Financial Assets and Income
Asset ownership and financial security are interconnected. Owning assets means having greater economic stability and mobility; assets enable millions of Americans to plan for the future, buy a home, prepare for retirement, send their children to college, and weather unexpected financial storms. In order to build and maintain assets, particularly in low-income communities, a financial environment must be in place to provide adequate tools and incentives to earn, save and invest. Accumulated assets must then be preserved and protected so that the benefits of holding onto assets may continue.
Federal Policy Priorities
Assets for Independence Reauthorization
Congress should reauthorize the Assets for Independence (AFI) program which provides savings matches for homeownership, college education and small business. Practitioner recommended changes include raising the authorization limit, lowering the non-federal match rate, expanding financial education investments, expanding eligibility standards and implementing technical changes.
Office of Refugee Resettlement IDA program
ORR provides funding for a discretionary IDA program that provides matched accounts to more than 20,000 refugees. These accounts help refugees integrate into American society. Funding for the program, which has decreased in recent years, must be stabilized.
The Beginning Farmer and Rancher IDA program
BFRIDA was authorized in the 2008 Farm Bill to provide savings incentives and financial education to 4,000 agricultural entrepreneurs. Funds must be appropriated.
Enact the IDA Tax Credit
The Savings for Working Families Act (SWFA) provides a tax credit to financial institutions that match the savings (dollar-for-dollar up to $2,000 over four years) of at least 2.7 million low-income families who are saving to purchase a home, start a business or go to college. SWFA provides $120 million for financial education for nonprofits to provide financial education for savers.
Congress should enact a universal, progressive children’s savings account program providing an initial deposit for all newborns and matching deposits for low- and moderate-income children for education, home-ownership, retirement and entrepreneurship. Congress should also permit adults to use a portion of their Roth IRA allocation to open accounts for youth.
Expanded Saver’s Credit
Simplify and expand the Saver’s Credit by providing a 50% match to households earning less than $65,000 who save up to $1,000 in a 529 College Savings Account, Coverdell, qualified Savings Bond and IDAs in addition to retirement accounts. In addition, make the credit refundable, automatically deposit the credit into a designated retirement savings account using IRS Form 8888 and index the contribution amounts to inflation.
Implement Automatic IRA
Extend payroll-based retirement saving opportunities to a majority of the 75 million employees currently without access to a retirement plan. Employers who do not sponsor a retirement plan would facilitate direct-deposit payroll deductions to an IRA and receive temporary tax credits to offset administrative costs. The law could affect all employers in business for more than two years and with more than ten employees.
Aligning Intermediate Withdrawal Rules
Current law allows savings in Individual Retirement Accounts -- and to some extent 401(k)s, 457s, and 403(b)s -- to be used for purposes in addition to retirement: IRA funds can be used without penalty to support college education and up to $10,000 can be used for first-time home-ownership; savers may borrow from 401(k)s for these purposes, but the loans must be paid back. The law should apply IRA rules for withdrawals for homeownership and education to 401(k)s and other employer-provided accounts. Doing so would clarify rules for savers, remove management burdens for employers, bring federal policy into alignment and, ultimately, encourage savings for all of these uses. In addition, the $10,000 lifetime limit for homeownership withdrawals should be doubled to provide adequate capital for downpayment.
Provide Affirmative Permission for Full Reporting of Utility Payments to Credit Bureaus to Raise Credit Scores
No or low credit scores relegate many borrowers to the subprime mortgage market even though many were a good credit risk. The current practice of reporting only late utility payments, rather than both on-time and late payments, has the effect of lowering the credit scores of many African Americans, Latinos, and young and elderly people. Full reporting of utility and telecom payments to consumer reporting agencies could raise the credit score of approximately 54 million of Americans. These payments are similar to credit, predictive, able to reported easily and help consumers. Currently, many utility firms’ counsels discourage full payment reporting due to concern that this is prohibited by The Telecom Act of 1996 (PL: 104-104). Congress should clarify the law by affirming that positive payment reporting is permitted.
Support the Alternative Data Initative.
Reforming Asset Tests for TANF and SSI
Many public benefit programs—including Temporary Assistance for Needy Families (TANF) and Supplemental Security Income (SSI)—limit eligibility to those with few or no assets. If a family has assets over the limit, it must “spend down” longer-term savings in order to receive assistance. Asset limits were originally intended to ensure that public resources did not go to “asset-rich” individuals. However, in programs like TANF, they are a relic of an entitlement policy that no longer exists. The TANF program focuses on quickly moving families to self-sufficiency. Personal savings and assets are precisely the kind of resources that allow families to move off, and stay off, public benefit programs. The SSI program, by contrast, is intended to give disabled individuals a long-term safety net. Yet, the punitive SSI asset test prevents recipients from building up any retirement savings and dooms them to a permanent poverty line existence well into old age.
The 1996 Personal Responsibility and Work Opportunity Reconciliation Act gave states the authority to raise or eliminate their asset tests. Nearly 20 states have done so. Congress should take the next step and eliminate the asset limits from the TANF program. Unlike the TANF program, states currently have no authority to set or eliminate the asset test in the SSI program. Congress should, at minimum, give states this option.
State Policy Priorities
For more information, click here: Lifting Asset Limits in Public Benefit Programs. Download the Lifting Asset Limits in Public Benefit Programs Policy Brief here.
One policy that helps low- and moderate-income people build assets is a state-supported Individual Development Account (IDA) program. IDAs are special savings accounts that match the deposits of low- and moderate-income savers, provided that they participate in financial education and use the savings for targeted purposes—most commonly postsecondary education, homeownership or capitalizing a small business. Research demonstrates that these accounts make families more financially secure and communities more stable. States should provide funds and support for local IDA programs.For more information, click here: State IDA Program Support. Download the State IDA Program Support Policy Brief here.
To augment low wages, state governments have increasingly used tax credits to help families escape poverty and put them on a path to prosperity. Tax credits available to low-and moderate-income families, such as the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and Child and Dependent Care Tax Credit (CDCTC), reduce the regressive tax burden on the working poor, put more money in their pockets, and make saving for the future possible. States should adopt versions of the EITC, CTC, and CDCTC that piggyback on the federal credit. Ideally, state credits should be fully refundable so that all low-income families, even those without a tax liability, can benefit from the credit.
For more information, click here: Tax Credits for Working Families. Download the Tax Credits for Working Families Policy Brief here.
Predatory payday lending refers to the practice of repeatedly making small, short-term loans at annual interest rates averaging about 400%, trapping borrowers in a cycle of debt. While payday lenders generally locate in urban areas, they are disproportionately concentrated among communities of color. By far the most important strategy for curbing predatory lending is banning these loans outright or effectively banning them by imposing small-loan interest rate caps of 36% Annual Percentage Rate (APR) or less. States should adopt these caps and help families avoid predatory payday loans in the first place by promoting alternative, safer small-dollar loan products and adopting policies that encourage low- and moderate-income families to save.For more information, click here: Payday Lending Protections. Download the Payday Lending Protections Policy Brief here.
Local Policy Priorities
- Enact Local EITC that builds off of state and/or federal credit
- Fund outreach and public awareness campaigns to increase take-up of federal, state and/or local EITC and use of free community tax prep services
- Develop/implement systems to increase take-up a range of local, state and federal public benefits
- Ensure caseworkers and recipients of/applicants for aid have accurate information about amounts they can save
- In states where eligibility decisions are devolved to the local level, lift asset limits
- Embed financial counseling and services into citywide efforts to help residents access public benefits
- Embed financial counseling and services into workforce development and skills training programs
- Embed financial education in K-12 system
- Expand access to asset-specific counseling
- Create standards for quality control and networks to streamline service to the public
- Encourage financial institutions to offer low-cost, convenient savings and transaction products
- Fund public awareness campaigns on availability of appropriate financial products and services
- Encourage employers to connect workers to appropriate financial products and services, e.g., adopting automatic direct deposit of paychecks and offering “opt-out” 401(k)s
- Use direct deposit as the primary means to receive local benefits, local EITC, etc.
- Provide funding for IDA programs to leverage state, federal and/or private funding streams
- Encourage college savings by matching the deposits of savers into education savings accounts
- Add incentives to save to existing municipal programs
- Curb predatory payday lending through land use and business licensing powers
- Curb refund anticipation lending through disclosure and other requirements of tax preparers
- Negotiate with financial institutions and tax preparers to improve terms of financial products
- Enforce state and federal consumer protections
- Carryout public awareness campaigns about deceptive consumer practices