Kenan Institute study shows federal incentive programs promote savings among working poor families

CHAPEL HILL -- As Congress debates creating new tax incentives for banks that expand savings options for working poor people, a new report by the Kenan Institute’s Center for Community Capitalism at the University of North Carolina at Chapel Hill shows widespread support among bankers to continue such saving programs with federal aid.

The report, "Financial Institutions and Individual Development Accounts: Results of a National Survey," shows that banks, thrifts and credit unions that offer Individual Development Accounts (IDAs) believe in their long-term value to create wealth for low-income people and opportunity in America’s distressed communities. Participation by the nation’s financial institutions is critical for this kind of market-based solution to work long term, researchers said.

"We found that financial institutions now are driven largely by their community development objectives, but that many share a longer-term view of the role IDAs can play in helping them develop a new customer base," said Dr. Michael A. Stegman, center director and leader of the research team.

"While not immediately profitable, banks believe the accounts will lead to profits as their new customers’ incomes grow and their demand for higher-margin banking products and credit increases," said Stegman, the MacRae professor of public policy and business and public policy department chair. "Federal incentives offered now can help develop a new market for banks and encourage working poor people to save and build wealth — a win-win for everyone involved."

A growing body of evidence indicates that matched savings programs encourage saving by low-income people as IRAs do for middle-income families. In the nation’s first IDA demonstration, the American Dream Demonstration (ADD), the average participant saved more than $1,500 and accumulated nearly $2,600 when match funds were included.

The center worked with Sen. Joseph I. Lieberman and his staff in 1999 to craft legislation that would take the IDA concept to national scale to build wealth for low-income families and communities.

That legislation proposed channeling federal matching funds in the form of tax credits through financial institutions rather than community-based nonprofit organizations because they could deliver the scale and geographic coverage needed for significant impact.

A bill containing the Savings for Working Families Act (SWFA) provisions passed the U.S. Senate last April. The U.S. House of Representatives version passed in September without the SWFA provisions. A conference committee will reconcile the two bills. SWFA would allocate $450 million in the form of tax credits for financial institutions that contribute IDA match funds to their programs. Collectively, these tax credits would generate sufficient matching funds to support 300,000 IDA accounts.

The UNC center’s IDA survey assessed the experience of financial institutions that offer IDA pilot programs to determine how the program can be expanded. Key findings are that:

• Financial institution participation in IDA programs is significant. At least 339 U.S. banks, thrifts and credit unions sponsored some form of matched savings programs in fall 2002. Banks sponsor most IDA programs (86 percent).
• Institutions that participate are committed to offering IDA programs long term, motivated by community development and a desire to develop the lower-income banking market.
• Financial institutions rely heavily on nonprofit partners to successfully operate their IDA programs. Nonprofits help improve program quality and make IDA programs more cost effective by assuming some labor-intensive program elements.
• Federal sources of financial support are particularly critical as the primary source of match funding for more than three quarters of all IDA programs. Participants depend on and recognize the need for public-sector funding for IDAs and favor proposed SWFA provisions as a way to significantly expand the program nationally.
  

"We are unlikely to see significantly more growth in either the number or size of local programs without a larger and more certain source of publicly funded program matching funds," the report concluded. "This is why pending federal legislation to create a national IDA program is so important."

The report may be downloaded at www.ccc.unc.edu. For information, contact the Center for Community Capitalism at (919) 962-8839 or Communitycapitalism@unc.edu.

The Kenan Institute of Private Enterprise is a research and outreach arm of Kenan-Flagler Business School. The institute offers knowledge, solutions and networks that help companies and communities prosper.

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Kenan Institute media contact: Kim Weaver Spurr, (919) 962-8951, spurrk@unc.edu
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