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Individual Development Accounts

Individual Development Accounts (IDAs) are a policy instrument for asset development for the poor. They show exciting promise as a new, effective way to provide a hand up to low-income families.

IDAs are basically savings accounts targeted toward low-income populations. There are a few characteristics that various IDA programs share in common:

  • Must Be Income Eligible. Generally, IDA participants must be low-to-moderate income.
  • Matched Deposits. A sponsoring institution provides matching funds for the account holder, usually dollar-for-dollar. Because many times low-income individuals and families have little or no discretionary income, the fact that the sponsoring institution will match deposits made by the account holder (usually up to $500 per year) provides the incentive to save.
  • Restricted Use. While the account holder’s own money is always under his or her control, the matching funds are kept in a separate, parallel account, and can be withdrawn only if used for specific asset-building purposes. Matching funds may typically be used only to buy a home, start or expand a small business, save for retirement, or pay for postsecondary education.
  • Financial Literacy. Typically, financial literacy training is offered or required for IDA participants. Participants in an IDA program receive basic education to help them save and track their finances.

Dr. Michael Sherraden, professor at Washington University, introduced the concept of IDAs in his book Assets and the Poor. He envisioned accounts that provide low-income families with the same kinds of benefits that middle- and upper-class families already enjoy with Individual Retirement Accounts (IRAs). Sponsoring financial institutions would match a low-income participant’s savings, to be used for specific asset-building purposes.

In 1997, Corporation For Enterprise Development (CFED) launched the American Dream Demonstration (ADD), which was the first large-scale test of IDAs as a social and economic development tool. The initial results from the ADD have been impressive. In 1998, Congress passed the Assets for Independence Act (AFIA), providing $125 million over five years to fund IDAs. This was the first federal law enacted to specifically support IDAs. Accodring to CFED, today more than 85,000 IDAs have been opened, resulting in more than 9,400 new homeowners, 7,200 educational purchases, and 6,400 small business start-up and expansion purchases.

IDA Savers Show Success

The Assets for Independence (AFI) program’s latest annual Report to Congress finds that Individual Development Accounts (IDAs) are successful at encouraging savings, building assets and moving low-income families into the financial mainstream. Key findings from the Report to Congress show (results are from 1999 through FY 2009):

  • Regular AFI project participants had opened a total of 60,108 IDAs; more than 8,258 of these accounts were opened in FY 2009, up 16 percent from FY2008.
  • 58 percent of all participants had enrolled in an IDA with the intention of purchasing a home, 20 percent enrolled with the intention of capitalizing a business, and 21 percent enrolled with the intention of pursuing postsecondary education or training.
  • Account holders had deposited a total of $56.6 million in earned income, or an average of $943 per account holder.
  • 46,642 participants had withdrawn $43.9 million of earned income they had saved in their IDAs.
  • 8,916 participants had withdrawn a total of $42.2 million to purchase a home. The average withdrawal (savings plus matching fund) per home purchase was $4,738.
  • 6,706 participants had withdrawn a total of $26.4 million to fund a business. The average withdrawal (savings plus matching fund) to fund a business was $3,942.
  • 7,426 participants had withdrawn a total of $27 million to pay for postsecondary education or training. The average withdrawal (savings plus matching fund) for postsecondary education or training was $3,649.

In addition, a five-year evaluation study found significant differences between AFI participants in comparison to similar non-AFI participants:

  • IDA participants had purchased a home at a rate more than 10 percentage points higher than the comparison group.
  • IDA participants owned a business at a rate 10 percentage points higher than the comparison group.
  • IDA participants were more than 21 percent more likely to engage in post-secondary education.

Reauthorization of Assets for Independence Act

In 1998, RESULTS and our allies successfully advocated for the Assets for Independence Act. Congress authorized $125 million for a multi-year project of IDAs. Supported by the Assets for Independence Act and private funds, more than 85,000 IDAs have been opened in programs administered by more than 1,100 sites across the country. CFED estimates that each federal dollar invested in IDAs would yield a return of approximately five dollars to the national economy in the form of new businesses, additional earnings, new and rehabilitated homes, reduced welfare expenditures, and human capital associated with greater educational attainment.

Authorization for AFI expired in 2003 although funding has continued at about $24 million a year. Reauthorization in 2010 would legitimate continuing the program and be an opportunity to pass improvements. So far, AFI has accounted for a very large share of all IDA activity, nearly 65,000 of 85,000 matched savings accounts. Congress should reauthorize the Assets for Independence Act as soon as possible. In doing so, they should triple the funding from $25 to $75 million, expand access to IDAs, and streamline the program to simplify access and use. See CFED’s specific recommendations for the AFIA.

Recent Legislation

H.R.2277/S.985, The Savings for Working Families Act. The Act, introduced by Rep. Earl Pomeroy (D-ND-At Large) and Sen. Blanche Lincoln (D-AR) in 2009, would have expanded the number of IDAs to 3 million people in the U.S. Under the Act, low-income individuals would be able to start tax-exempt IDAs to pay for education expenses, first-time homebuyer costs, and business capitalization or expansions. Participants would be eligible for a dollar-for-dollar match of up to $500 per year and also receive financial literacy training as part of the program. Organizations providing matched savings deposits would receive a business tax credit. Any amounts saved in a qualified IDA would be disregarded for purposes of determining eligibility for assistance under certain means-tested federal programs. Unfortunately, this legislation did not make it out of committee before the 111th Congress adjourned.

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