The Financial Security Credit (FSC)

Building savings and assets is an integral part of ending poverty, yet few financial instruments are designed for low-income families. Without savings, these families are always at the risk of falling into or deeper into poverty when financial crises arise. With savings, low-income children are more likely to go to college and move into the middle class as adults. The Financial Security Credit (FSC – formerly known as the Saver’s Bonus) uses the convenience of tax time to encourage low-income tax filers to start saving. The FSC is a matched deposit to low-income tax filers who agree to direct deposit all or part of their tax refund into an eligible savings product. A recent pilot program in New York City ($aveUSA) has proven that the FSC can work.

Savings Help Break the Cycle of Poverty

Savings help improve household stability. One in four American children is born into families with negligible savings to weather financial emergencies or invest in the future (http://tinyurl.com/3uqc9we). With assets, people are better able to weather financial emergencies, thus reducing the chances of disorder in the household. Children in low-income families who save are more likely to escape poverty. Specifically, 71 percent of children born to high-saving, low-income parents move up from the bottom income quartile over a generation. (http://tinyurl.com/3asggnu). Savings also enhance the well-being of children and could effectively reduce intergenerational poverty. For example, children with a savings account in their name are as many as seven times more likely to attend college than those without an account (http://tinyurl.com/3elk76n).

The Financial Security Credit (FSC)

The FSC (formerly the Saver’s Bonus) would use the convenience and timing of tax season to promote savings. Tax time is an ideal time because many low-income taxpayers receive large tax refunds from credits they have earned, such as working to earn the Earned Income Tax Credit (EITC) or the Child Tax Credit (CTC). Here are the key elements of the FSC:

  • Targeted at taxpayers who aren’t likely to receive other support for savings — maximum income level for participants is 120 percent of EITC eligibility. Most taxpayers under this level don’t have a 401(k) type account, don’t receive a retirement savings match from their employer and don’t benefit from the tax advantages of a 401(k).
  • At tax time, the taxpayer checks a box on the tax return agreeing to deposit all or part of tax refund into an eligible savings product (e.g. IRAs, 401(k)s, 529 College Savings Plans, Coverdell Education Accounts, U.S. Savings Bonds, and certificates of deposit (minimum 12-month term).  Then they would receive a 50 cents per dollar match for their deposits, up to $1,000 (max match would be $500).

OR

  • The individual could put their money into a traditional savings account.  In this scenario, they would have to wait 8 months and receive the match based on how much they were still saving after 8 months.  The match would still be 50 cents per dollar match  for their deposits up to $1,000 (max match would be $500).
  • There is also the opportunity to open a savings account right on the tax form.  This is particularly important aspect of the structure because it simplifies the process and decreases barriers. 

The Financial Security Credit at Work — $aveNYC and $aveUSA

In 2008, New York City started the $aveNYC program very similar to the FSC. Participants in the $aveNYC program agreed to deposit all or part of their tax refund into a designated savings account. After one year, if they maintained no less than their initial deposit amount, they received a matching deposit from the program. Among the 2,200 people who opened an account under $aveNYC, 80 percent maintained their deposits for a year and received the match, and 70 percent of participants who received the match maintained it or reenrolled the next year.

Because of the success of $aveNYC, it was expanded to three other cities (Newark, Tulsa, San Antonio) and renamed $aveUSA in 2011. In its first year, the program helped open 1,600 $aveUSA accounts, helping participants save nearly $1 million. “Sometimes the difference between the person who rises out of poverty and the one who doesn’t is whether she or he has assets,” said Deputy Mayor (NYC) for Health and Human Services Linda I. Gibbs. “$aveUSA program is a national model helping more and more New Yorkers – and Americans – save money and grow assets, a crucial component in reducing poverty and increasing self-sufficiency.” (http://tinyurl.com/77sd7eg)

RESULTS' 2013 Economic Opportunity Campaign PowerPoint Presentation

The Financial Security page from The New America Foundation

Check out the CFED’s Assets and Opportunity Scorecard to see what asset poverty looks like in your state.

Financial Security Credit Blog Post by Justin King of the New America Foundation

PowerPoint presentation about New York City's "$aveNYC" program

Marketplace report about the $aveNYC program

RESULTS' Individual Development Account page

RESULTS' Childrens savings Account page