New programs spur working poor to begin saving

Americans are rotten at saving. To encourage thrift, the government hands out billions in tax breaks, mostly to the nation's wealthiest half. The other half, it's long been assumed, either cannot or will not save.

In recent years, a growing number of state governments, nonprofit groups, foundations and private companies have been running pilot programs to induce poor and working-class Americans to save. The results, they say, are surprising: When participants get the right incentives and financial counseling, many open savings accounts, arrange for payroll deductions, and begin accumulating assets.

A Pennsylvania state program helped Michelle Simmons, 37 years old, to go from living on the streets to owning her own home, and inspired Dorothy Beale, 36, to clean up her debts and qualify for a mortgage. Another program outside St. Louis helped Charlin Hughes, a 36-year-old single mother of five, to begin saving for a home. Both programs offer to match participants' savings, but only if they consistently save and agree to attend financial-planning classes.

The programs are drawing support from both the left and the right. Advocates say they could become productive successors to liberal anti-poverty programs of the 1960s and conservative welfare reforms of the 1990s.

But proponents acknowledge it is difficult to persuade many poor people that they can afford to save, even with financial incentives. And rolling out such a program nationally would be expensive, costing about $40 billion over 10 years, according to one estimate.

Ms. Simmons says she was a "hope-to-die dope fiend" living in cardboard boxes on the streets of Los Angeles when she was arrested in 1998 for prostitution. Freed from prison after one year, she returned to her hometown, Philadelphia, and found low-paying work. With the help of a nonprofit agency that helps administer Pennsylvania's Family Savings Account Program, she got financial advice and opened an individual development account, or IDA.

The program offers to match participants' savings of up to $2,000 over three years with state and federal funds. Households with incomes of no more than twice the poverty level (about $40,000 for a family of four) are eligible. They must save at least $10 a week and attend a series of financial-planning classes. IDA savings must be used for college, job training, buying a home or starting a business.

By 2003, Ms. Simmons had saved $1,007. The program matched that amount, producing enough for the down payment on a $50,000 home from Habitat for Humanity.

There are more than 500 asset-building projects across the country, whose participants have opened more than 20,000 savings accounts. Thirty-three states support such programs on a small scale, using state funds and federal welfare-to-work subsidies for savings matches, and contracting with nonprofits to run the programs. Demonstration projects have also spread around the world from Canada to China. Great Britain last year became the first country with a national program of savings accounts for each child at birth.

The U.S. savings rate -- the percentage of after-tax income that Americans save -- has declined for nearly three decades. In 1984, it was 11%. In 2005, it dropped into negative territory, meaning that Americans were spending more than they earned.

One-third of U.S. households have no financial assets. An additional one-fifth have insignificant holdings. But households with about $2,000 or more in assets, including retirement savings, are ineligible for basic welfare programs, which provides a disincentive for the poor to save.

The savings programs have their roots in the work of Washington University professor and social worker Michael Sherraden. His 1991 book, "Assets and the Poor," argued that governments and charitable groups should move beyond traditional welfare's aim to provide the poor with income to meet immediate needs. The broader goal, he wrote, should be to help the poor save money, which can provide them a stepping stone to escaping poverty.

•	New programs spur working poor to begin saving Incentives, counseling inspire people to clean up debts Wall Street Journal, Wednesday, Jan. 11, 2006 Byline: Jackie Calmes, WSJ Staff Reporter