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While net worth is on the rise for most Americans, the picture is only getting dimmer for the country's poorest families: For the 11.3 percent of Americans living below the poverty line in 2000, wealth (in terms of financial investment, savings, and assets) is going down.
Besides simply not having enough money to prosper, low-income families' access to health benefits, their civic participation, family stability, and mental wellbeing are all diminished by their low success rate in building assets.
Peter Tufano, Sylvan C. Coleman Professor of Financial Management at Harvard Business School and Chair of the Finance unit, has spent the past four years investigating ways to help low-income families break out of this cycle and thus gain some of the benefits of being connected to the world of financial services. Programs providing incentives to build retirement accounts, mutual funds, insurance, CDs, and transaction accounts for the poorest families are difficult to build and scale to the many millions of families who live below the poverty line.
| Let's use the dot.com dividend to solve this problem. |
| — Peter Tufano |
Difficult, but doable, with large-scale and far-reaching government involvement, said Tufano in a recent in-house HBS seminar on "Providing Financial Services to the Poor: High-Tech and High-Touch."
Current public policy clearly supports asset building, said Tufano, but 90 percent of tax-based asset building incentives benefit the top 50 percent of America's wealthiest households. It's not that low-income families have a terrible savings rate, explained Tufano. In fact, within Individual Development Accounts (described below), poor families have a 2.2% savings rate, compared to the national average of almost zero. The challenge now is to create asset-building programs and policies that are accessible to and benefit the poor, that go beyond savings, expanding into other financial services with higher return rates and greater opportunities.
Promoting the Individual Development Account
To this end, Tufano has been interested in helping to promote and develop the ideas behind the Savings for Working Families Act (S. 2023/H.R. 4106), sponsored by Senators Joseph Lieberman (D-CT) and Rick Santorum (R-PA), which was introduced in 2000. Currently, the SWFA has been incorporated in the Charity Aid, Recovery and Empowerment (CARE) Act of 2002, along with other measures aimed at getting more federal funding for social service programs, and is under debate in Washington.
The Act aims to promote and greatly increase the number of Individual Development Accounts (IDAs). IDA accounts provide matched savings plans for low-income families, with the stipulation that savings are intended for asset-building purposes only—for real estate investment, post-secondary education, and building a small business, for example. IDA participants would be required to receive some form of financial education. (The exact form of this is to be determined.) Most IDA programs are managed through social services, banks, and faith-based organizations.
Current IDA savers number 10,000. But Tufano and his colleagues want to raise these numbers dramatically. He estimates there are 40 million families eligible for IDAs under the Act. But reaching only 10 percent, or 4 million families, would take approximately $10 billion in matching funds from the government. Thus, the Act's backers are starting with a smaller goal: $1.7 billion over 5 years to support 900,000 more families.
One of the main roadblocks to expanding the IDA program is the prohibitive cost of administering these very labor-intensive programs. To increase the number of participants to 900,000 more families, let alone to reach the 40 million families in need, seems financially impossible.
The dot.com dividend
Using technology, what Tufano calls the "dot.com dividend," to change the nature and delivery of the IDA program could be the answer, he says. Rather than administering IDAs through brick-and-mortar channels—banks, paperwork, and more paperwork—why not use technology to speed up, standardize, and improve systems and processes? By using Web technologies for transaction and customer services and to streamline distribution channels and innovate financial services, says Tufano, the cost of creating IDAs would decrease dramatically.