The Saver’s Bonus

The tax code is riddled with provision that allow middle- and upper-income households to create and expand savings and wealth. The mortgage interest deduction, lower rates on capital gains and dividends, and deductions for state and local taxes are just a few of the provisions that benefit you more the wealthier you are. Rarely can low-income households take advantage, or receive the full benefit, of these provisions the tax code. Yet, just like any other household, low-income families need to save. As an asset development strategy, savings provides access to the economic mobility and security needed to escape poverty and low-income families will save if they are given the right methods and incentives to do so.

The Saver’s Bonus Takes Advantage of Tax Time

The Saver’s Bonus uses the tax code to create incentives for low-income families to save. The idea is to use the existing infrastructure of the annual tax filing season to help people save. Generally, tax time is generally when low and moderate income taxpayers receive their largest check of the year. Because many of these taxpayers receive the Earned Income Tax Credit (EITC) and Child Tax Credit, their refunds can sometimes be several thousand dollars (for the 2010 tax year, the maximum EITC for a family with three children is $5,666). Therefore, this can be an ideal time to start saving.

The Saver’s Bonus Makes It Easy to Sign Up

Low-income tax filers (families at 120 percent or below of EITC eligibility) would be able to sign up for the Bonus right on their tax return. To receive it, these taxpayers would have to commit to deposit all or part of their federal tax refund into an eligible savings product and/or report previous contributions made to an eligible account during the tax year (*The IRS allows you to “spilt” your refund into different accounts). If the person does not have such an account, he/she can open one right on their federal tax return.

Eligible accounts include IRAs, 401(k)s, 529 College Savings Plans, Coverdell Education Accounts, U.S. savings bonds and certificates of deposit (minimum 6 month term). The Treasury Secretary could also allow additional savings products to be eligible for the Bonus.

The Saver’s Bonus Provides the Incentive to Save

However, the key component of the Bonus, and what makes it effective, is a dollar-for-dollar match on savings deposits. The government would match up to $500 per year in savings deposited by the taxpayer. This match provides the incentive needed for low-income taxpayers, who generally do not have much discretionary income, to start saving. Deposits made into the accounts during the year (not at tax time) would also be eligible to receive the match.

Once these household starts saving, not only will they be on a pathway out of poverty, they will also begin creating a “habit” of saving that will be strengthened over time.

We expend hundreds of billions of dollars each year on asset-building strategies that mostly benefit middle and upper income households. The Saver’s Bonus is a smart, effective, and common sense way to start providing some of those benefits to those who need it most. By creating a matched savings account using the existing infrastructure of the IRS, the Saver’s Bonus combines the success of traditional Individual Development Accounts (IDAs) with quick and convenient access to participation. In other words, the Saver's Bonus provides the incentive and ease to help millions of low-income taxpayers begin saving. 

The Saver’s Bonus in Action — New York City’s “$aveNYC” Program

In 2006, New York City launched a Saver’s Bonus-like program called $aveNYC. Like the Bonus, $aveNYC used the convenience of tax time to help low-income residents begin to save. To participate, low-income New Yorkers had to agree to deposit at least $100 of their tax refund into a designated savings account. If after one year they had maintained those savings, they were eligible for a fifty cent match for every dollar they saved, up to $250 dollars (this amount was raised in later years).

The program proved very successful. Before the program began, less than one-third of participants were unbanked, most had less than $500 in savings, and one-fourth had no intention of saving any part of their tax refund. Yet, among the 2,200 people who opened an account under $aveNYC, eighty percent maintained their deposits for a year (and received the match) and seventy percent of participants who received the match rolled over their account or participated in the following year’s program.  Here are some other significant finds from the program:

• The average participant saved $561 and over half contributed the maximum amount eligible for the match ($500 in 2008 and 2009, $1,000 in 2010).
• The top reasons participants gave for opening an account were the ease of opening an account (67 percent) and the match on deposits (64 percent).
• Participants with refunds over $1,500 were nine times more likely to open account. On average, they contributed $258 more into that account than those with refunds under $500.
• In all 3 years, about 50 percent of participants saved up to the match amount. When the match was doubled (from $500 in 2008-09 to $1,000 in 2010), average savings increased from $380 to $700 without a decline in participation.
• People who deposited only the $100 minimum amount were most likely to close their account after their first year. However, only 16 percent of filers who saved more than $200 closed their accounts before receiving the match.

What the $aveNYC program shows is that when people are giving the opportunity and incentive to save, they will. It also shows that the convenience of opening the accounts when they file their taxes, as well as the account match, are critical components to its success. $aveNYC’s success resulted in it becoming $aveUSA with programs being set up in Newark, NJ, Tulsa, OK, and San Antonio, TX.

Thanks to staff at the New America Foundation for help summarizing $aveNYC statistics.

Recent Legislation and Additional Resources

The Saver’s Bonus Act, S.3372, was introduced by Sen. Robert Menendez (D-NJ) in 2008 but did not make it out of the Senate Finance Committee before the 110^th Congress adjourned. The Act was not introduced in the 111^th Congress, but we are hopeful that the bill will be introduced in both the Senate and House in 2011. Despite this, one aspect of the Saver’s Bonus has been adopted: beginning in 2009, taxpayers can now buy U.S. savings bonds on their federal income tax returns and, beginning in 2011, can purchase a savings bond for another family member. For more information on purchasing savings bonds at tax time, see the resources posted by Bonds Make It Easy.

RESULTS' 2011 Economic Opportunity Campaign PowerPoint Presentation

Saver’s Bonus page from The New America Foundation

Saver's Bonus Op-ed "From Groupon to Saveon: The Smart Way To Boost Savings" by Rachel Black 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