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CALMUS: Culture of saving could be best path for economic mobility

- - Wednesday, January 2, 2013

ANALYSIS/OPINION:

"I'm going to save more."

It's one of the more common new year's resolutions. It's also one of the best steps anyone interested in moving up the economic ladder can take.

Studies show a strong connection between family savings and increased future earnings — for the saver and the saver's children. The desire to save is also linked with traits such as grit, determination, perseverance and the ability to delay gratification — all necessary for personal improvements (like completing college) associated with moving up.

Unfortunately, many Americans — especially low-income workers — don't amass the personal savings needed to ward off emergencies and increase their earning potential. For these workers, a broken-down car or unexpected expense can lead them through a cycle of expensive loans, pushing the family further down the economic ladder.

Often, low-income households harbor the belief that banks are not the best place for their money. Faced with inconvenient bank hours and locations, potentially high bank fees, and a lack of financial information, they rely instead on pawnshops, check cashing, title-loans, and payday loans.

Fortunately, some financial institutions are devising services better suited to meet the needs of lower-income communities.

One is PayNet Deposit accounts. Managed through local credit unions, these accounts allow "banking" at a check-cashing facility. The program doesn't address the high cost of check-cashing services, but it appears promising for certain populations, such as taxicab drivers needing to make off-hours deposits.

Model Safe Accounts are fully electronic accounts with low balance requirements and minimal maintenance or insufficient fund fees. This Federal Deposit Insurance Corp. pilot program demonstrates that well-designed accounts can serve low-income workers without being complex or costly.

Bank On partners with financial institutions to create similar accounts and with organizations offering education on how to use personal accounts and manage household finances. Long-term relationships between consumers and banks or credit unions are facilitated by positive banking experiences and profitable account design.

Yet account design doesn't entirely counter our nation's consumerism drive. When the hypothetical decision to skip the daily coffee shop turns into a real-life morning without a pick-me-up, willpower often falters.

To prevent that, Autosave removes the decision each payday to save. New employees simply complete a form that authorizes their employers to divert a portion of each paycheck into a savings account. This places money in savings before the employee ever sees it, reducing the temptation to spend.

The Save More Tomorrow feature goes further by formalizing future intentions to save. Employees commit to save future raises. Participants are free to change their minds, but most don't. In one company, 78 percent of employees joined the program, and of those 98 percent remained through two raises. Savings increased from 3.5 percent to 13.6 percent of income over 40 months.

The growth of savings can be discouragingly slow. Individual Development Accounts enable savers to reach goals faster by matching saved funds. When the savings goal is met, the saved and matching funds are used for big purchases, such as the down payment on a home.

Some Americans, meanwhile, still view the lottery as "the most practical way" to save for retirement. But after the excitement, almost every player is left with nothing to show. Harnessing that excitement to promote savings has led 26 million Britons to save more than $65 billion through a national prize-linked saving program called Premium Bonds.

In the U.S., a consortium of credit unions created a certificate of deposit with lottery-style drawings though a loophole in Michigan law that allows credit unions to create "savings promotion raffles." Save to Win, launched in 2009, helped 11,500 people save $8.5 million in 2011. Save to Win diverts lottery expenditures into savings. Unfortunately, legal obstacles impede widespread implementation.

Too many Americans are just a medical bill away from financial ruin. Innovative programs, however, can engage Americans in setting aside money for all aspects of life. That's the best culture for upward economic mobility.

Diane Calmus is a former research assistant in the Center for Policy Innovation at the Heritage Foundation.