Asset Building - Individual Development Accounts

From the Homestead Act to the GI Bill to home mortgage deductions, Americans have recognized that it is good public policy to help people build assets. 

Like the distribution of assets in the U.S., however, the distribution of incentives is skewed. Ninety percent of the benefits of the two largest asset-building programs in the country – home mortgage interest deduction and tax-free retirement savings – go to the wealthiest 55 percent of Americans.

Many of the country’s working poor live paycheck-to-paycheck. Unable to put aside enough money for a down payment, they are unable to take advantage of the greatest contributor to the wealth of average Americans, home equity, or to save for education and retirement.

It has long been recognized that access to capital is a barrier to ending chronic poverty. Small, short-term loans have been used in other countries to help poor people without assets to use as collateral start up income-generating enterprises. But in 1991 an American professor of social work proposed to help poor people build assets by rewarding saving toward specific purposes. (Michael Sherraden, Assets and the Poor:  A New American Welfare Policy, M.E. Sharpe, Armonk, New York, 1991.)

Like some 401(k) plans, individuals who contribute to Individual Development Accounts (IDAs) are provided with a one-to-one (or sometimes higher) match. Savings can be used for a down payment on a home, investment in a small business, education, or a small number of other approved purposes.

The American Dream Demonstration proved that IDAs work. Participants saved an average of $20 of their own money each month during the four-year project (1998 to 2002). Of the more than 2,300 families who took part in the program, 28 percent bought a home, 23 percent started or expanded a business, and 21 percent pursued higher education.

Backers of IDAs include former-President Bill Clinton and President George W. Bush. An important step in federal regulation came in the 1996 welfare legislation, which endorsed the use of block grant money for IDAs. Since then federal support through measures such as providing Community Reinvestment Act credits for participation in IDA programs has been important in advancing the idea.

At the same time, asset-building programs are very much community-based, and the support of state and local governments makes the difference. Twenty-four states had state-sponsored IDA programs operating in 2004, and three more were in the process of developing programs. Of these, 8 provide state matching funds and 10 provide state tax credits for contributions to IDA programs, and 12 provide funds for matching or program operation from their TANF budgets.

To read more about the theory behind asset building and IDAs, visit the Center for Social Development, part of the George Warren Brown School of Social Work at Washington University in St. Louis. The center also offers State-by-State IDA Policy Information.