Promise Accounts: A New (and Improved!) Matched Savings Program
Working families need more support in order to save for the future. This is especially true for Black and Latino households, due to the growing racial wealth divide. While many exciting proposals are advancing through Congress highlighting the need and importance of saving in the short term for emergencies, and in the long term for retirement, we also need more flexible savings options for the medium term to support critical assets like higher education and homeownership. That’s where Promise Accounts come in.
As detailed by our newly released proposal, Promise Accounts: Matched Savings to Help Families Get Ahead, Promise Accounts use insights from decades of research and experience to create a new matched savings program that incentivizes working families to boost their savings and get on a wealth-building path through opportunities for higher education, work and homeownership.
Each year, the federal government provides fiscal resources to help families build wealth. However, most of these resources go to those who are already wealthy. The wealthiest 20% of Americans received 71% of the benefits coming out of the Tax Cuts and Jobs Act. Almost 80% of the $218 billion in tax cuts went to White households (an average of $2,020 in tax cuts), while Latino and Black households received an average of $970 and $840 respectively. Those families getting the smallest amounts of tax relief are the ones who need the most support to save for their future.
Decreasing economic inequality and closing the racial wealth divide means creating saving pathways for low-income households to build wealth. Promise Accounts make some key changes to traditional matched savings programs. Specifically, these accounts would have features including:
Standardized accounts created through one platform: Under the Promise Accounts program, all the accounts would be issued and managed by the U.S. Department of the Treasury. This would ease the administrative burden of staff at local organizations in helping participants open and manage accounts. The savings accounts would have reasonable fees, no minimum contribution or balance requirements and virtually no risk of investment losses. This would ensure that all participants would have access to a very safe and robust savings product and account management platform.
A strong role for local organizations: Local organizations can support participants through all phases of the program to make their experience successful. They can create easy inroads for low- and moderate-income families to access these accounts through critical moments in their lives such as getting a job, starting a family, buying a home and enrolling in higher education. By working through organizations embedded and trusted in communities, households will have a higher likelihood of success in building wealth.
More types of purchases eligible for the program: Broadening the eligible uses for Promise Accounts could help working families build wealth more effectively. Purchases should be oriented around three buckets: higher education, work and housing. This would allow purchases that are most helpful to working families—a truck or tools for a new carpenter, a new roof for an older home or childcare for a young mother starting college. Previous program guidance has been very restrictive, typically only allowing investments in the narrow categories of homeownership, small business and higher education. Limitations on asset types restrain households from potentially saving for critical individual needs. Saving for non-traditional financial needs can serve as a catalyst for greater economic security and still relate to higher education, work and housing.
More families eligible to participate: To be eligible for the accounts, participants would have to be under 80% of the AMI (area median income) or 300% of the federal poverty line—whichever is the higher of the two. While higher-income households can save modest amounts, incentivizing them with matches could increase their savings to invest in major purchases. Previous programs had much narrower eligibility. By widening the participants who would qualify for matched savings, Promise Accounts could better reach the populations that need the most support to save.
An elimination of savings penalties: Families should not have to choose between saving in a Promise Account and getting the public benefits they use to meet their daily needs. Savings penalties, sometimes known as asset limits, in SNAP, TANF, LIHEAP and SSI prevent families from saving due to fear that they would lose these critical benefits. SNAP, TANF and LIHEAP are determined by the participant’s state while SSI savings penalties are administered by the federal government. Currently, depending on what state participants live in, they can be in danger of losing their public benefits if they save even as little as $2,000. Removing these penalties would allow families to support their daily needs with critical public benefits while continuing to save for the future.
Building savings for the medium term is an essential key to wealth building. Although the government provides hundreds of billions of dollars in support for families to build assets through a variety of tax incentives, those supports are targeted towards higher-income families who need the least help. Low- and moderate-income families, who need the most help, get few or no tax incentives to encourage savings for building assets. Promise Accounts can help these families with the saving supports they need to get ahead. For more information about Promise Accounts, read our proposal, Promise Accounts: Matched Savings to Help Families Get Ahead, here.