IMPROVING SAVINGS INCENTIVES FOR THE POOR
August 12, 2009
Low-income workers have a low rate of saving their after-tax income. The Federal Reserve reports that only one-third of families in the bottom fifth (incomes of less than $20,291) saved any of their income in 2007, compared to almost three-fifths of households in the middle fifth (incomes between $39,000 and $62,000). Without savings, low-income families have no resources to invest in efforts to increase their human capital, such as education and job training to improve their skills, or in physical assets such as housing and transportation to help them move out of poverty, says D. Sean Shurtleff, a policy analyst with the National Center for Policy Analysis.
There are programs to encourage savings by low-income workers. To encourage retirement savings by low-income workers, the federal government has the Saver's Credit, a tax credit of up to $1,000 ($2,000 for joint filers):
- Depending on income, the taxpayer receives what is, in effect, a match of up to $1 for each dollar they save in a retirement account.
- A 2006 National Bureau of Economic Research (NBER) study found that receiving a higher credit -- in effect moving from a 25 percent to 100 percent match -- increases participation by only 1.3 percentage points.
- The Saver's Credit is not refundable, however, which means that low-income tax filers with no tax liability against which to apply the credit do not benefit. In fact, few eligible taxpayers use the credit.
Individual Development Accounts (IDA) provide matching funds for each dollar saved by participating low-income households. Match rates vary from $1 to $8 for every $1 contributed by the individual. The accounts are managed and funded by nonprofit organizations with subsidies from the federal government. The savings can be used only for postsecondary education, or to purchase a home or a business.
A 2008 study by the U.S. Department of Health and Human Services found that IDAs encourage medium-term saving and help build assets among participants:
- After 3 years in the program, 42 percent of IDA participants were homeowners, compared to 31.1 percent of comparable low-income workers not in the program.
- More than a fifth (21.9 percent) owned a small business, nearly twice the proportion of comparable workers (11.9 percent).
- Some 43.5 percent were pursuing postsecondary education versus 22.3 percent of other workers.
Source: D. Sean Shurtleff, "Improving Savings Incentives for the Poor," National Center for Policy Analysis, Brief Analysis No. 672, August 12, 2009.
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