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Giving Asset-Poor Americans the Incentive to Save |
In June 2009 the Massachusetts Asset Development Commission issued a report about ‘asset-poor’ people in the state. This term describes people who would lose their households in less than 3 months if they experience a sudden loss of income or a catastrophic medical emergency. Asset-poor people work—but they work at low-paying jobs and have no assets: a savings account or a car. For these families survival depends on assistance such as food stamps because the breadwinner does not bring in enough money to cover food and shelter.
Ironically the state’s requirements for receiving aid may actually prevent people who are asset-poor from ever getting out of poverty. The Commission found that people who are just surviving by working at low-paying jobs while receiving aid from the state “face substantial barriers” to saving up in order to build some type of cushion against the sudden loss of income.
The report concludes that “income and asset restrictions on state programs make it harder for families to develop assets, and can even create disincentives to save or find a higher-paying job. Many families lose their eligibility for transitional assistance or education programs once they’ve built even an extremely low level of savings.”
Responding to the Massachusetts Asset Development Commission’s report the Boston Globe ran an editorial entitled “How not to help the Poor” arguing that it makes no fiscal sense to penalize people receiving state aid when they try to save money or buy a used car in order to commute to a better-paying job. The goal should be “to help people climb out of poverty, not keep them cycling through.”
That editorial makes a good point—but how, then, do you help the poor?
One model, which has been successful with over 7 million people in over 30 countries, is the Grameen Bank’s microlending process that was created in Bangladesh by Nobel Prize laureate Professor Muhammed Yunus in 1983. In this model, very small loans are made to very poor people with no collateral so that they can start or expand a small business. This model has now expanded to the United States with the establishment of Grameen America . A key difference between qualifying for state aid and qualifying for a Grameen America loan is that for the latter a savings account is a requirement, not a hindrance.
The savings accounts starts out small, $2/week, but maintaining it is a requirement for the loan to remain in good standing. For most women who qualify for a Grameen America loan, this savings account is the first bank account of any kind that they have ever had.
The idea is to help those who are asset-poor create assets so that they have a cushion in case of a sudden loss of income. Similarly, the goal of the loan itself is to help people work their way out of poverty rather than “cycling through” it by supplementing their income with revenue from a home-based business such as in-home manicures, catering, or a small mobile business like carpet cleaning.
Grameen America has two sites open so far: Queens, New York City, and Omaha, Nebraska. Plans are underway to open another site in Boston, MA. For the poor, starting and maintaining a savings account can mean the end of living hand-to-mouth, and the beginning of financial independence.
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