Center for Social Development
George Warren Brown School of Social Work
Washington University in St. Louis

Individual Development Accounts and Welfare Reform: A Case Study

Stacie Hanson, Research Assistant
Amanda Moore McBride, Ph.D., Research Director
Margaret S. Sherraden, Ph.D., Faculty Associate[1]
Michael Sherraden, Ph.D., Director

August 30, 2003

Public subsidies encourage the middle class and wealthy to build and maintain assets.  Tax deductions for home mortgages, 401(k) accounts, and Individual Retirement Accounts (IRAs) assist individuals and families in the accumulation of long-term assets and financial stability.  These subsidies are not in place for low-income families, making it difficult for the poor to accumulate wealth and break out of the cycle of poverty.  Moreover, asset limits in means-tested programs create disincentives for saving and asset accumulation.  In effect, the government has a dual policy for asset accumulation: incentives for the rich and penalties for the poor.

Asset Building for the Poor: Individual Development Accounts

In 1991, Michael Sherraden proposed that incentives and institutional structures be created to enable low-income families to save and build assets.  Since then, programs known as Individual Development Accounts (IDAs), matched savings accounts for low-income people, have been implemented across the nation.  IDA participants may withdraw their matched savings to purchase assets that promote long-term stability, such as homes, post-secondary training and education, and businesses.  IDAs provide both structure and incentives (in the form of matching funds) for saving.  Most IDA programs also require participants to take financial education courses, enhancing financial management skills. 

Beginning in 1996, Temporary Assistance to Needy Families (TANF) allowed states to use federal dollars to fund IDAs of welfare recipients.  Perhaps more importantly, money in IDA accounts under TANF is exempt for asset limits in all federal programs.  In other words, the federal government removed the disincentive to save.  This is a very important policy precedent.

IDAs operate largely through nonprofit community-based organizations and are funded by public and private sources.  At least 31 states have passed IDA or related legislation (Edwards, 2003).  IDA legislation has bipartisan support in Congress, and the federal government has implemented an IDA demonstration known as the Assets for Independence Act.[2]   

This case study details the experience of a former welfare recipient who joined an IDA program that was part of a national demonstration of IDAs called The American Dream Demonstration (ADD).  ADD is funded by a consortium of foundations and is being implemented at 13 non-profit organizations around the country (Schreiner, et al., 2001). 

Zhan, Sherraden, & Schreiner (forthcoming) studied the savings experiences of former and current TANF recipients in IDA programs.  Thirty-eight percent of the 2,378 ADD participants had received AFDC/TANF at some point in their lives.  After controlling for factors such as employment, education, demographic characteristics, income, and IDA program characteristics, no significant differences in average monthly net deposits, savings rates, or deposit frequency were found between IDA participants who were or had been welfare recipients and those who had not.  This study demonstrates that former and current welfare recipients were able to save as well as others when given the opportunity and structure to do so. 

These subjects self-selected into the IDA program.  Therefore, findings cannot be generalized to all TANF recipients, and it is difficult to predict the results of providing IDAs to an entire welfare or low-income population.  However, findings support the view that some low-income individuals and welfare recipients, like the middle class and wealthy, will take advantage of institutions and incentives that encourage saving (Zhan, et al., forthcoming).

Denise: A Case Study

Denise is a 29-year-old African American woman with four young children.[3]  She is currently separated from an abusive husband, and she receives child support from her two older children’s fathers.  Denise was on public assistance in the past, and, at the time of the interview (July 2000) received support for housing, food, and health care.  She is a high school graduate and is employed as a child care worker.  Denise had participated in the IDA program for a year and a half, and she saved approximately $500.  Her goal is to own a house and eventually open her own home daycare center.  Denise is classified as a "low saver," with an average monthly net deposit of $12 (average monthly net deposits in ADD are close to $20).

Family and childhood savings experiences.
Denise was raised in a single parent household, and her mother was constantly struggling to provide for her five children.  Although her basic needs were always met, it was frustrating for Denise to watch her mother work so hard and make so little money.  They always lived paycheck to paycheck, although her father occasionally helped out with some child support.  Denise started working at age 15 to help her mother and pay for her high school expenses.  Her family received AFDC on a frequent basis, usually when her mother was in between jobs:

Interviewer:  You said . . . sometimes she was on public assistance?

Denise:  Yeah… When she didn’t have a job, she would have to draw a check.  Until she got a job.  And then she’d get a job and she’d let it go.  (271:297)

Although Denise knew her mother was struggling, financial issues were never openly discussed in the household.  She does not think her mother was able to save in a bank account, but she remembers her mother hiding money under a mattress or in a closet.  When she started working as a teenager, her mom occasionally told her to save her money, but “that was just like talking to a wall.”  She said she was more interested in spending her money and never developed the discipline to save as a child or a teenager.

Past and current financial situation.  Denise had two children soon after high school, and she lived with her mother to share expenses.  She was on public assistance after having her first and second child.  Denise was then married and had two more children.  Denise and her husband are separated, and although this makes her financial situation worse, she is glad to be out of an abusive situation.  Her husband contributes child support intermittently.  Denise makes $800 a month as a childcare worker, but she does not work during the summer when she depends solely upon child support from her children’s fathers.  She also receives Food Stamps, Medicaid, and subsidized housing.

In the past, Denise saved sporadically.  She used to hide $20 under the mattress occasionally for emergency purposes, and three years ago, she opened up a savings account.  When she was married, it was very difficult to save because her husband did not support this goal.  After separating, she would put $5 to $10 in the savings account now and then, but she would always  withdraw it to cover unforeseen expenses.  She wanted to save in order to have a safety net and stop living "paycheck to paycheck":

Denise: I would be around people too that would talk about, you know, saving, and setting aside.  And I wasn’t, you know, and I would ask them, “How do you do that without spending everything?”  Because I didn’t really, I wasn’t raised, as far as taught on saving money.  But I always, in the back of my mind, I would always tell the Lord that I wanted to be able to save.  I want to have extra money.  I don’t want to live from paycheck to paycheck .  .  .  Having no money .  .  .  just made me say, “Well, I need to start at least putting back $10 or $20."  Putting it up under the mattress, you know, for an emergency or something.  (745:758)

Choosing between short-term and long-term goals makes saving difficult for Denise.  She wants to provide for her children, but she also understands that she should save for her future goals:

Denise: I know that I’ve got to put this money away, you know, every month . . . and I’d be looking at it.  But I’ve got to do all this other stuff for my kids.  You know, and that really frustrates me because I say, “I’ve got to put this $10 in my account but I really do need this $10.”  But then I look and I think that I really do desire a house.  Cause that’s what I’m saving to buy, is a home.  So, when I think about that, it makes me go ahead and just say, “Okay, I’m gonna do this.”  But it’d be hard because I’d be needing that money to do other things for my kids.  I mean, I do for my kids before I do for myself.  You know, and I’m a single parent right now even though I’m married, I’m still . . . I’m separated and it’s just me and my 4 kids that stay here.  So saving is really, it takes discipline for me to save right now because I got to make sure those four kids’ needs are met, and they have clothes, and have shoes, and have food, you know.  It’s hard.  (777:805)

IDA savings experience.   Denise benefited both financially and psychologically from the IDA program.  She has been able to save $500 so far, and she credits the program with educating her about how to achieve financial goals and create a "savings habit."  As the following two interview segments suggest, she says that she has learned how to cut back on unnecessary expenses by thinking about what she "needs" and what she "wants:"

Denise: since I been in this IDA thing, I mean, a lot of stuff that I used to just go buy just because I want it and didn’t really need . . . I say, “I could’ve used that money for something else.   I can put it in the IDA account.”  (1894:1916)

Denise:  I used to splurge all the time.  I don’t splurge all the time any more.  I mean, I used to go you know, women like to shop, you know, I used to just go shopping.  .  .  But now, I don’t think I really shopped actually for myself in about three months .  .  .  I don’t splurge as much anymore.  I sort of try to take care of as much of the things that we need and those other things that come.   You know, whenever if I have extra…I sort of, like I said, sacrifice.  (2206:2221)

Denise views the IDA program as a opportunity and "blessing" in her life, saying that "it really gives people the confidence that they can do it with the help of the IDA.  You know, it’s a great program.  It really is.  It really put me on track. I mean, as far as saving."  Denise is determined to take advantage of the program and fulfill her dream of buying a house.  Her newfound determination to save regularly is significant given her extremely limited income.  The following segment describes her opinion of the program:

Denise: When they put this program together they really did a good job as far as having the community people that you know, have a desire to buy a home but don’t think they can really reach that goal.   I mean, buy a home, it teaches them how to save and they encourage you and they give you confidence about reaching that goal.  .  .  I think it’s even a blessing for them to even match the funds.  Umm, I just think this program is just great.  It’s just great.  I’ve never experienced one like this . . . actually been in a part of one like this before.  I mean, it’s, it helped as far as spending . . . it changed the way I look as far as needs and wants.  I mean, it’s been great and I would recommend it to other people, which I have already done.  (2852:2865)

In the following two interview segments, Denise specifically credits the required money management classes and the program staff for teaching her useful skills for saving. 

Denise:  Like I said, the money management classes really helped me start saving.  And if it wasn’t the IDA, I’d probably be still in the same place.  I mean, as far as trying to save but wasn’t saving because going to those classes really opened my eyes to see that you can save if you really put your mind to it.  If you really want to reach that goal.  (2076:2082)

Denise:  When you go through those classes it affects you because you change.  I mean, you know, if it something that you’re not doing and, you know, that this is what I need to do to make it work.  (2489:2494)

She says the program staff encouraged saving, and offered ideas:

Denise:  Oh, yeah.  They [the staff] have.  Umm, just giving you ideas on how to do certain, different things.  And just encouraging you.  “You can do it, you can save.”  You know, “You can reach that goal.”  Encouragement and just ideas…different ideas on what to do.   How to reach the goals.  

Interviewer:  Okay.  How easy has it been for you to ask questions and interact with the staff?

Denise:  Umm, it’s been good.  I mean, what are you saying?

Interviewer:  How, you know, how easy it is to interact with them, ask them questions . . . and all that?

Denise:  They tell you anytime . . . call them.  Feel free to call.  If you have any questions, or stop by.

Interviewer:  How do they treat you?  How does the staff treat you as an IDA account holder?  

Denise:  Yeah, they make you feel confident. You know, like, “You can do this.”  You know, they make you feel like you can do it.  You can reach that goal.  Confident.  (2242:2264)

Denise believes that the IDA is different than other forms of saving because the match, the financial education, and the focus on a goal make it easier for her to save. 

Interviewer:  So when you look at savings and your IDA account is it any different from the other kind of savings that you have done in the past?  How different is it?

Denise:  Umm, it’s different because those other accounts, they don’t match nothing.  You know, they not matching.  They not helping you out.  Then again, after going through these classes and showing you how to reach goals and what it take to reach goals . . . See, by then when I opened that account, I didn’t know all of that.  I was just saving and taking out and saving.  I didn’t really know what saving was and that you could get into, you know, keep it there to draw interest and all of that.  To where now it’s like I know more about it and I got my mind . . . toward that goal a little bit more.  ‘Cause for one, like I said, I haven’t even touched it and ain’t planning on it because my mind saying, “I’m gonna purchase a house.”  (1999:2019)

Although it has been difficult for Denise to save in the past, she has now come to see her IDA account as the key to her goal of homeownership, and she does not plan to touch that money until that goal can be realized.

Interviewer:  How important to you is your IDA account?

Denise:  Right now it’s really important.  And you can tell because I haven’t made any withdrawals.  There was a lady doing my credit report or whatever and she’s like, “You haven’t even made a withdrawal.”  And I said, “I’m not planning on making no withdrawal from that account.”  She was like, “Oh, that’s good.”

Interviewer:  What makes it important to you?

Denise:  Because I won’t, I know what I’m saving for . . . is to buy a house.  And that’s a goal.  That’s something that I desire for me and my family.  So to me, that is important.  And so I just, I told myself I’m not gonna, I’m just gonna save.  I ‘m not gonna withdrawal until it’s time for me to purchase.  And I won’t be purchasing until another year.  (2413:2429)

Denise claims there is no comparison between public assistance and IDAs, because welfare programs do not help recipients work toward a goal; they only provide minimal support for survival.

Interviewer:  How would you compare the IDA program with other programs out there like other public assistance programs?  How would you compare this program?

Denise:  Umm, there really is no comparison.  This program is, a lot of programs, they help you, but the IDA program sort of break it down, you know . . . sort of show you, give you confidence, try to show you how to reach that goal.  Take time, you know, to set up classes for you to come to.  And they helpin’ you, for one, by matching your funds.  You know, to work toward that goal.  ‘Cause some, you don’t get too many, too many people don’t do that.  And then I know that sort of, when you know, I look at it too, that it’s a blessing for them to help.  You know, match your funds for you to go toward what you’re trying to get to.  A lot of programs they don’t offer that and then the IDA program . . . the way it’s set up . . . you know, the classes and the seminar, and . . . I’ve never seen a program like this before.  I mean, this is my first time ever.  I have never seen one like this before.  Where they’ll take you through step-by-step and show you, you know, how to reach that goal.  I mean, ‘cause a lot of people don’t know how.   They say they got a goal but don’t know how to get to it.  (2503:2534)

Conclusion

Denise’s story is similar to many IDA participants who have received public assistance.  She believes that welfare served to sustain a minimal level of existence for her family, and while she tried to save money for emergencies, she had neither the financial tools nor the institutional structure to build her savings and reach her financial goals.  The IDA program provided her with the opportunity to develop money management skills, change her spending habits, and focus on a goal to purchase a home.  The structure of the program helped Denise develop a monthly pattern of saving that she plans to continue after the program is over. 

It is apparent from Denise's comments that not only did the IDA program help her create positive changes in her financial decision-making, but it also gave her greater confidence and empowered her to work toward long-term financial goals.  In her case, the goal is to purchase a home.

Because IDAs to date are "demonstration" programs and therefore short-term, it may be unlikely that Denise and other IDA participants will be able to sustain their savings pattern following the program.  IDAs were first proposed as life-long accounts.   Just as the non-poor have 401(k)s and IRAs that are not time limited, the poor also should have long-term asset-building accounts.  Ideally, these accounts would begin at birth (Sherraden, 1991).  The goal for asset-based policy should be inclusion of the whole population.

References

 

Edwards, K. (2003).  Summary tables: IDA policies in the states. St. Louis: Center for Social Development, Washington University.  Retrieved 8/28/03 from http://gwbweb.wustl.edu/csd/statepolicy/StateIDAtable.pdf.

 

Schreiner, M., Sherraden, M., Clancy, M., Johnson, L., Curley, J., Grinstein-Weiss, M., Zhan, M., & Beverly, S. (2001). Savings and Asset Accumulation in Individual Development Accounts: Downpayments on the American Dream Policy Demonstration. Center for Social Development, Washington University in St. Louis. Available [online] http://gwbweb.wustl.edu/users/csd/publications

 

Sherraden, M.  (1991).  Assets and the poor: A new American welfare policy.  Armonk, New York: M.E. Sharpe.

 

Zhan, M, Sherraden, M., & Schreiner, M. (forthcoming). Welfare recipiency and savings outcomes in Individual Development Accounts, Social Work Research.