Ray Boshara

Making an Impact with Scalable Savings Mechanism Session

Remarks of Ray Boshara, Federal Reserve Bank of St. Louis¹

Thank you for the opportunity to contribute.  I was asked by Michael Collins to serve as the discussant on three papers for this session focused on scalable savings mechanisms:

Like Benita Melton and many of the other asset-building field veterans in this room, it is both humbling and gratifying to be having this discussion around non-restricted or slightly restricted savings.  Through IDAs, this field started out heavily (and somewhat patronizingly) focused on savings restricted to a first home, small business, and post-secondary education.  If families did not use their savings for one of these assets, they were penalized through the loss of the match.

In fact, in the American Dream Demonstration, or ADD, which tested about 2,400 IDAs in 14 sites across the country, two-thirds of the mostly lower-income women in ADD made an unmatched withdrawal, forfeiting a 2-1 match to meet some emergency or shorter-term savings need.  That was a huge price to pay.  Eventually we learned not to see this as a failure of IDAs, but rather as a crucial insight about the kinds of savings families need, and that we burdened IDAs with too many savings expectations—that one product could not meet the savings needs of lower-income, or indeed of all, families. I’ll return to these product challenges later on in my comments.

So here we are today, in this salon, focused exclusively on short-term savings which, as I have noted elsewhere, cut across the health of family balance sheets: Families with unrestricted savings can better avoid pay-day lenders and the like, have the savings to get started on a longer term asset such as a home, business, education or retirement account (all of which help them diversify their asset base), can pay down their debts, and generally have better access to good credit.

Two of the papers I’ll discuss today leverage the tax-filing platform, while the other leverages the TANF/EBT platform.

TANF BANK ACCOUNTS TO INCREASE FINANCIAL CAPABILITY. This proposal would create bank accounts for recipients of TANF who receive EBT cards; whomever the state contracts with for EBT cards would be required to provide a low/no fee bank account to every participant who connects to TANF.  The account would be integrated with evidence-based financial education and coaching services.

What I most like about this proposal is that it is automatic, targets a population greatly in need of quality financial services and savings, leverages technology, and holds great scale potential within this population.

I have five comments:

  1. Are the expectations too high—does having a bank account take you far enough?  Even combined with mandated financial education, does that lead to emergency savings and, more broadly, the sustained use of wealth-building financial services?  We learned from the most recent FDIC study, released last fall, that there is lots of churning in and out of the banking system even for people with checking or banking accounts; many with accounts do not necessarily use them.  It appears that a bank account is only the beginning—the sine qua non of a healthy balance sheet; necessary, but not sufficient.  So I guess I am challenging you to say more about how the account and required financial counseling actually lead to emergency savings and, ideally, more regular use of the kinds of financial services that contribute to a stronger balance sheet.
  2. I understand that in Washington State TANF serves 40,000–60,000 families each month, and that there is a lot of recidivism, about four cycles on and off per adult.  I further understand that only 6 percent choose direct deposit (or EFT), while everyone else receives EBT cards. So, as families cycle in and out of TANF, would they keep their EBT cards? Would direct deposit be a better, more enduring option, one that is likely to have a greater impact on achieving financial inclusion and emergency savings? As families churn, they would presumably keep their direct deposit account but not necessarily their EBT cards (although I do not know if the same card could be reused or reloaded).  And it appears that there would be significant cost savings for states as well through direct deposit: In Missouri, for example, it costs $.10 per month for direct deposit, but $0.58 per month for EBT.
  3. I also was unclear about the source of savings—from where or how would TANF families generate savings?  Would there be incentives from states or non-profits?  Are there other behavioral techniques you would use besides automatic enrollment to generate saving (some of which may not require public or private funds)?
  4. In the paper you note that the TANF bank accounts would be fully liquid.  Well, then, what makes it a savings account? How is it not just additional income once the families have met the mandatory financial education requirement? This of course raises a product design challenge apparent in all of our efforts—how to balance the liquidity and light restrictions or relative “stickiness” of an emergency savings account.
  5. Finally, the paper rightly notes that a change to asset limit restrictions would be necessary—the rule that families on TANF cannot accumulate savings and assets in excess of certain amounts (which vary by state) in order to remain on TANF.  Certain states would be more receptive to such changes, or may have high enough limits already.  But I would note that even in states where the limits have been raised or eliminated, a strong and enduring perception exists among TANF recipients that they cannot save or own anything in order to keep their benefits. You would need to address this significant challenge should families receive TANF bank accounts with the explicit message to start saving in them.

REFUND TO SAVINGSThis initiative, since it is already underway, inserts savings “prompts,” messages, and actual savings mechanisms—all heavily informed by behavioral economics—into TurboTax’s “Freedom Edition,” which offers free electronic tax preparation services for certain lower-income families and military personal. R2S is a randomized controlled experiment (something rare though greatly welcomed in the assets field), now testing over one million households, and is supplemented by a household survey that reaches around 12,000 filers.

It is hard not to be excited about the enormous scale potential of R2S, given its rather low marginal cost and full integration into a successful, commercial tax-preparation package.  And the field has long been excited about the potential of generating savings at tax-time, given that the average family receives a tax refund of about $2,800, including large refunds among lower-income families due to the EITC.

I have four comments:

  1. It was noted that savings residing in a checking account would not count as savings in R2S; only savings in actual savings accounts would count. If that is the case, then by how much do you think you are understating actual savings achieved under R2S? Or what if families use their tax refunds to pay off debts, does this count? Will these and other healthy balance sheet behaviors be captured by the Household Financial Survey?
  2. You note that there is a much bigger savings effect if families first elect to split their refunds using form 8888.  What ideas does R2S have to improve the number of families that split?  For instance, I observed that once families know they have a refund, they have a choice about whether or not to split their refund (to go to form 8888), or simply to go to the screen that lets them get their refund without splitting.  I am wondering if we could make form 8888 the default screen—everyone entitled to a refund would go directly to form 8888, which presumably would then lead to more savings among R2S families and everyone else?
  3. Could R2S also apply to the repayment of debts?  I understand from Josh Wright that there might be issues around direct payments to third parties, but if we think about a broader balance sheet approach, this might be worth pursuing.  Could your paper address this challenge or opportunity?
  4. Finally, what is your policy ask or the role of public policy? Is it just better and greater use of form 8888, something along the lines of what I mentioned above—8888 being the default screen? Or what if Treasury’s Go Direct initiative, which requires all federal benefit payments to be electronic, could apply to tax refunds; presently, these are the largest types of payments not subject to this rule (i.e., families can still receive paper checks).  Imagine the savings opportunity if all tax refunds had to be delivered electronically.  Or do you see R2S informing the development and passage of the “Financial Security Credit” proposal in the U.S. Congress, which would offer matching funds for tax-time savings among lower- and moderate-income Americans?

SaveUSA COALITION.  This paper calls for the creation of a “Save USA Coalition,” a network of cities designed to replicate and enhance the tax-time savings program SaveUSA, which offers a 50 percent match (up to $500) to lower-income families who save an initial deposit for one year.  “SAVE” is now at some VITA sites around the U.S.; the SaveUSA Coalition would expand beyond VITA sites to a wider range of service providers.

I really like how clear the national policy ask, or route to scale, is—a direct tie-in to the Financial Security Credit mentioned above.  This proposal also beautifully leverages the “Super-vitamin” approach that Commissioner Mintz and his office has pioneered—the idea that building assets and a healthy balance sheet should be integrated into a broad range of social services programs.

I have four comments:

  1. From a scale perspective, might it be too costly or too cumbersome to have to prove that an account has remained open for one year and fully funded in order to claim the matching funds?  Might you have a sense of what that would cost?
  2. The success of the Super-vitamin approach depends on the financial capability of service providers.  So how do you envision ensuring that their level of financial know-how is sufficient enough to build the financial capability of the clients?  And how expensive would it be to build or deliver that level of financial capability across the nation through the SAVEUSA Coalition?
  3. The paper correctly points out that there is a “sweet spot” of incentivizing savings participation and levels while keeping the matching amount low to minimize cost.  Great point. But is the match the most important predictor of savings?  Research suggests that it may not be.  True, the paper acknowledges the match “cap” vs. match “rate” dynamic—that we are likely to generate more savings through higher match caps (the maximum amount of savings that could be matched) vs. the matching rate (1-1, 2-1, etc.). But it would be great to see this critical issue receive greater attention in the paper, and perhaps the testing of that proposition more central to the SaveUSA inquiry.  We also know that a little bit of savings, and sometimes simple account ownership, can generate a huge asset effect, too—that matching dollars are not always necessary to generate the constructive behavioral and psychological changes associated with savings we would like to see.  So, in your view, how much savings might necessary to achieve these asset effects?
  4. My biggest question, though, is, Should we subsidize or match emergency savings?  The “Start to Save” proposal from the Opportunity Fund also raises this question.  Not only does matching significantly raise the cost (a real issue in this era of austerity) but (as noted above) matching dollars and various behavioral insights suggest that we may not need to match or subsidize savings to generate new savings.  And, significantly, there is no public policy precedent for matching unrestricted savings, while there is (largely through tax breaks) for savings for college, homes and retirement. So, politically, this could be difficult to achieve—something the proponents of the Financial Security Credit must no doubt be aware of.  To be sure, the match may be necessary from an accumulation/sufficiency standpoint (do families have enough savings to build or repair a balance sheet or avert a financial crisis?), and perhaps that is the point.  Or perhaps Commissioner Mintz and team are boldly leading us to a place we need to go—that emergency savings is so critical to the financial health of families that it merits a match?  This question must be addressed, these goals clarified, especially given the exciting potential of the SAVEUSA Coalition.

GENERAL COMMENTS.  Let me close with just a few general comments and observations regarding policy and scale.

First, I think the product challenges are immense. What are the goals of the product, and how do we resolve the tension between liquidity and restrictions? Do we use existing products (the preferred route), or create new ones?  This is huge product challenge and a huge policy challenge, too.  Could we, for example, imagine a tweak to an existing product—perhaps making the emergency withdrawals already permitted in Roths a little more clear and robust, and perhaps calling it a “Rainy Day Roth,” which would then combine both liquidity and asset building in one product?  I think we have to imagine products along these lines.

Second, since this panel is about scale and policy, it is important to ask, What problem are we trying to solve?  What is our argument?  The stability and mobility of families is what I would argue.  Reflecting on our years promoting child savings accounts (CSAs) in Congress, it is easy for emergency savings, like CSAs, to become a solution in search of a problem—which, politically, solves nothing.  Framing is key, and ideally we would offer Congress a solution to problem they already want to solve, instead of asking them to buy both our problem and our solution; the fewer “asks,” the better, in a political setting.

And finally, and similarly, who is our target population? Yes, lower-income families, but are not low levels of family stability and mobility now a middle-class problem, too?  If so, Congress is more likely to address this issue; we will just have to make sure that their response reaches far enough down the income ladder as well.

Thank you.

¹ These are my own views, and not necessarily the views of the Federal Reserve Bank of St. Louis or the Board of Governors of the Federal Reserve System.