Health & Human Services

Study: Savings Program Helps Poor Put Aside 4 Times More

The report comes at a time when some federal policymakers want to end the program and while states and localities are launching similar initiatives of their own.
by | January 18, 2017
(FlickrCC/Pictures of Money)

For almost 20 years, a little-known federal government program has tried to help low-income workers save money. Until now, no one knew whether it was successful. But according to the most comprehensive study of the program to date, its participants are slightly more likely to have savings and save significantly more money than low-income people who aren't in the program.

The report, which was conducted by the Urban Institute, comes at a time when some federal policymakers want to end the program and while states and localities are launching similar government-backed saving initiatives of their own.

Under the Assets for Independence (AFI) program, people who set aside some of their earnings on a regular basis get rewarded with a matching deposit from the government. It must be a minimum of $1 and a maximum of $8 for every $1 saved. Over time, the hope is that people can pay for things that will improve their lives, such as a car, home, college education or business.

According to the report -- which reviewed program sites in Albuquerque, N.M., and Los Angeles -- 88.6 percent of AFI participants had savings after one year, compared to just 81.1 percent of nonparticipants. More notably, participants had almost four times more in savings: $881 compared to $224.

The results appeared in a December report sponsored by the Office of Planning, Research and Evaluation, an arm of the Administration of Children and Families.

Not only were the families saving for long-term financial goals, they appeared to be slightly better off in dealing with short-term crises as well. A slightly smaller share of participants (52.4 percent compared to 55.8 percent) struggled to pay for food, housing, utilities and medical bills. In addition, the average number of hardships per household was also lower (1.8 compared to 2.8).

“One key takeaway is that a small amount of savings can go a long way for low-income households,” said Gregory Mills, a researcher who oversaw the study.

AFI supporters, however, are concerned that the program will end under the Trump administration. Last year, the U.S. Senate Appropriations Committee recommended defunding it, but because Congress didn’t pass a budget, funding remained at its previous level -- $19 million a year.

One concern about a government-backed savings program is that the money people put away will eventually have to be withdrawn to pay for emergencies instead of assets like cars and homes. Every program site places limits on when and why people are allowed to withdraw their matched savings, but people can pull their own money for emergencies, such as paying a medical bill or rent.

According to the Urban Institute researchers, only 3 percent of AFI participants made unmatched withdrawals for an emergency. But Mills said it will be important to monitor the long-term impacts. After the first 12 months, program participants had equal rates of homeownership, business ownership and education as nonparticipants. In other words, people are saving to buy assets, but they haven't bought them yet.

Since 1998, the federal government has provided roughly $214 million in AFI grants to more than 880 program sites. Local nonprofits and community colleges make up a majority of the grantees, but about 6 percent are state, local or tribal governments who administer a savings program of their own.

The basic idea behind AFI is also spreading through state and local government.

Boston, Durham, N.C.; St. Louis and two California cities -- Oakland and San Francisco -- already opened or are opening college savings accounts for kindergartners. Like AFI, the programs offer matching deposits. Unlike AFI, they use a combination of public and private contributions from banks and credit unions.

Some states -- such as Maine, Nevada and Rhode Island -- are promoting 529 college savings plans for kindergartners and newborns, so that parents can earn tax-free interest on money they set aside for higher education. Again, outside funders, such as banks and foundations, offer matching deposits to incentivize parents to save.

Other municipalities are specifically targeting low-income people who are unbanked or underbanked. Nationally, about 7 percent of households do not have a checking or savings account, and another 19.9 percent use check cashing, payday loans and other alternative financial services that often come with high interest rates and fees. More than a dozen cities provide financial counseling and secure affordable services with fewer and lower fees from local banks or credit unions.

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