Incentivized savings accounts
What is it?
Incentivized savings accounts are a special type of savings product designed to encourage low-income families to build financial reserves. Building savings is critical for low-income households, who experience income shocks more frequently than other households and often have no reserves to draw on during a financial emergency. According to Prosperity Now (formerly CFED), about 19 percent of White households and 41 percent of households of color are asset poor, meaning they do not have sufficient assets to subsist for three months, at the federal poverty level, in the absence of income. The absence of emergency savings and lack of access to the mainstream financial system can drive individuals to use predatory financial products like payday and vehicle title loans that often entrap them in cycles of debt and prevent them from building credit.
Cities and states have implemented matched or incentivized savings accounts to help address financial insecurity, which harms residents and exerts a major toll on city budgets. Incentivized savings accounts take many forms. They are commonly offered as individual development accounts for adults and have at least a dollar-for-dollar match for savings toward higher education, homeownership, or starting a business. Child savings accounts typically have an explicit focus on savings toward college expenses or other post-secondary training. Incentives vary, but a key feature of most child savings accounts is an initial deposit, in addition to savings matches. Typically, individuals must meet certain income limits to qualify for an incentivized savings account. These savings programs are proven to serve diverse constituencies and have bi-partisan policy appeal.
In addition to the PolicyLink resources listed on the right, see Prosperity Now; the Institute on Assets and Social Policy; 1:1 Fund; the Center for Social Development at Washington University in St. Louis; and the Center on Assets, Education, and Inclusion (AEDI) at the University of Kansas for more resources on incentivized savings accounts
Who implements it?
- Elected and appointed city officials can establish local savings accounts programs that reach a certain population or are delivered universally. For example, cities, counties, or school districts can decide to implement a child savings program for all students.
- Financial institutions such as banks, credit unions, and community-development financial institutions can serve as account custodians.
- Business leaders and philanthropies can provide funding to supply or increase the match for a savings program.
- Community-based organizations and other advocates can work with city officials to develop an incentivized savings program, and can facilitate community outreach to ensure community members know about the programs for which they are eligible.
Cities seeking to establish a matched savings account program must consider a range of practicaland logistical questions.
- Public-private partnerships with financial institutions: Cities need to vet and select partner institutions to act as account custodians (and potential match providers). Cities should consider the institution’s history and relationship with the community, ensuring that it does not engage in predatory practices within the community.
- Automatic enrollment: The most robust matched savings account programs have an automatic enrollment process — where families chose to opt out rather than opt in to child savings, for example — that significantly increases program participation.
- Permanent funding: The most significant challenge to establishing a matched savings account program is securing permanent funding to provide the match through public or private sources or a combination of the two. The federal government’s Assets for Independence program is currently the largest provider of matching funds for individual development accounts.
- Legal access to accounts: In the case of child savings accounts, city officials may limit who can legally access the account. In most cases, family savings and incentives are held in “parallel” accounts, so parents can usually withdraw their contributions, but not the matched funds.
- Impact on eligibility for public benefits: Many public assistance programs such as Temporary Assistance for Needy Families (TANF) and Supplemental Nutrition Assistance Program (SNAP) have asset limits that cap the amount of savings and other assets a recipient may have. Cities should understand how matched savings accounts could impact eligibility for public assistance and design programs to protect program participants from risks to their public benefits.
- Progressive program structure: Many matched savings programs set asset limits for eligibility; the most effective also have a progressive structure, so that the savers with the lowest incomes will receive the greatest incentives to save.
Where is it working?
Cities have invested in incentivized savings programs as a strategy to improve the economic security of low-income residents and people of color by helping them build financial assets.
- In San Francisco, the Office of Financial Empowerment’s Kindergarten to College (K2C) program is helping children and families achieve economic success. Through this program, every child who enters kindergarten in a San Francisco public school automatically receives a college savings account. K2C launched during the 2010–2011 school year as a two-year pilot program and was made permanent in 2012. The program provides a seed deposit and a variety of savings matches to encourage families to save early and often. The City and County of San Francisco provide a $50 “seed deposit” and a $50 bonus for students enrolled in the National School Lunch Program. Private philanthropy provides a dollar-for-dollar match for the first $100 of savings and a $100 “save steady” bonus for families that save consistently for six months. By 2015, more than 21,000 kindergarten through fifth-grade students in San Francisco had K2C accounts worth a total of $3.4 million.
- In St. Louis, the Treasurer’s Office established St. Louis College Kids, a program that provides child savings accounts for all kindergarteners in public schools within the city, including charter schools. These accounts are opened automatically with an initial $50 deposit to help families jump-start their children’s college savings. The accounts can be matched dollar for dollar, up to $100, in the first year. There are additional incentives, including a $1 dollar weekly perfect attendance bonus, as well as a $50 incentive for families who complete a financial education curriculum. The program began in 2015 and has enrolled more than 6,000 kindergarteners.