Individual development account

An individual development account is an asset building tool designed to enable low-income families to save towards a targeted amount usually used for building assets in the form of home ownership, post-secondary education and small business ownership. In principle IDAs work as matched savings accounts that supplement the savings of low-income households with matching funds drawn from a variety of private and public sources.
While anti-poverty policy makers have traditionally focused on issues of income and consumption, an expanded vision of poverty alleviation has emerged in recent years—one that encourages savings, investment, and asset accumulation in conjunction with, not instead of, traditional anti-poverty programs. Assets play a vital role in poverty alleviation by providing not only economic security but also a psychological orientation that encourages low income families to save and plan for the future. In his book, Assets and the Poor: A New American Welfare Policy, Michael Sherraden proposed establishing individual savings accounts for the poor calling for the government and the private sector to match individual contributions to IDAs as a means of encouraging savings and breaking the cycle of poverty. Sherraden argued that asset and saving accumulation requires institutional structures and incentives and that asset based development policies can have psychological, social and economic impacts. Since then IDAs have been adopted by United States federal legislation via the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 and in more than 40 states of the country. Evidence of IDA programs also exists outside of the continental United States especially in Hawaii, Sub-Saharan Africa., the UK, and also all around Europe.

How IDAs work

Most IDAs are offered through programs that involve partnerships between local nonprofit organizations, also called IDA program sponsors, and financial institutions. The IDA program sponsor recruits program participants and provides financial literacy classes. Additionally they may also provide counseling and training for efficient saving practices and money management. When recruiting, IDA program sponsors need to ensure that participants meet certain criteria that the Corporation for Enterprise Development specifies as follows:

Income: Most IDA programs specify a maximum household income level for IDA eligibility. Depending on the program sponsor, the eligible maximum income levels can range from 200% of the poverty level to 80% of area median income.
Earnings: The source of the savings are another important criterion. Many IDA programs require that all or part of the savings accumulated during the course of an IDA program should come from "earned income". This is usually defined as the income coming from a paycheck, but welfare, disability, social security, or unemployment checks also qualify as earnings. An example of ineligible source of income would be money received as a gift.
Net Worth: Besides looking at maximum household income, some IDA programs additionally take into consideration household assets such as a car, home, savings, etc. when determining IDA eligibility.
Credit History: Certain barriers to savings are also taken into account when determining eligibility. One of them is debt from credit cards and loans. Therefore, too much debt or bad credit history can prevent one from qualifying for an IDA.

The number of eligibility criteria employed varies by the IDA program sponsor and their funding sources. Once recruited, participants open IDA accounts with the partnering financial institution and begin making deposits. Account holders generally make monthly contributions to an account, usually over a period of one to four years, and their savings are matched by donations typically at a rate ranging from 1:1 to 3:1. Match dollars for IDAs come from many different places, such as government agencies, private companies, churches, or local charities. Any individual, organization or business can contribute match dollars to IDAs. In most cases, donors can get a tax deduction for contributions to IDAs, and they are also recognized for helping others in their community. Each month, IDA participants receive a report telling them how much money is accumulating in their IDA, which is a sum of their individual savings, matched dollars and interest. Individual and matching deposits are never co-mingled; all matching dollars are kept in a separate, parallel account. When the IDA account holder has accumulated enough savings and matching funds to purchase the asset and has completed a required financial education course, payments from the IDA are made directly to the asset provider to complete the asset purchase.

Purpose

IDAs reward the monthly savings of working poor families who are trying to:

purchase their first home;
pursue post-secondary education;
start or expand a small business.

Additionally, some IDA programs allow participants to save for home repairs, computers, automobiles, or retirement.

Purchasing a first home

is generally representative of stability and financial advancement since it is an important means of saving and asset accumulation. In the United States especially home ownership can be a leading step towards attaining the American Dream. IDAs can help participants achieve their goal of homeownership by encouraging savings and providing matched funds to overcome the lack of income and liquid wealth needed to make a down payment or pay housing closing costs. Even if the savings from an IDA do not result in a full purchase amount, a recent study shows that the probability of a household owning a home increases by 41% by just having $1000 in liquid wealth, which is a feasible goal under an IDA program.

Pursuing post-secondary education

Access to post secondary education can positively impact one's economic status as well as critical thinking abilities. For low income families education can provide a route out of poverty and towards social mobility. Savings from IDAs can make the goal of post secondary education attainable. This is specially significant for low-income single mothers for whom earning a post secondary education can break the cycle of inter generational poverty and whose opportunities in gaining such an education might be marginalized by federal legislation like The Personal Responsibility and Work Opportunity Reconciliation Act of 1996. For such women and several low income communities, IDAs provide a means of investing in a more prosperous future.

Starting or expanding small businesses

data show that for every 1 percentage point increase in
the rate of entrepreneurship in a state, there is a 2 percent decline in the poverty rate.
Entrepreneurship is another step towards reducing poverty where IDAs can play a helpful role. According to Stephen Slivinski, a senior economist at the Goldwater Institute, data across the United States shows that between 2001 and 2007 1% increase in the rate of entrepreneurship in a state led to up to 2% decline in the rate of poverty. Small business start up and expansion also have a demonstrated record of success in assisting individuals such as welfare recipients, people with disabilities, immigrants and refugees as well as ex-offenders returning to their families and communities. Matched savings from IDAs can provide the seed capital and/or funding for further expansion for such established businesses and aid in poverty alleviation.

Programs

Programs in the US

Since its inception, the concept of IDA programs and asset-based development has been strong and persistent in the United States. IDA programs in the US differ in funding sources and their targeted population.

Assets for Independence

The Department of Health and Human Services currently funds the majority of IDAs through Assets for Independence, a competitive grant program administered by the Office of Community Services. OCS awards grants to nonprofit entities and state, local and Tribal governments that administer AFI projects. Grantees are required to raise an equal contribution of nonfederal funds to match the federal AFI grant. Just in 2012 alone, AFI granted over US$13 million to over 60 institutions including city councils, nonprofit organizations, universities and other community based organizations.
Project participants receive up to $2,000 in federal matching funds. In order for participants to be considered eligible for an IDA through AFI, participants must be TANF eligible, EITC eligible, or have income at or below 200% of the poverty line. Since the inception of the program in 1999, AFI has enabled more than 60,000 low-income earners save through an AFI IDA.

Office of Refugee Resettlement IDA Program

The Office of Refugee Resettlement's Individual Development Account program is designed to assist refugees in purchasing assets as a means of increasing their financial independence, encouraging integration into the American financial system and increasing refugee knowledge of financial and monetary topics. ORR began funding IDA programs in October 1999. ORR invites qualified entities to submit competing grant applications for five-year projects that will establish, support, and manage IDAs for eligible low-income refugee individuals and families.
ORR IDA grantees provide matches of up to $1 for every $1 deposited by a refugee in a savings account. The total match may not exceed $2,000 for individuals or $4,000 for households. Upon enrolling in an IDA program, a refugee commits to and signs a savings plan agreement which specifies the savings goal, the match rate, and the amount the refugee will save each month. Basic financial training is provided by the grantee.
Since 1999, more than 20,000 refugee families have saved through an ORR IDA program. Eighty-one percent have used $74.5 million in savings and match to purchase assets valued at more than $351 million. This represents a 748% leverage of match funds. An average of $4,503 was used by each refugee saver to purchase an asset. Over $226 million has been leveraged in loans for refugee asset purchases.