A Saving Grace for the Poor

Charitable accounts add to assets of people breaking free of poverty

Putting several hundred dollars in the bank paid rich dividends for Zelinda Davis-Kirk.

For two years, every $1 that Ms. Davis-Kirk saved was matched with $2 by the Women’s Self-Employment Project, a Chicago charity that, with foundation backing, helped her set up an “individual development account.” That nest egg of about $2,000 enabled Ms. Davis-Kirk to buy supplies for and market her fashion-consulting business, which has seen its income nearly triple in just nine months.

Now, instead of relying on a welfare check to take care of her two daughters, as she did for about five years, Ms. Davis-Kirk helps welfare recipients make the transition to work by advising them on their wardrobes and appearances. And Ms. Davis-Kirk, who continues to put money in the bank regularly, says she expects to have saved enough money within the next year to purchase a home.

“It allowed me to say farewell to welfare,” Ms. Davis-Kirk says. “If it wasn’t for the I.D.A., I would have still been receiving welfare for an additional 12 to 18 months.”

Accelerated-savings accounts such as the one that Ms. Davis-Kirk created were relatively rare until recently. But, spurred by an infusion of foundation and government dollars, and recent changes in the welfare system, individual development accounts have blossomed across the country. More than 100 such charity-run programs are now in operation.

Each savings program varies in how it operates, but the basic outline is the same: Participants agree to deposit money regularly into a savings account, and each penny saved is matched in some ratio by a non-profit group. People generally can use the money for limited purposes: to purchase a home, start a business, or further their education. Most of the savings programs also contain an “economic literacy” component in which participants are offered tips on such items as saving money and applying for a loan. The ultimate goal is to help the poor acquire assets and skills that will allow them to pull themselves out of poverty permanently.

That goal has appealed to grant makers and legis lators, some of whom have grown frustrated that too many antipoverty efforts simply meet the emergency needs of poor people and do not attempt to have an impact on their lives over the long haul. Foundations also see the development accounts as a logical — and equally inexpensive — extension of “microcredit” programs that have become a staple of non-profit work around the world in recent years. Those programs provide small loans so that poor people can start businesses.

While foundations, charities, and policy makers across the ideological spectrum are enthusiastic about the long-term potential of the accounts in the fight against poverty, not all poor people are eager to start one. Some charities have had trouble persuading the poor to take advantage of the offer to have their savings matched, in large part because low-income people have too much trouble scraping by to save any money whatsoever.

To figure out how to get over such hurdles, foundations are backing a large-scale effort to determine how the individual development accounts can be designed to help the poor most effectively. The project, called “Downpayments on the American Dream Policy Demonstration,” is a six-year, $15-million effort that has attracted money from some of the largest antipoverty grant makers in the country. The project, which is being coordinated by the Corporation for Enterprise Development, a Washington non-profit group, has created programs in 13 areas around the country and will provide 2,000 poor people with individual development accounts.

Smaller, local efforts also have flourished in recent years. The United Way of Metropolitan Atlanta, for example, is spending $1.4-million on individual development accounts to help residents of impoverished neighborhoods become homeowners. First Nations Development Institute, in Fredericksburg, Va., is making grants totaling at least $650,000 to enable American Indians to open matched savings accounts.

The groundwork laid by non-profit groups is now paying off in the public-policy arena, with politicians across the ideological spectrum embracing the idea. The 1996 overhaul of the welfare system contained a provision that said the states were free to spend money they received from the federal government on individual development accounts, as did a bill signed by President Clinton last month that revamped job-training programs. And in July, the Senate passed the “Assets for Independence Act,” which would authorize federal spending of up to $125-million over five years for individual development accounts.

The transformation of individual development accounts from an academic idea into a public-policy darling has taken place in less than a decade.

The idea was first proposed by Michael Sherraden, a professor at Washington University, in St. Louis, in his 1991 book, Assets and the Poor: A New American Welfare Policy. Mr. Sherraden sees the matched savings accounts as a key piece of an antipoverty strategy that focuses on the accumulation of assets such as homes or businesses as a way for the poor to become financially self-sufficient.

“In the long term, not many people will spend their way out of poverty,” Mr. Sherraden says.

He and other boosters of individual development accounts point out that middle- and upper-income people receive incentives to save — such as tax breaks for money placed in individual retirement accounts — but that poor people usually cannot afford to take advantage of them. The supporters believe that individual development accounts are a first step to bringing the poor into the economic mainstream.

Many foundations agree.

“Individual development accounts offered a longer-term perspective that we thought was missing,” says Unmi Song, a program officer at the Joyce Foundation, in Chicago, which has spent $2.6-million on individual-development-account programs in the last five years and was one of the first foundations to make grants in this area. “People were very focused on, How do you increase cash benefits? Or, How do you provide people with temporary housing?”

With the advent of “Downpayments on the American Dream” in 1997, other grant makers have rushed in as well. The Fannie Mae, Ford, Levi Strauss, John D. and Catherine T. MacArthur, and Charles Stewart Mott Foundations are among the 10 national grant makers that, coupled with local matching dollars, have put up $15-million for the six-year project.

That money has been used to start individual-development-account programs in 13 locations. The projects span the country and range in setting from Owsley County, Ky., with just 5,000 people and a 52-per-cent poverty rate, to cities such as Chicago and Washington. The foundation backers hope that those demonstration projects will provide some examples of what practices work best so that other non-profit groups can easily start similar programs.

To that end, the Corporation for Enterprise Development, which is coordinating the project, has de veloped a Web site that it hopes will serve as a resource for non-profit groups interested in starting matched savings accounts for poor people (http://www.idanetwork.org). Visitors to the site can read through a handbook on creating an individual-development-account program, get tips on lobbying for legislation to set up such accounts, and locate other accelerated-savings programs in their area.

The Corporation for Enterprise Development, as well as its foundation supporters, is also urging groups that offer individual development accounts to make a special effort to teach participants about basic financial issues. Participants, many of whom have little or no experience dealing with banks, are required to attend classes that highlight how to improve a poor credit rating, strategies for saving money, and tips on applying for a loan, among other things.

At Central Vermont Community Action Council, in Barre, for example, which expects to provide individual development accounts to 150 people, clients are required to attend eight two-hour classes. William R. Peterson, a participant who is saving to purchase a computer that he hopes will enable him to start a bookkeeping service, says that for him the financial classes have been almost as useful as the matching funds.

“Everybody wants free money,” Mr. Peterson says, “but information is also money.”

The widespread support for individual development accounts by foundations, charities, and politicians comes despite the fact that little research has yet been done on the viability of the programs. Because the idea is so recent, many of the finer points of how these programs work — and if they will ultimately be successful — continue to be debated.

One question that non-profit groups are still grappling with is how much money they should provide to people who open savings accounts.

In Indianapolis, Eastside Community Investments, one of the first non-profit groups to set up accelerated-savings accounts, initially offered participants a match of $9 for each $1 they saved. Kim Lewis, who had just left her husband and was living in a shelter for battered women when she enrolled in the program, says the generous match was just what she needed. Ms. Lewis, who has three children, put away $100, which was transformed into $1,000. She is now using that money to return to school after an absence of 12 years to become a registered nurse.

“Before this, I had lived paycheck to paycheck,” Ms. Lewis says. “I never saw myself going to school again when I started this account.”

Most non-profit officials now believe that programs such as the one that Ms. Lewis participated in are too generous. The Near Eastside I.D.A Program, in Indianapolis, which grew out of the program Ms. Lewis participated in, now offers clients $3 for each $1 they save.

In Philadelphia, the Women’s Opportunity Resource Center provides an even smaller incentive to get people in the door. Participants, who have incomes of up to 200 per cent of the poverty level, or $32,900 for a family of four, receive 50 cents for each dollar they save.

“We don’t want to look at it too much as a handout,” says Trevor J. Day, compliance officer at the Women’s Opportunity Resource Center. “If they’re going to become self-sufficient, things like this aren’t going to be available forever.”

Perhaps the greatest problem that non-profit groups will have to overcome if individual development accounts are to become a potent antipoverty tool is a dearth of willing participants. Almost every organization that has started accounts has struggled to convince poor people that it is in their best interest to save money. The Columbus Housing Partnership, in Ohio, started a program earlier this year designed to help at least 55 people acquire assets. But so far, only about 14 people have signed up. The non-profit group has held pizza parties with door prizes and free child care to try and get poor people to participate but has had little luck.

In Fond du Lac, Wis., Advocap, a charity that provides services such as counseling and housing to low-income people in three counties, expected to enroll 100 low-income people in its first individual-de velopment-account program, but could only find 80 clients interested in taking part. “We thought it would be a snap to get 100 people, but it just didn’t happen,” says Tina M. Potter, coordinator of the Advocap program.

Non-profit officials who have worked with individual development accounts say that there are numerous reasons why the programs have been slow to catch on with poor households. The most in tractable problem, they say, is that it’s simply difficult for families at or near the poverty level to save money. Even putting aside $10 a month is a considerable burden for people who are just scraping by.

Another problem, non-profit officials say, is that poor people have been taken advantage of in the past by “get rich quick” schemes and often are skeptical of programs that seem too good to be true. “There’s a healthy, and maybe even beyond healthy, degree of skepticism that has to be overcome,” says Robert E. Friedman, founder and chair of the Corporation for Enterprise Development.

Community Action Project of Tulsa County, in Oklahoma, is one of the few non-profit groups that has been flush with recruits for its individual-development-account program. When the organization initially sought participants, more than 500 people applied for the 175 available slots.

The organization will have to redouble its efforts, however, in the coming months. Community Action Project was recently selected by the Corporation for Enterprise Development to become a guinea pig of sorts for the study of individual development accounts.

Over the next eight months, the Tulsa non-profit group plans to sign up 500 people — all with incomes less than 185 per cent of the poverty level — for the savings plans. The charity will also recruit an equal number of people who are not starting accounts. Those people will serve as a control group so that researchers can determine if individual development accounts actually make a difference. The two groups will be analyzed to determine not only whether the savings accounts help them become economically self-sufficient but also whether they produce less tangible changes such as increased participation in civic life or fewer incidents of domestic violence.

The Corporation for Enterprise Development believes that the demonstration project in Tulsa, along with other research currently being done at other sites, will provide proof that individual development accounts work in practice, not just in theory.

In Chicago, Ms. Davis-Kirk and others who started individual development accounts with the Women’s Self-Employment Project have few doubts about the effectiveness of the programs. They are now pushing their saving strategies well beyond a simple bank account. At the end of the two-year program, many of the women were so inspired that they started an investment club called “Sisters in Partnership.”

The women meet periodically and select stocks to invest in jointly that they believe will provide them with long-term financial security. Ms. Davis-Kirk says she had thought about investing before, “but I didn’t think it was possible for someone that was in my financial situation.”

Ms. Davis-Kirk and the other women who participated in the program also say they want to pass on the ethic of saving to their daughters. To that end, they started the “Girls’ Savings Club.” Each of the girls has opened bank accounts, and once a month they get together to learn about economic topics such as starting a business.

“Once I saw that I had the ability to save, and once other women saw they had the ability to save, they felt more empowered and believed that they could do more,” Ms. Davis-Kirk says. “We wanted our daughters to have the same opportunity.”