Creating a new generation of savers

October 08, 1997|By Neal R. Peirce

WASHINGTON -- Are we Americans ready to transform the way we help our working poor? To move from subsistence handouts to investment? From bureaucratically run income security systems to direct community ties?

An ingenious idea to do just that, garnering early bipartisan support, surfaced in Washington last week.

The kernel of the idea: Start treating our low-income neighbors the way middle-class and affluent America are favored -- at a cost of some $200 billion a year -- by such breaks as home mortgage deductions, 401(k)s and expanded IRAs.

Low-income people, under a formula getting a test by such pioneering community groups as Indianapolis' Eastside Community Investments, are invited to set up special savings accounts -- so-called Individual Development Accounts, or IDAs.

The carrot: For every dollar they save there's a matching dollar of investment by community groups, foundations, churches or government itself. The only catch: Proceeds of the savings must go to the savers' most vital long-term needs: down payments on a home, setting up their own businesses, or furthering education.

The idea of IDAs first developed in a 1991 book by Michael Sherraden of St. Louis' Washington University. Its national champion has been Robert Friedman and the national policy group he founded, the Corporation for Enterprise Development.

I recall Mr. Friedman, a voice in the wilderness, urging in the early '80s that welfare recipients be allowed to turn their payments into investments in their own start-up businesses.

It's taken years for such out-of-the-box thinking to take hold. But last month in Washington, Mr. Friedman was able to announce that several leading American foundations -- among them Joyce, Ford, Mott, Levi Strauss, MacArthur, Moriah and Kauffman -- have committed funds to a national experiment to start over 2,000 IDA accounts.

To meet the growing demand, Sen. Dan Coats, R-Ind., and Rep. Tony Hall, D-Ohio, appeared with Mr. Friedman to push for federal partnership through $100 million in matching funds to underwrite IDAs for 50,000 people over the next four years.

State-sponsored IDA programs, inaugurated in Indiana, Pennsylvania, Maine, Iowa and North Carolina, may also start multiplying, especially in view of the states' recently reported surpluses totaling $14.2 billion.

With IDAs, said Mr. Friedman, poor people will be able to join the sea change under way in savings practices -- away from standardized government programs such as Social Security or Medicare, toward much more individualized accounts in which people have real, personal choices to make.

Instead of government programs providing the poor with income for consumption, the new approach assumes they'll sacrifice if they see real hope for better lives. "Income," says Mr. Sherraden, "may feed people's stomachs, but assets change their heads."

Mr. Hall told of visiting, on a congressional committee trip, a decrepit shack that's home to a Mississippi family. The building didn't even have a toilet. But on the wall, Mr. Hall saw pasted an insurance policy for the owners' burial arrangements. "There they were," he said, "saving money to die but not to live."

Mr. Friedman has produced rough projections of what each 100,000 IDAs financed by government and private funds might produce: $287 million more deposited in community financial institutions, 12,000 families off welfare, 7,000 new businesses, 69,000 job-years of employment, 6,000 new and 6,000 rehabilitated homes and 32,000 additional high school and college degrees.

But can one be sure? Will poor people -- folks just one sickness, an accident or divorce away from poverty -- really be willing, in significant numbers, to invest? That's what the foundations' major new investment, and even more, the proposed Coats-Hall bill, would test.

Mr. Friedman, noting that IDA plans have contingencies for personal emergencies, underscores the new system's grass-roots, personalized delivery system. Enrolling in a community organization's program, savers receive training on personal financial management and asset-building and then ongoing credit counseling from the organization's staff.

Community organizations already piloting IDAs have found that even people whose families have been mired in poverty for generations can and do remake their lives with savings incentives and guidance.

As the nationwide homeowner assistance efforts of the federally created Neighborhood Reinvestment Corp. demonstrate, low-income people can and will pay obligations like middle-class people, provided the terms are reasonable and they receive sound credit counsel.

Alarmingly, the demanding new global economy is pushing us to income extremes -- more affluent families, earning a huge share of the American income pie, but also growing numbers of people without skills, assets or much hope.

The big idea of IDAs is that savings incentives will reduce the gap by prompting today's asset-less Americans to plan for success through their own labor, energy and vision.

Thirteen organizations spread coast-to-coast (like Tulsa, Oklahoma's "Project Get Together") will use the foundation funds to test that thesis.

Friedman & Co. are calling it the "Down Payment on the American Dream Policy Demonstration." It couldn't have a better name.

Neal R. Peirce is a syndicated columnist.

Pub Date: 10/08/97

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