Do IDAs Actually Work?

A potent picture of a tear-stained face can send us delving quickly into our wallets. But making that giving a legal responsibility, and the sympathy of most citizens turns to a defiant glare. Why should our hard-earned end up in the savings accounts of the lowest societal denominators?

This is the controversy concerning Individual Development Accounts (IDAs). The dark horses of welfare, IDAs are special savings accounts for low-income persons and families. While entry requirements vary by state, participants must generally be within 200% of the Federal poverty line, have a steady source of income, and possess less than $5,000-$10,000 in net wealth, excluding home ownership and one car.

Money placed in an IDA is matched at a specified ratio (i.e. 1:1, 2:1, 3:1) either through a private organization or government assistance. Most IDAs have input limits, ranging from $500 to $3,000, and last between six months and three years. Generally, IDAs are for buying a home, returning to education, or starting a business. But IDAs are not just about money.

Participants are taught financial responsibility and literacy. Entrants are stringently screened prior to acceptance, and work one-on-one with business advisors, improving credit scores, developing entrepreneurial skills, and achieving a high level of business acumen. They get top notch business training at no cost, plus free money to put it into practice.

That’s the goal anyway. But does it work? Do IDAs make people richer?

In the short-term, yes. Programs such as San Francisco’s EARN; the Federal government’s AFI, which is the largest federally subsidized IDA program, averaging $25 million per FY, OCS, JOLI, and FSS; and the 21 states with IDA support (2009), have been shown to increase short-term savings. According to (2007), 168 million in government funds has been injected into IDAs thus far, leading to an average of $1,543 in savings per participant.

Participants like Jenny Robinson and Dametria Williams, formerly poor and hapless women, have used IDAs to begin their businesses and give them hope. IDA proponents proudly point to similar stories and claim victory.

But how does the future play out? Not so hopefully it seems. Long-term, IDA holders have trouble saving, maintaining their homes, or rising above their economic position. And sadly, the ones that need help most may not be getting it.

A study by Mills, Gale, Patterson, Engelhardt, Eriksen, Apostolov, and Emil (2008) shows that, although participants showed an increase in home ownership, IDAs had almost no “discernible effect” on other assets, net wealth or poverty rates, and that many participants withdrew matched funds for unqualified purposes. Another study by Grinstein-Weiss, Zhan, and Sherraden (2006), state that the most disadvantaged (i.e. African-Americans, the unmarried, least educated and poorest) show the least long-term asset improvement. And most subduing, the Kansas City TCF IDA program has an estimated 30% successful completion rate (2006). As a result, millions of taxpayer’s dollars are frittered away on good intentions.

Still, a few successes may be better than none. Social trends may start small and grow to include many. The success of one leads to the hope of another and so on. While it’s true that taxpayer funds are sometimes lost on these programs, the cash contributions come from banks. Taxpayers foot the bill for the financial counseling portion of IDAs.

These plans do appear to help those who are willing to put in the hard work achieve goals that would otherwise be unattainable, even unimaginable. It’s those individuals who simply cannot believe that they might ever be successful who fail to use these programs to full advantage. And for those who have never seen anyone they know succeed, it’s hard to believe they might ever achieve anything greater than what they see around them.