A Penny Saved

Why do people find it hard to get off welfare? One reason is that current laws require a client to spend most of his or her savings in order to receive welfare, and they cut welfare allowances if a recipient's savings increase.

Michael Sherraden, an associate professor of social work at Washington University in St. Louis, notes that asset accumulation is one of the reasons why the richest Americans get and remain wealthy. The richest 20 percent of Americans earn 46 percent of the country's income but own 75 percent of the wealth. By contrast, the poorest 20 percent of Americans earn 4 percent of the income but own only 0.1 percent of the wealth.

For generations, liberals and socialists have attempted to reduce this gap between the rich and the poor by redistributing income. But Sherraden, in a paper published by the Progressive Policy Institute, a centrist Democratic think tank based in Washington, D.C., suggests that low-income Americans might be better able to permanently escape poverty by building assets. Accumulating assets, Sherraden notes, "leads people to behave in productive ways: planning ahead, deferring consumption, working harder, and saving."

To encourage asset building, Sherraden proposes that the federal government create "Individual Development Accounts" (IDAs). These savings accounts, like Individual Retirement Accounts, would be voluntary, and the earnings and interest in them would be exempt from federal taxes.

Sherraden proposes four types of IDAs—for housing, college education, self-employment, and retirement. Sherraden suggests that the federal government match the contributions low-income workers make to their IDAs, in some cases at a greater than dollar-for-dollar rate. By creating accounts, Sherraden contends, the federal government would make "more Americans stakeholders in our free-enterprise economy."