Bush’s individual savings proposals fall far short of their potential, says visionary scholar

The social work professor who pioneered the idea of Individual Development Accounts (IDAs) — matched savings accounts for low-income Americans — says that President Bush’s new individual savings proposals benefit the wealthy but leave behind the working poor.

Michael W. Sherraden

Michael W. Sherraden, Ph.D., the Benjamin E. Youngdahl Professor of Social Development and director of the Center for Social Development at Washington University in St. Louis, says that President Bush’s proposals to expand individual savings are wise, but fall far short of their potential. Sherraden suggests investing opportunities that would be available and profitable to all.

Two of the major innovations under President Bush’s recently proposed tax plan are Lifetime Savings Accounts and Retirement Savings Accounts, both with $7,500 annual limits.

Income tax would be paid up front, followed by lifetime tax-free accumulation. Income eligibility limits would be removed. Any couple could save up to $30,000 a year, with tax-free compounding.

Sherraden notes that wealthy couples would benefit from these plans, while working families and others with low incomes would be left behind.

“Wealthy couples are most able to take full advantage of the new saving opportunities, and for every dollar saved, their net gains are greater,” says Sherraden, who has developed a reputation as a visionary scholar in reshaping how America addresses domestic policy, particularly for low-income residents.

“Thus, the new savings proposals, as they stand, would use public policy to transfer money to the already well off, exacerbating inequality. This is not the vision and principles upon which America was founded,” says Sherraden, who is a professor in the university’s George Warren Brown School of Social Work.

In *Assets and the Poor: A New American Welfare Policy*, Michael W. Sherraden Ph.D. proposed Individual Development Accounts — matched savings accounts for low-income Americans — to allow the poor to accumulate assets and property rights. Sherraden says President Bush’s new individual savings proposals benefit the wealthy but leave behind the working poor.

In response to the changing economy, asset-based policy is emerging, notes Sherraden. The creation of many individual account policies since 1970 — 401(k)s, 403(b)s, IRAs, Roth IRAs, Educational Savings Accounts, Medical Savings Accounts, College Savings Plans in the states, and others — represents a major transformation in domestic policy, he says.

“It is very possible that individual accounts will become the dominant domestic policy instrument in the United States and many other countries during this century, overtaking social insurance and welfare transfers in relative importance,” says Sherraden. “The Bush savings proposals are an attempt to extend and simplify an emerging policy. This is a transition, I believe, from welfare state to investment state.”

‘Savings for all’

Sherraden proposes an option to the president’s plan that would expand investing opportunities to the entire population. He suggests that the government create a Lifetime Savings Account for every adult American, making an initial deposit into the accounts of those with low incomes, or by matching their savings, as is currently done in Individual Development Accounts.

Introduced in Sherraden’s 1991 book, Assets and the Poor: A New American Welfare Policy, IDAs serve as a means of extending matching funds to low- and moderate-income families to encourage savings and asset building. The savings can be used for investment in higher education, home ownership, small business development and retirement security.

In 1998, Congress passed legislation, which Sherraden helped draft, establishing a five-year, $125 million IDA Demonstration Project.

In Assets and the Poor, Sherraden argued that asset accumulation is structured and subsidized for many non-poor households, primarily via retirement accounts and home ownership, with subsidies in the form of generous tax benefits. IDAs serve as a means of promoting asset building among people who do not have access to these subsidies.

Sherraden suggests that the government take the Lifetime Savings Account idea a step further by opening an account for every newborn and begin deposits from birth.

“In the investment state, promoting and subsidizing asset holding by everyone will contribute to economic growth in the long-term,” says Sherraden. “Savings for all is a sensible public policy, because it would increase the capabilities, engagement and productivity of the people.”