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Chapter 7 Individual Development Accounts and Asset-Building Policy: Lessons and Directions Michael Sherraden T his chapter addresses individual development accounts (IDAs), which feature matched savings for the poor as a strategy for building assets. A large, multi-method, and continuing research project known as the American Dream Demonstration (ADD) provides the empirical foundation for the discussion . Several research methods and key results from ADD and other studies are summarized and discussed. Evidence is considered in light of current and potential policy, and future research directions are suggested. ASSET-BUILDING AS A POLICY STRATEGY: CONTEXT AND MOTIVATION It is a commonplace that asset accumulation and investment pave the way to household development. With few exceptions, families must save and invest in education, skills, experience, a house, land, an enterprise, financial securities, or other assets to improve their capabilities, earnings, and life circumstances over time and across generations. Not focusing on assets may do a disservice to understanding poverty and household development, perhaps particularly by race (Conley 1999; Lui et al. 2006; Nembhard and Chiteji 2006; Oliver and Shapiro 2006; Shapiro 2004). Moreover , there is evidence that asset inequality in itself may have negative consequences for well-being. For example, Juan Rafael Morillas (2007) finds that asset-holding is associated with earnings mobility and that racial inequality in asset-holding is further associated with earnings mobility.1 Approximately 20 percent of Americans have zero or negative net worth, with much higher percentages among people of color. Moreover, asset inequality is much greater than income inequality. For example, looking at inequality by race, at the median whites have average income roughly 50 percent greater than African / 191 Americans and Latinos, which is a large inequality. But whites have median net worth in the range of 1,000 percent (ten times) greater than African Americans and Latinos (Caner and Wolff 2004; Kochhar 2004; Mishel, Bernstein, and Allegretto 2007; Oliver and Shapiro 2006; Scholz and Seshadri, this volume; Shapiro 2004; Wolff 2004). Income, as a proxy for consumption, has been the standard definition of poverty in social policy. Income support is essential to provide basic necessities. But today there is increasing questioning of income as the sole definition of poverty and wellbeing . Amartya Sen (1993, 1999) and others are also looking toward capabilities. Asset-based policy—one measure of long-term capabilities—can be seen as part of this larger discussion. As public policy, asset-building may be understood as a form of “social investment” (Midgley 1999; Sherraden 1991). From this perspective, asset-based policy is a complement to income-based policy, each serving different purposes: income may support consumption, or “getting by,” while assets may promote development, or “getting ahead.” Asset-based policy is not new. Current examples of U.S. asset-based policy include homeownership tax benefits, investment tax benefits, and defined-contribution retirement accounts with tax benefits—at the workplace in 401(k)s and 403(b)s, and away from the workplace in individual retirement accounts (IRAs), Roth IRAs, state college savings plans, and medical savings accounts. These defined-contribution policies have all appeared since 1970 and are growing rapidly. Unfortunately, the poor receive almost none of the benefits. Public subsidies operate through tax deferments and exemptions and are tied to income in a regressive way. The United States spends well over $300 billion annually in tax expenditures for asset-building in homes, investments, and retirement accounts, and over 90 percent of this expenditure goes to households in the top half of the income distribution (Corporation for Enterprise Development 2004; Howard 1997; Seidman 2001; Sherraden 1991). THE PROPOSAL FOR INDIVIDUAL DEVELOPMENT ACCOUNTS Insight for the proposal for IDAs came during discussions with “welfare mothers” during the 1980s. These women said that a major part of their challenge was that they could not “get anywhere” because they could not accumulate resources for long-term goals, such as finding better housing, getting more education, starting a small business, or moving to a better neighborhood. These discussions led to a proposal for individual development accounts, or IDAs. IDAs are matched savings for low-income individuals. In response to the rapidly growing and regressive asset-based policies mentioned earlier, IDAs were proposed as a universal and progressive asset-building policy that would bring the poor into asset-building policies. As originally proposed , IDAs would include everyone, provide greater support for the poor, begin as early as birth, and be used for key development and social protection goals across the life span, such as education...


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