Children s Savings Accounts and the Save and Invest Economy. By Carl Rist and Robert Friedman With Mike Knight

Transcription

1 Children s Savings Accounts and the Save and Invest Economy By Carl Rist and Robert Friedman With Mike Knight

2 Assets are hope in concrete form. Michael Sherraden, Assets and the Poor, 1991 About CFED Established in 1979 as the Corporation for Enterprise Development, CFED is a nonprofit organization that expands economic opportunity by helping Americans start and grow businesses, go to college, own a home and save for their children s and their own economic futures. We identify promising ideas, test and refine them in communities to find out what works, craft policies and products to help good ideas reach scale, and develop partnerships to promote lasting change. We bring together community practice, public policy and private markets in new and effective ways to achieve greater economic impact. CFED works nationally and internationally through its offices in Washington, DC; Durham, NC; and San Francisco, CA. Visit for more information.

3 Hope in Concrete Form Children s Savings Accounts and the Save and Invest Economy By Carl Rist and Robert Friedman With Mike Knight

4 Acknowledgements As the Book of Deuteronomy says: We drink from wells we did not dig; we are warmed by fires we did not kindle. In the same way, this book would not have been possible without the hard work and dedication of countless people and organizations that made the SEED Initiative a reality. This includes, first of all, the generous SEED funders whose wise investment turned an idea into a real-life innovation. We would also like to thank our brilliant colleagues at the national partners in the SEED Initiative with whom we were honored to plan and execute such a unique demonstration. We extend heartfelt thank-yous, as well, to the staff at the 12 community partner sites in SEED who did the hard work of not only organizing and delivering SEED accounts in their communities, but also gathering and documenting many of the stories and pictures in this book. Special thanks are also due to our colleagues at CFED Rochelle (Watson) Howard, Liana Humphrey, Barbara Rosen and Leigh Tivol whose dedicated efforts to support, encourage and learn from the SEED community partner sites will never be forgotten. We are also especially grateful to the Communications team at CFED, including Chris Campbell, for the beautiful layout of this book, and Kristin Lawton, who took many of the better photos and kept us focused on our vision of a final publication that would share the promise of children s savings accounts through the stories and pictures of SEED savers. Finally, we will be forever grateful to the SEED savers and their parents whose stories and images grace these pages and whose willingness to do the hard work of saving day-to-day and month-to-month brings us closer to the time when all newborns will have their own children s savings accounts. Carl Rist, Vice President of Programs, Director of Asset Building, and Robert Friedman, Founder and Chairman Editorial leadership by Leigh Tivol Photography by Kristin Lawton, CFED staff and SEED community partner sites Geoffrey Canada photo by Paul Mobley Cover and Design by Chris Campbell CFED, 2010

5 Table of Contents Foreword by Geoffrey Canada... 6 Introduction: Planting SEEDs, Realizing Dreams Chapter 1: Saving for the Future: A Not-So-Impossible Dream Chapter 2: The Power of Saving: Building Means and Changing Minds Chapter 3: Saving for College: An Overlooked Key to Earning a Degree Chapter 4: Learning by Saving: How Children s Savings Accounts Boost Financial Know-How Chapter 5: A Little Help from My Friends: The Role of Support Systems in Making Savings Happen Chapter 6: Saving More than Money: Foundations for the Save and Invest Economy Endnotes Works Cited... 52

6 FOREWORD

7 When life gave me lemons - you taught me to squeeze lemonade. When destiny brought rain - you taught me to build a reservoir. When fate served me sorrow - you wrote me the recipe for hope. When fortune would have me stepping warily on shaky ground - you bring brick and mortar and together a safer path we lay down. When circumstance placed my hopes too high - you told me there is no such thing. Hand-in-hand we weave safety nets from broken ties and reassemble judicial acronyms into aspirations for my life. Because you seem to understand that while I must do the crossing, you can certainly help to bridge the gap. La Terra Cole (21, SEED participant, Mile High United Way, Denver, CO) THINKING ABOUT THE FUTURE is like a fantasy for the many young people who grow up in America with limited means. As the CEO of the Harlem Children s Zone, I work daily with children facing the kind of gap La Terra describes. They are but a tiny fraction of the 14 million children who live in families whose 7

8 income is below the federal poverty standard. The gap they face represents a lack of opportunity that is unlikely to go away unless we help. A few years ago, I was appointed by Mayor Bloomberg to a seat on the Commission on Economic Opportunity in New York City. As part of the commission, we visited England, and there we witnessed a revolutionary idea. The country s leaders had made a commitment to measurably reducing child poverty, and one plan for reaching this goal was to give each child a small stipend the equivalent of $500 for all children, $1,000 for poorer children. The idea was to give them an opportunity to build real assets from birth. At the Harlem Children s Zone, our work is based on much the same idea giving young people the ability to have a future. Our goal is to start very young and to build an expectation for our children about going to college and succeeding in life. By having a small nest egg to go with those expectations, we re helping to make those dreams a reality. And if you can solve poverty for one child, you change the conditions for future generations of that child s family. From my perspective, you really have to be in the business of developing assets to be in the business of fighting poverty. Beyond the gaps faced by especially vulnerable populations, it is important too that we consider the wellbeing and opportunity of all children. Since 2003, the Harlem Children s Zone has been proud to be a part of an innovative national demonstration the SEED Initiative that is testing what would happen if every child had an endowed savings account to help save for the future. As you ll witness in the pages that follow, through the experience of young people like HCZ s own Richar Anozier, this is an idea that works and could help to change the life chances for an entire generation of children. 8

9 A gap is a space or void between here and there, or between what is and what should be. In her poem, La Terra refers to the gap between a cruel reality that too many children face and a vision for a better tomorrow. She celebrates how adults can help children cross over from despair to hope by providing help, guidance and opportunities to succeed. Shouldn t this also include ensuring all children in the United States begin life with at least the minimal resources they need to build a better future? Otherwise, for some we are tacitly allowing that gap to be filled with little more than despair. For others, we risk losing an opportunity. For hundreds of years, the United States has been the Land of Opportunity : The opportunity to realize our potential, and the possibilities presented by life, liberty and the pursuit of happiness. If we look we will find opportunity in every child born in this country. It is the opportunity each possesses to achieve his or her potential, to succeed and contribute to the common good. But most poor children will not achieve that potential without resources to help them reach their goals. And endowing each with the kind of children s savings account that is the subject of this book is one step we must take to help every boy and girl develop and build the assets they re unlikely to build without us. Our children must combine resources with hard work to turn the American dream into reality. Children like La Terra, and others you ll meet in the pages that follow, demonstrate just how hard they re willing to work. It is up to us to bridge the gap for them, and for our own sake, we must. Because that is our country s true opportunity and within it, our promise. Geoffrey Canada CEO, Harlem Children s Zone 9

10 INTRODUCTION Planting SEEDs, Realizing Dreams

11 FROM HORATIO ALGER to Little Orphan Annie, one of the enduring legends of American life is the rags to riches story in which an impoverished hero frequently a child rises from the humbling depths of poverty into affluence and respectability. Focusing on individual achievement and the opportunity to reach for the top, regardless of birth or rank, these legends are a core component of the American dream. While individual achievement plays a big part of that dream, too often we overlook the importance of the wise public investments that transformed the dream into a reality for so many Americans. The G.I. Bill, dubbed by some as the Magic Carpet to the Middle Class, is the best example of this. Besides helping millions earn college educations and vocational skills, start businesses and buy homes, the G.I. Bill also provided a desperately needed boost to the country s post-depression economy. Other examples of popular public policies that have helped Americans bootstrap their way to financial security include the Homestead Act, the 30-year mortgage and universal public education. Today we rely on tax breaks to promote higher education, homeownership, business creation and savings. But most of these subsidies are meaningless to the 36 million people living in poverty in the United States. That s because these important public investments operate through tax deferments and exemptions meaning you ve got to make enough money to owe taxes, own a home or have a retirement account before you can take advantage of them. And while the United States spends nearly half a trillion tax dollars annually to help citizens build assets, including homes, investments and retirement accounts, almost 90% of those dollars go to households in the top 20% of the income distribution. As a result, many families especially those of color have not shared in the public support that has helped to fuel the American dream for so many middle-class families. Consequently, there are alarming disparities in not just what people earn, but also what they own. Economists and others who study household finances suggest this is an increasingly important distinction. 11

12 At the median, the income of whites is roughly 50% greater than that of African Americans and Latinos. Yet that figure pales when compared to household net worth, meaning the value of savings accounts, retirement accounts, home equity and other monetary assets. At the median, whites have 10 times the net worth of African Americans and Latinos. If a lack of income means it s hard to get by on a daily basis, then a lack of assets something to fall back on, something for a rainy day, something to invest for the future means it s even harder to get ahead. This is especially bleak for the millions of American children half of all minority children who arrive into families too poor to weather life s unavoidable storms or to invest in their own futures. Today, according to researchers at Brandeis University, the gap in financial holdings between white families in America and their African-American counterparts is wide enough to pay full tuition for two children at a four-year public university, and tuition at a public medical school on top of that. Compounding Interest AT THE OPENING OF THE 21 st CENTURY, while the economy was in the midst of a debt-fueled expansion, independent think-tanks, academics and forward-thinking foundations came together around a simple question: What difference would it make if every child in America grew up knowing he or she had a nest egg for college, a home or a business? To answer this, CFED and five other leading national organizations organized SEED the Saving for Education, Entrepreneurship and Downpayment Initiative. Launched in 2003, SEED is a 10-year, nationwide, policy, practice and research initiative designed to develop and test an innovative idea matched savings accounts for children and youth. 12

13 The idea of endowing all children at birth with an account to call his or her own a Children s Savings Account (CSA) 1 is a novel idea championed by people like Michael Sherraden, named in 2010 by Time as one of the 100 most influential people in the world. Yet the concept is as old as America itself and has roots in the writings of Thomas Paine and others whose vision for America was a property-owning democracy. As conceived and proposed more recently, CSAs are long-term, asset-building accounts established as early as birth and allowed to grow over a lifetime. Typically, accounts are funded with an initial deposit of $100 to $1,000 and built by contributions from family, friends and the children themselves. In addition, savings are encouraged by matching incentives, and accountholders receive age-appropriate financial education to help them make better decisions, which leads to greater accumulation in the account. Savings in CSAs are usually intended to fund higher education, homeownership, starting a business or building retirement funds proven investments that can boost opportunity and lead to a more secure future. SEED Partners SEED is a partnership between six national organizations, including: Center for Social Development at Washington University in St. Louis CFED Initiative on Financial Security at the Aspen Institute New America Foundation RTI University of Kansas School of Social Welfare Given the chance and the right support, families even those well below the federal poverty line - will save, build assets and connect to the mainstream economy. 13

14 How SEED Works Since its beginning in 2003, more than 2,600 actual CSAs, or SEED accounts all with differing designs and working with children and youth ages 0-20 have been established as part of the SEED Initiative. This one-ofa-kind demonstration of CSAs took place in a variety of settings, including urban and rural, from Harlem to the Mississippi Delta. The SEED Initiative includes one large experiment in Oklahoma, opening accounts for more than 1,300 infants randomly chosen at birth. The other half of the accounts in the SEED Initiative were established in community-based programs that were created in 12 locations across the United States and in Puerto Rico. The stories and pictures in this book are drawn from participants at these community-based SEED programs. For each of these SEED participants, the sponsoring host organization received $2,000 in account incentive funds. This money was used in three ways to encourage saving: an initial deposit, dollar-for-dollar savings matches and benchmark incentives for reaching certain milestones or completing specific activities. These benchmarks varied by site, but typically included completing a financial education program, earning and maintaining good grades, and volunteering for community service. The 12 host organizations at these communitybased demonstration sites in the SEED Initiative had primary responsibility for the delivery of SEED accounts to the participants in their communities. These community organizations played valuable management roles, including planning, recruitment, account management, providing financial education and encouraging saving. t t Besides these demonstrations, the SEED Initiative involved seven t research studies, active federal and state policy research and design, t t and communications research. In all, the SEED Initiative received funding from 12 national foundations and included more than 50 t partners community organizations, financial institutions, academic researchers, foundations and state policy coalitions. t SEED Community and State Policy Partners t Community partners State policy partners SEED OK experiment t 14 MI SEED preschool quasi-experiment t

15 Meet the SEEDlings Over the course of the first seven years of the SEED Initiative, we were introduced to incredible children and their parents who were eager to learn, save and build more promising futures. Most, though not all, came from low-income backgrounds. From them, we learned that if given the chance and the right support, families even those well below the federal poverty line will save, build assets and connect to the mainstream economy. They do this not because it is easy, but because it is the price of a better future. It has been our privilege to get to know many of these amazing children and young adults. In the following pages, we share a number of stories from these SEED savers. From them you ll learn why they saved in their CSA or what we called a SEED account during the SEED Initiative how saving was possible for them, how their SEED account helped change their lives and why all children should be endowed with a CSA at birth. We hope you ll also discover from them what we ultimately did: Children s Savings Accounts aren t just about building savings. They re about building lives. 15

16 CHAPTER 1 Saving for the Future: A Not-So-Impossible Dream

17 I Never Thought I Could Save Who could blame Jacob Kimball for believing that? When he was 17, Jacob was placed into foster care by the state of Colorado, and like most adolescents in those circumstances, had few resources of his own. Yet by 2008, Jacob was 20 years old, finishing his second year of trade school in Denver, and well on his way to becoming an auto mechanic. So what happened? Jacob received the help he needed to become a saver. With the SEED program, there s a custodian of [the account], and the custodian actually holds onto the money so that helps me to save, Jacob said. He received scholarships for school and was able to double that amount through his SEED account, which then covered his tuition. Of course it was hard, he said, When you get money, you want to spend it it s human nature. But with the SEED account I learned how to save it, and I put it away and couldn t access it. So now I m kind of in the habit of it. It s not just Jacob and people like him who struggle to save. Most Americans do. According to a 2009 report from the Institute on Assets and Social Policy, more than half of all U.S. households lack sufficient savings to buy a new home, start a business or send their children to college. Savings That Count Savers like Jacob demonstrate that CSAs can be a powerful tool for saving for the future and that, when given the chance, incentive and support, even more impoverished families among us can be successful savers. And with time, even modest contributions grow large. More than half of all U.S. households lack sufficient savings to buy a new home, start a business or send their children to college. 17

18 With a $500 initial deposit and the SEED average savings of $30 per quarter, the child would have more than $6,000 by age 18 - enough for two years at a community college. The results from the SEED Initiative reinforce this: Despite relatively high levels of poverty and limited financial knowledge, by December 2007, a total of 1,171 SEED accountholders in a study of saving patterns had accumulated nearly $1.8 million. Participants saved an average of $30 per quarter over the course of the program, and the average total balance in participant accounts after less than four years of saving was $1,518. Not all participants were able to contribute to their account during the demonstration phase, but for the majority of SEED participants who did (57%), their quarterly savings averages rose to $43. These are significant figures when considering the economic circumstances shared by so many participants who participated in the SEED Initiative. Fully 50% of the children who participated came from families with gross incomes below the federal poverty guidelines. For a family of four, that s less than $425 before taxes per week. And 34% of SEED families had gross incomes between 100% and 200% of the poverty guidelines. Given time, additional contributions and the power of compound interest, savings in CSAs can become significant. Even at the SEED average of $30 per quarter, an account with a $500 initial deposit that grows at only three percent annually would grow to $6,147 by age 18. And an account with a $1,000 initial deposit, $43 contributed per quarter, and a five percent interest rate would grow to $11,626 by age 18. That s enough money to change lives. According to a 2009 College Board report, the average tuition and fees for the academic year ranged from $2,544 at public two-year colleges to $5,930 at public four-year colleges. Even as costs increase, savings accumulations of this scale ($6,000 $11,500) would pay for up to two years of tuition and fees at a public university. 18

19 What Makes CSAs Such a Good Idea? Make no mistake, for poor families saving isn t easy. Although families in the SEED Initiative understood the importance of saving and wanted to save, many faced economic barriers that made saving a challenge. Yet 57% of SEED participants made at least one contribution to their account during the demonstration phase of SEED, and at some of the individual SEED sites, participation rates were above 90%. This accomplishment is even more remarkable when compared to the general U.S. population, whose savings rate during the same time period hovered near zero. That s because the SEED Initiative was designed to set up a structure for saving or even make saving automatic, when possible just as it is for other, more affluent populations. For example, many Americans are able to save as a part of employer-based programs. Once enrolled in an employer s 401(k) plan, saving is automatic and has little to do with personal saving traits. And mortgage deductions create tax savings for homeowners (though of course you have to own a home to qualify for the deduction, something many lower-income Americans cannot do). Support for savers in the SEED Initiative included initial deposits, dollarfor-dollar savings matches and other financial incentives, 2 financial education, personal guidance and support from staff, the elimination of certain bank fees, access to accounts, protection from savings penalties in public benefit programs, and automatic deposits, where available. Can CSAs help parents and kids to save? Marei Kubiak, the mother of Kathleen, a SEED participant near Pontiac, Michigan, thinks so. Before SEED we were unable to save money for our children s college education because of our debt load, family size and employment being slow, Kubiak wrote in a letter. During the SEED program, my child and I learned to put aside 10% of each pay we received into the account to receive the match benefit. Now it is a regular routine. So far Kathleen has saved $2,200 in her SEED account. 19

20 CHAPTER 2 The Power of Saving: Building Means and Changing Minds

21 I Want To Build Houses So I Can Build a House for My Mother I want to become an engineer and build the most beautiful house in Puerto Rico for Mami, said David Texidor in David lives in Vega Baja, a small town 30 miles west of San Juan, Puerto Rico. Though the Caribbean Sea s emerald waters border the town, life in Vega Baja is far from idyllic for most of the people who live there; nearly 60% of the town s residents live in poverty, and average per capita income is barely over $7,000 per year. David s dream of building a house for his mother was one born from disaster, one he experienced firsthand. I built the two houses where my family lived, Texidor s mother, Antonia Rodriguez, explained. The first house was made out of wood, but a hurricane four years ago damaged it so badly we had to tear it down and build another home with cement blocks. Rodriguez worked extra hours at odd jobs including sewing flags to afford the new house. She enrolled David in the SEED program at Fundación Chana y Samuel Levis so some day he could have a chance to attend college, buy a home or start his own business. By the time David was in first grade, he had saved $971 in his SEED account. And even at six years old, he instinctively understood how much his SEED account meant to his future and his family s. 21

22 Building Beyond Assets David and his mother are just one example of the powerful psychological benefits that come from having real assets. The director and founder of the Center for Social Development at Washington University in St. Louis, Michael Sherraden, writes, Income may feed people s stomachs, but assets change their heads. If having a reasonable opportunity to accumulate assets is transformative for adults, then it is especially necessary and promising for children at least that s what the SEED Initiative suggests. In-depth interviews with 27 parents at two SEED sites found perceived positive effects in areas including increased self-esteem, hope for the future, sense of security, and interaction with their children about finances and college. Parents also reported that they observed positive effects on their children, including fiscal prudence, future orientation and increased self-esteem. In addition to parents who believe that participation in the SEED Initiative positively influenced their children, teens at one SEED site detailed the benefits they received from their experiences with their SEED accounts. First, they noted that they had begun to think before making purchases, and also that they had learned to distinguish between wants and needs. In short, they recognized they were making smarter and more financially prudent decisions with their money. And even the act of saving money made a positive difference in their lives. Teens noted an improved view of self, and were proud that they had the discipline it took to save regularly. Perhaps not surprisingly, they also felt an enhanced sense of direction because of the future goals linked to their accounts. 22 According to the teens, SEED savings accounts gave them a greater sense of security because they knew they were saving the money now for important things they d need or want later in life, including a college education or a home. And even though some bristled at SEED s financial education requirements, in the end they believed their overall financial knowledge had improved because of the coursework.

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24 My Whole Life Has Changed as a Result of This Research shows a positive link between parents who have savings... and the cognitive development of school-aged children. Gina Aleman was born into a life of hardship. One of six children, she often stayed home from school to care for her siblings. Her parents were of little help. Gina s father was in prison and her mother wasn t always around. We didn t know where my mom was half the time, she said in At the age of 15, Gina was placed in foster care along with her then 5-month-old son. But after dropping out of high school, Gina earned a GED, completed two years of college and then two years of AmeriCorps service. And with the help of her SEED account and a community program designed to help youth achieve self-sufficiency after leaving foster care, Gina landed a job with benefits, and saved enough to make a deposit on an apartment big enough for herself and her three children, and to buy a new car. According to Gina, her life has never been better. This is the first job in which I m not on any public assistance. I really wanted my life to change and I worked at it, she said. My whole life has changed as a result of this. Research suggests that whether used for education, a home, a business or retirement, assets matter. Children who grow up in homes with assets do better than those who do not. Research shows a positive link between parents who have savings and other financial assets and the cognitive development of school-aged children. And as Gina Aleman s story reinforces, holding assets connects young people to the economy. It raises their expectations and allows them to shape their futures. 24

25 As journalist and novelist Joan Didion has written: The secret point of money and power in America is neither the things that money can buy nor power for power s sake... but absolute personal freedom, mobility, privacy. If every child had a CSA starting at birth, we could level the playing field and ensure that all children can aspire to the very American ideals that Didion describes. No matter our circumstances, assets afford us one of life s most valuable possessions: the chance to dream, knowing that with hard work, those dreams might come true. In the 'I Can Save' program I learned many things about money, such as budgets and income. Income is the money you earn from working and I beg you to keep the program running as long as Delmar- Harvard Elementary School exists. I am saving for college. Ernest Green, a participant in I Can Save, a SEED program at Beyond Housing in St. Louis, Missouri. 25

26 CHAPTER 3 Saving for College: An Overlooked Key to Earning a Degree

27 I Want Him To Know Education Is The Most Important Thing Orphaned at the age of seven, Darlene Anozier grew up a ward of the state before landing in Harlem, getting married and giving birth to Richar, her son. I never thought of college for myself, she said in But for my son, it s a different story. Most of the people in Darlene s community live in poverty, and Darlene is no exception. She faces incredible challenges just to keep her family fed. Her husband is disabled, and sometimes she must turn to community organizations, such as the Harlem Children s Zone, for food and assistance. Yet with the help of SEED, Darlene believes her son can achieve his dream of attending Stanford University. It s a fantastic feeling knowing that the money I m depositing is going toward my son s future. It s safe to say that most people understand that a postsecondary education is one of the best investments a person can make. Regardless of income, 92% of all parents in the United States believe exactly the same thing as Darlene that their children will attend college. People who obtain a bachelor s degree earn far more than those with only a high school diploma. And those earning advantages can lead to the additional accumulation of resources necessary to qualify for a mortgage, start a business, prepare for retirement, or perhaps all three. That strengthens communities by enabling more people to better support common needs, including public education, roads and bridges, and needed social and human services. But for the first time in generations, young adults in the United States are not attaining postsecondary education at a higher rate than their parents. And while a majority of Americans (57%) in the top income quintile have a four-year college education, only 10% from the lowest income quintile can make that same claim. 27

28 Assets, Aspiration - and Achievement Financial barriers are a big reason that low-income students are less likely to enroll, attend and graduate from college. One of the biggest hurdles is the escalating cost of tuition. But other factors, including the need to take on long-term debt, overcoming unmet financial need not covered through loans, grants or scholarships, sticker shock, and a complex financial aid process can all keep families from sending their children to college. According to the Advisory Committee on Student Financial Assistance, for those families earning $20,000 or less, the cost of sending a student to a four-year public university would consume 44% of their annual income after grant aid is factored into the equation. And even though most parents expect their children to attend college, for many, it s wishful thinking: less than half (41%) of all parents have set money aside for college, according to a 2009 FINRA Investor Foundation survey. For these families, covering the $5,000 to $7,000 average unmet need after all financial aid, scholarships and other assistance is exhausted, can be too costly to manage. Anecdotal evidence from the SEED Initiative suggests that the presence of a college account leads to greater post-secondary education aspirations. Moreover, a recent study by the Center for Social Development confirms that a positive relationship exists between assets and college expectations and completion. In particular, after considering family income and other characteristics, the study Students with savings accounts in their own names are seven times more likely to attend and complete college than peers with no savings accounts of their own. 28

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30 The perception that one has the ability, resource or opportunities to obtain positive outcomes or avoid negative effects through one's own actions... is one of the most robust predictors of student resilience and academic success. found that having college savings or other financial resources is a consistent predictor of college graduation, and that financial assets are linked to higher education expectations among both parents and children. Additional Center for Social Development research reports that owning an account helps prevent students from giving up on their college dreams. The study found that 55% of adolescents with no savings account of their own experience wilt a term describing young people who expect to earn a degree, but haven t attended college between the ages of 19 to 22. Conversely, students with savings accounts in their own names are seven times more likely to attend and complete college than peers with no savings accounts of their own. These students also perform better once they get to college. In short, the authors note, the perception that one has the ability, resource or opportunities to obtain positive outcomes or avoid negative effects through one s own actions is one of the most robust predictors of student resilience and academic success. My Money Goes Right Into My SEED Account Michael HARLEY was just 11 when we met him in his North Central Philadelphia neighborhood in He hoped to become a Supreme Court judge, mayor, maybe even president of the United States. And he knew saving for a college education was the key to the kind of education and training he d need in order to realize those dreams. CSAs, like Michael s savings account in the SEED Initiative, are designed to help children accumulate the assets they need to earn the education and job training necessary to improve their circumstances. But these savings accounts also teach and instill important habits at an early age, habits that will serve children throughout 30

31 their lives. Just as importantly, CSAs encourage many families and children who might never have considered college to strive for a better future. According to nationwide polling research conducted by Peter D. Hart Research Associates, Inc., Americans support the idea of establishing savings accounts for all kids, especially when used for college. Moreover, the public investment in those savings accounts will largely pay for itself in the long run by encouraging more savings by low-income children to improve their education and become self-sufficient adults, while at the same time reducing crime and the burden on public assistance programs. Just ask Michael. I miss getting the money, but I know it s for the greater good. I m going to be a millionaire! No, a trillionaire! Then I m going to give the money to all the people who need help. I'm going to be a millionaire! No, a trillionaire! Then I'm going to give the money to all the people who need help. Michael Harley, a 9th-grade SEED accountholder from People for People Charter School in Philadelphia, PA. 31

32 CHAPTER 4 Learning By Saving: How Children's Savings Accounts Boost Financial Know-How

33 If I Allow Time to Work for Me, I Can Accomplish a Better Way of Life In less than four years, Jamar Nembhard, a 16-year-old from Wilmington, Delaware, saved $2,900 through his SEED savings account. But Jamar and his family gained much more than savings from SEED. Through SEED, Jamar and his mother, Sonia Johnson, were able to enroll in financial education classes that helped them both learn valuable lessons for saving money, and investing in their futures. Jamar learned the importance of budgeting, saving, spending and sharing. He also learned important strategies for avoiding the spending traps so many of us encounter, including giving himself a cooling off period before making a purchase. Jamar s mother, Sonia, opened an Individual Development Account (IDA) similar to a CSA, but for adults made available by the local SEED host organization, the Boys & Girls Clubs of Delaware, and decided to use her savings for a college degree that would help her pursue a healthcare career. It was a great opportunity to learn the value of money, Jamar said. I now recognize that no matter how little the amount of money I begin with, if I allow time to work for me, I can accomplish a better way of life. At the time, Jamar s future plans included pursuing a computer science degree, starting his own business and giving back to his community. But no matter what he does with his life, the financial lessons Jamar learned through SEED will be with him wherever he goes. And they ll be with his mother, too. 33

34 Smart(er) Money In April 2008, the Jump$tart Coalition released the results from a national study measuring financial literacy in high school students. Developed and written by noted financial expert Lewis Mandell, a professor at the University of Washington, the study included nearly 7,000 high school students from around the United States. Mandell s findings were alarming. 75% of young American adults are likely to lack the skills needed to make beneficial financial decisions. According to Mandell, the financial literacy of our country s high school students had fallen to its lowest level ever; only 48% of the students who took a 31-question exam measuring their financial knowledge earned a passing score. And while college students performed better than their younger counterparts (nearly 65% of college graduates were deemed financially literate ), the findings ultimately provide little comfort or hope: only 25% of America s young adults graduate from college. This means that 75% of young American adults are likely to lack the skills needed to make beneficial financial decisions, Mandell wrote. Practice (and Access) Makes Perfect Mandell suggests and other experts concur that if we want to help young people learn to save and understand how to manage their finances, then it s not just about being taught how to save money. According to Nobel Laureate Amartya Sen and Martha Nussbaum, Professor of Law and Ethics at the University of Chicago, the more appropriate goal should be financial capability. Such capability results when people have both financial know-how and the access to mainstream financial services that let them leverage that knowledge. Or, in the words of Bob Marley, having hopes and dreams isn t enough: it s about having ways and means. This includes access to affordable checking and savings accounts, as well as 34

35 having the opportunity to make personal decisions about saving and investing. This is easier said than done in America according to CFED s Assets & Opportunity Scorecard, nearly 27% of all American households are unbanked, meaning they have no checking, savings or money market accounts. By providing a chance to save in a real account, along with a reason to learn about money matters, CSAs endowed at birth would be powerful tools to help young people prepare for the financial world of tomorrow. This would be a marked contrast to our otherwise dismal performance in achieving financial literacy in our children, and population at large. At each of the community-based demonstration sites in the SEED Initiative, age-appropriate financial education was provided hand-in-glove with the SEED account. Indeed, the experience of young SEED savers, including Jamar from Delaware, reveals the kind of financial understanding and know-how that young people can gain from an early age when they have both training and an account to make financial education lessons come alive. What s more, research shows that when people have financial education and an account, they not only increase their financial skills they also add to their savings. In a national demonstration of adult IDAs, researchers found that each additional hour of financial education, up to 8 hours, increased average monthly savings $1-2, an increase of almost $ in annual savings. SEED Definitely Helped Me Learn to Save John Espejo experienced the life-changing financial empowerment that comes with having a nest egg to call his own. A senior at Burton High School in San Francisco, John jumped at the opportunity to build a savings account for himself via the SEED program at Juma Ventures. I know I m going to need the help in paying for school, he said in John added to his account quickly, depositing money he earned from a part-time job at a local supermarket so he could realize his goal of earning a college degree. 35

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37 One of my objectives in joining this program is to learn more about concepts that are related to financial responsibility and financial literacy. I would like to pursue a career in financial accounting, with the hopes of one day opening my own business in a community that needs financially literate people who want to give back and use the knowledge they gain to help benefit their community. The classes I attend will help me acquire knowledge I need to reach this goal. Vanessa Serpas, SEED participant, Juma Ventures, San Francisco, California After graduation from high school, John enrolled in a full load of classes at the Community College of San Francisco. He also worked full time, splitting his earnings between his SEED account and helping his mother pay rent and other expenses for the home they shared. Affordable classes and a helpful financial aid package enabled John to attend school and add to his SEED account, too. And as his savings account grew, John began to consider how he might use that money if he didn t have to spend it all on education. As of 2010, John was just 20 years old, and as with many young adults, still planning his future. Initially he hoped to buy a home he and his mother could share instead of the house he shared with five other relatives. A business major, John has instead set his sights on opening a restaurant that would employ not just himself, but also an older brother and friends who have completed culinary training school. Along with his SEED account and other savings, he had amassed $15,000 to use for additional education, and to start his own business. SEED definitely helped me learn to save, he said. No matter the age, owning a Children s Savings Account can help children understand how to manage money and succeed in the financial marketplace. Such accounts also instill strong savings habits that will last a lifetime, and can serve as educational springboards that increase financial literacy throughout the entire family. 37

38 CHAPTER 5 A Little Help from My Friends: The Role of Support Systems in Making Savings Happen

39 SEED Gives Me a Chance to Save Saving money isn t easy for Almedia Jones. Almedia lives in tiny Lexa, Arkansas in the Mississippi Delta not far from Memphis, Tennessee. And according to a City Data report, in 2008 Lexa s annual per capita income was less than $16,000. Fewer than 300 people live there, and African-Americans like Almedia are far more likely to be poor than whites. The Mississippi Delta where Almedia lives is one of the poorest areas in the United States. With the support of the Southern Good Faith Fund in Helena-West Helena, Arkansas one of 12 local SEED host organizations Almedia found a chance to save money for her daughters future and her own. Almedia opened a SEED account for her daughter, Brianna, and took her to events that helped young children understand how savings accounts work, such as a hands-on shopping trip to demonstrate budgeting. Almedia also enrolled in an Individual Development Account (IDA) through the Southern Good Faith Fund, and completed its economic training program. Brianna s account was seeded with an initial deposit of $1,000. And like her mother s IDA account, the Southern Good Faith Fund offered to match her contributions dollar-for-dollar, up to $1,000. In order to ensure that her savings were locked up for the future, the Southern Good Faith Fund also served as the custodian of Brianna s account. Almedia appreciated the chance to save. But she also recognized the value of having a custodian for her daughter s account, a trusted partner that could keep her strong during the moments of weakness most of us encounter. I know (the) money s there, she said. I can t mess with it. The truth is, the poor aren t the only ones who struggle to save. Few of us in the United States save much money anymore at least not in the old-fashioned way. 39

40 Saving in America: You Just Don't Understand According to the Bureau of Economic Analysis, from 1985 to 2004 the personal savings rate in the United States slid from 9% of disposable income to just 2% even as our net worth climbed to record highs. And then it slid even more: in the second quarter of 2005, for the first time since 1933, Americans personal savings rate was less than zero. Clearly, saving money is a struggle for most families in the United States. A detailed survey of financial capability released in 2009 by the FINRA Investor Education Foundation found that over half of Americans have trouble keeping up with monthly expenses and bills. If finding the money to save is difficult for most Americans, then it s especially tough for poorer families, like Almedia s, who have even less money and slack in their budgets. Yet part of this savings challenge may be our understanding of how saving really works. The truth is that Americans can and do save money when the price is right. For example, employer-sponsored 401(k) retirement plans frequently include matching contributions. According to a 2007 survey by the Employee Benefits Research Institute, nearly 82 million American workers (or 51.8%) worked for an employer who offered a retirement savings plan, and of those, 80.1% participated in the program. In addition, tax deductions, credits and matches for contributions to IRAs and 529 College Savings Plans, as well as the mortgage interest tax deduction all provide direct and substantial saving incentives via the federal tax code. All are examples of savings made not as a result of pluck or financial discipline, but rather through automated systems, be it a monthly mortgage payment or payroll deduction at work. In fact, academics have begun to revise their understanding of how saving happens and have developed a new institutional theory that suggests that saving occurs because of factors that increase savers information about accounts, provide access to accounts, or facilitate the act of making deposits. As Michael Sherraden of the Center for Social 40

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42 Development at Washington University in St. Louis points out, individuals who have opportunities to participate in [these] asset accumulation programs are not simply saving money due to their propensities to save. Rather, they are accepting a good offer. If this is how saving really works, then it s no wonder that poorer households with limited access to these types of offers and systems have difficulty saving. Small, lower-wage employers frequently don t offer retirement savings benefits only one out of three employers with a workforce between employees provides a retirement plan (and less than half of employers with between 25 and 99 employees do). The poor also face other unique obstacles that make saving harder. Fees for opening accounts, minimum account balances and high overdraft fees make many of limited means leery of using banks. The lack of affordable banking services and credit constraints force some to use check cashing outlets, pawnshops, money orders and payday lenders, whose high costs only increase their economic burden. Similarly, the home mortgage interest deduction only has value to those who own a home and have a tax liability. For the poor and unbanked, these institutionalized savings incentives are indeed attractive offers for everyone else but them. Saving Places: Community-Based Organizations 42 Almedia Jones experience with the SEED program sponsored by the Southern Good Faith Fund in Arkansas wasn t unusual. Each of the 12 savings programs in the SEED Initiative was sponsored by a local community-based organization, such as a church, United Way agency, Boys & Girls Club or human service agency that was a trusted and established neighborhood resource. One of the important research findings from the SEED Initiative is how savings account design, in tandem with programmatic support systems, influences savings accumulation.

43 Key features of the SEED program at the 12 local sites, including staff relationships, matching deposits, financial incentives, direct deposit systems, withdrawal restrictions, peer group meetings, savings targets and financial education all appear to have facilitated saving for SEED participants, especially those with very low incomes. One study from the University of Kansas School of Social Welfare, based on focus group sessions with a number of SEED parents, found that the restricted nature of the SEED account was a particularly useful institutional feature. Or, as Almedia suggests, community-based organizations make steady-handed partners who can help savers resist temptation, and keep money in the account after it s been deposited. Indeed, a report on the implementation of the SEED program at the 12 local sites concluded that it would be difficult to overstate how important local program staff members were to some parents. Savings Structures Matter Saving isn t easy no matter one s income level. But those who do save tend to rely on structures that make it simple, automatic and worth their dime. The SEED Initiative shows that, with the proper support in place, a national system of CSAs for all newborns could provide the structure for longterm saving by all households, regardless of income. I wasn't sure if it was possible to pay for college on my own and I had almost given up hope. However, now, thanks to the SEED program, I am well on my way to saving for college. Dena jo Squyres, SEED participant, Cherokee Nation 43