The American people have a clear vision of what it means to be "middle class," and, according to new data from the Pew Research Center, they see two central characteristics: having a secure job and being able to save. Unfortunately, more than 60 percent of Americans would have a hard time handling an unexpected $500 expense, according to a new survey from Bankrate. If saving is so central, and so out of reach for millions of Americans, it's no wonder many believe the middle class is in deep trouble. Americans need innovative solutions to help families build up savings that they can use as emergency aid in the short term.
The Financial Security Credit Act of 2015, H.R. 4236, sponsored by Rep. José Serrano (D-N.Y.), would reform the existing, retirement-focused Saver's Credit into a flexible, accessible credit that could help millions of Americans build up their emergency savings. The concept behind the bill originated as a pilot called $aveNYC in New York City and, with the support of a Social Innovation Fund grant by the Corporation for National and Community Service, spread to San Antonio, Newark, N.J., and Tulsa, Okla. This expanded pilot, called SaveUSA, allowed families who deposited part of their tax refund into a designated account, and maintained the deposit for a year, to receive a 50 percent savings match up to $500.
A new study of the effort — which included a rigorous, randomized control trial evaluation — provides strong evidence of the potential of a simple matched savings effort offered at tax time. Evaluating the SaveUSA experience, the research firm MDRC found that 80 percent of SaveUSA participants had non-retirement savings after participating in the program for one year, and they had, on average, $522 more in savings than the control group. More fundamentally, there was a 6 percent reduction in liquid asset poverty for SaveUSA participants, a critical measure of emergency savings and financial security. This effort was aimed at those who would need it most: The adjusted gross income of participants was close to $18,000, and almost 70 percent qualified to receive the Earned Income Tax Credit, which helped deliver average total refunds of almost $3,900.
We've also learned that this approach improves savings habits over time in meaningful ways. SaveUSA participants continued to put away more money during the follow-up period than the control group and they kept their savings accounts active even after the program ended. Additional findings confirmed that participants did not incur debt to receive the match and were consistently in better financial shape than they were before participating in the program. To put it simply, they began to save much more than they would have otherwise.
The challenge now is to take this concept to scale. The federal government has a long history of encouraging families to save and build assets, but these incentives have focused on retirement savings, a difficult first step for those with low incomes. But we know now how to create realistic savings opportunities for people with low incomes. We know that with an incentive and access to an account through the tax filing process, families will be able to set money aside. We have the tax filing system in place, but we need an incentive to trigger the development of real savings and the increased savings behavior that can make a real difference in a family's financial future — and the future of the middle class in America. It is time to integrate an emergency savings incentive into the federal tax code.
Cramer is director of the Asset Building Program at New America. Mintz is president and CEO of the Cities for Financial Empowerment Fund, Inc., and formerly served as commissioner of the New York City Department of Consumer Affairs under Mayor Michael Bloomberg, where he oversaw the development and operation of $aveNYC and SaveUSA.