these is the American Dream Demonstration (ADD) which tested over 2,000 IDAs between 1997-2002 and demonstrated that IDAs can be delivered effectively by a wide range of community organizations and financial institutions to meet asset-building goals. For example, the results of an ADD-run randomized controlled experiment in Tulsa (Oklahoma) found a statistically significant migration from renting to home ownership amongst IDA users, especially the African-American community.
More recent studies have also validated these results. An evaluation of IDA programs run by 5 community action centers in Vermont in 2011 revealed that participants gained significant financial literacy through the IDA process – they learnt of their credit scores and worked actively to improve them, they began using a written budget and saw a statistically significant increase in their household incomes. Aside from such quantitative outcomes, anecdotal feedback from IDA practitioners also report increased self-esteem and confidence in IDA users, due to a greater ability to channel earnings into savings and higher levels of satisfaction with money management. For example, Ms. Yanki Tshering of the Business Center for New Americans says that “…immigrant IDA users channel their new savings into micro-credit loans, aimed either at building credit history or even starting their own businesses.” This often generates positive social and economic spillovers in local communities. Such positive results tie into the broader goals of microsavings initiatives across the world – to improve incomes, future credit access and financial literacy amongst low-income communities.
IDA programs are not unique to the US. For example, the “Saver Plus” program in Australia, the “Matched Savings” project in Mexico, the “Child Trust Fund Project” in the United Kingdom, the “Family Development Accounts” project in Taiwan, and the “Penny to Penny” project in Poland offer various forms of matched savings. These programs, often initiated through public policy, share many objectives with IDAs – encouraging savings and financial literacy and increasing access to credit. Evaluations of these programs have also revealed significant benefits, such as greater financial preparedness and stability.
Overall, evidence thus far suggests that matched savings programs, and IDAs in particular, are a potentially effective tool for economic redistribution and asset-building. Research institutions such as the New America Foundation and the Centre for Social Development are also actively promoting IDAs as a tool for economic development. For example, projects such as the Global Assets Project (co-led by Prof. Michael Sherraden, the creator of IDAs) are drawing together ideas from research, policy and practice in this field, to chart a new agenda for future work and innovation. However, as with any policy intervention, much of the success of IDA programs depends on effective design and implementation. For example, clear information about withdrawal penalties and transparency regarding qualifying asset goals help participants make decisions on savings amounts and durations. Practitioners (such as Ms. Tshering) have also identified the challenges associated with finding matching grants for federal IDA funds. As policymakers learn more about the effective design and use of IDAs, their reach and scope can potentially be expanded even further.