Since April 2005, every child born in Great Britain has received a welcome-to-the-world gift from the government of £250 (roughly $370). If the infant’s family income is far below the poverty line, the amount is doubled. The program is called the Child Trust Fund (CTF), and no, it is not due to any lovely largesse expressed by a doting queen.
Its genesis traces back to one soft-spoken, genial social-science professor at Washington University, Michael Sherraden, and to an aha! moment he experienced in the mid-’80s. At the time, he was examining the pitfalls of welfare, and after numerous conversations with recipients, he realized that the system didn’t allow anyone to save. If they did, they were jettisoned from the rolls.
“If we structure financial assistance on a monthly basis—‘This is your check, your rent subsidy, your food stamps to get through the month’—these policies are structuring people’s cognition in the short term,” says Sherraden, who is also the founding director of the Center for Social Development at Washington University. “It’s ‘How do I get through the month?’ There is nothing about their financial life that allows them ever to get out of that. They are kind of stuck.”
At the same time he reached this realization, Sherraden was personally being urged to save through a TIAA-CREF retirement account that the university matched.
“It is a social policy, because it is a tax-deferment,” Sherraden says. “People like me were being encouraged to accumulate as much as we could with public subsidy. And the welfare moms were being told they should not accumulate or they would be penalized.
“With 401(k) plans and mortgage-interest deductions, we really have decided as a country that we are going to support asset building for the top half of the population and we are going to use public funds to do that,” he continues. “My view is that has been pretty successful by and large. Why don’t we just do that for everybody? I don’t think it is that hard to do. I think we can do it. And I would default them in at birth.
“When you accumulate assets,” he adds, “you are by definition out of that [month-to-month] pattern. It’s other money, it does not disappear by the end of the month, and that creates this cognition about a period of time longer than a month. It’s about the future.”
Sherraden named the idea Individual Development Accounts and formally introduced it in his 1991 book, Assets and the Poor: A New American Welfare Policy. The structure is simple: An IDA is a matched savings account for the poor. After going through 12 hours of basic financial education classes, a person opens an IDA through a social-services agency, then saves toward a goal: a house, an education, a car or a small business enterprise. When they withdraw for the stated purpose, the amount is matched on an average of 2-to-1. In Missouri, individuals who want to can donate to the IDA system—and get significant tax credits—by contributing to Family Development Accounts, available through such agencies as Beyond Housing.
Over the past two decades, IDAs have gained in both acceptance and popularity.
Sherraden says that in the program’s early days, one of the ongoing questions was how poor people could indeed save some of their money. “We now have evidence that they can,” he says.
The federal government has passed laws allowing welfare funds to be used for IDAs, and the Assets for Independence Act provides federal funds to support IDAs. So far, 40 states have instituted some kind of IDA; Sherraden estimates that there are probably 100,000 total accounts in the U.S.
The logic is so apparent, and the results are … irrefutable.
For the past decade, the United Way of Greater St. Louis has consistently invested in IDAs through six agencies that deal with adult clients and four agencies working with youths aging out of foster care. “Now it is about 2,000 accounts,” says Cassandra Kaufman, the group’s director of community investment. “It’s quite a bit. Through 2008, we have invested $2.7 million; we also obtained grants of over $600,000. Through funding we have leveraged, our investment has been almost $3.4 million.”
The response has been overwhelmingly positive. At United Way, Kaufman says, “That program has evolved into an entire focus area on financial stability. It was a great investment, trying to help people move out of poverty by focusing on increasing their financial stability. It’s that whole teaching people to fish, rather than handing them fish kind of thing.”
Beyond Housing recently received federal funding for a program in Pagedale that provides 100 IDAs for adults and students. Currently 14 Normandy High School sophomores have enrolled in the financial education classes and the IDA program, which lasts 2½ years. “It’s a 2-to-1 match,” says Eric Zegel, IDA services manager at Beyond Housing. “If they save $1,500, they would get a match of $3,000, for a total of $4,500 to be used for college.”
Among other encouraging anecdotes, Zegel cites 15 clients who used their IDAs to purchase homes through Habitat for Humanity. He boasts of a success rate—those who open IDAs and successfully save—of close to 75 percent. “Those we see who have completed their financial education classes and who we get asset-ready for owning their own home or business are doing really well,” Zegel says. “And on the back end, we are not seeing any foreclosures.”
The United Way has been working on IDAs with Redevelopment Opportunities for Women, an organization for women who have been impacted by poverty, homelessness and/or intimate partner violence. “They have some of the best success rates of all of our participants, and they are some of the lowest-income women, who are also dealing with spousal-abuse issues,” Kaufman says. “When they go through training, the women are able to save for houses, cars or starting small businesses. It is pretty interesting that someone who is really, really in poverty and has never had any control of their finances can turn their life around like that.”
Of course, just like every other segment of society, some save, some don’t.
“In IDA programs, about half the people don’t do very well, and about half the people do really well,” Sherraden says, adding that the average savings in such programs is $16 a month.
“When people say, ‘Well, half the people aren’t doing well,’ I say, ‘How many people are saving every year in their IRAs?’ I have an IRA, and I haven’t made a deposit since some time in the 1980s. Am I a failure? Well, maybe not. I don’t think I’m a failure.” Indeed, the country as a whole has a lackluster savings record: according to a recent Slate magazine article by Mark Gimein, Americans saved 9 to 10 percent of their incomes through the post-WWII years, but that number dropped steadily the last two decades until hitting zero in 2005; only recently—as times have toughened—has the percentage started inching upward.
Sherraden—who, along with his wife, is actively involved in developing local IDA programs—won’t consider his crusade a success until the whole United States has the sort of national program that exists across the pond. He would like to see Child Development Accounts established, with a $500 contribution at birth to each child, and $1,000 for each child born to an extremely poor family. As with CTFs, the CDA’s balance could not be withdrawn until the child turns 18, and the withdrawal would need to be for education, a home or a car, or be left there for retirement.
“Babies deserve a chance—they shouldn’t be penalized for the status of their parents,” Sherraden insists. “There is some support for the universal idea that we are all citizens of the country, that everyone deserves a
fair start.”
A fair start … and a future.
Additional Information
To learn how you can donate to a Family Development Account, contact the Missouri Department of Economic Development at 573-751-4539 or dedfin@ded.mo.gov. Visit Wash. U.’s Center for Social Development at gwbweb.wustl.edu/csd to learn more about Sherraden and his efforts.
