Policies aimed at turning more Americans into savers are primarily sold on economic merits. But the financial advantages of accumulating wealth may actually be less important to people than some of the non-economic effects. Academic research has uncovered social and psychological bonuses that accrue along with the dollars and cents. These benefits may represent one key to building more stable families and neighborhoods across America in the future.
Professor Michael Sherraden of Washington University in St. Louis has been testing the effects of Individual Development Accounts (IDAs) since 1997. These experimental accounts are designed to encourage saving and asset building among low-wage workers who ordinarily invest little, by matching individual contributions with outside funds 2-to-1. The pilot program has almost 2,400 low-income participants around the country who are slowly building wealth. Average workers put aside around $25 per month. When matched, this enables workers to save up to $900 annually. Over time, these savings can turn into the down payment on a house, college education for a child, the means to start a business, or a retirement income well above what Social Security alone could provide.
IDAs don't make the participants millionaires, but they do make them owners. And studies show that even modest amounts of invested wealth produce an unexpected stream of benefits. For instance:
- Asset ownership makes people more oriented toward the future, more confident, and more likely to take calculated risks. Savers feel more in control of their lives.
- Married couples who build up financial assets are less likely to divorce. Improvements in marital stability persist even after controlling for income, race and education. Account holders say they have better relationships with family members.
- Persons with savings are more likely to make education plans for themselves and their children. They perform better on tests and reach higher education levels, even after factoring out differences in income.
- Asset-holders enjoy better long-term health, even after making demographic adjustments.
- At the very same levels of education and income, mothers and children are less likely to live in poverty if the mother came from a family with asset holdings.
- Asset-owners have a higher level of civic engagement. One survey of more than 300 IDA participants suggests that many believe possessing assets helped them become more involved in their neighborhoods, or more respected by other community members.
- Many of these benefits appear to pass from parents to children. Parents who save are more likely to have children who save, even after other influences are considered.
The effects of increased asset ownership on our political culture could mimic the changes that took place in 1980s Great Britain. Stressing "the importance of being an owner," Prime Minister Margaret Thatcher sold over 1.6 million government-owned apartments and houses to their occupants. This had salutary effects on the new owners, and also helped alter Britain's political culture. In the 1979 election, Conservatives increased their vote by an average of 39 percent in constituencies in which privatized houses made up half or more of the total housing. Socialism has now largely disappeared from British politics.
Perhaps the best opportunity for U.S. leaders to spur more saving and wealth-building among everyday Americans would be to establish personal accounts for Social Security. Rather than expecting people to scrape up extra income to put away, workers would simply be allowed to save and invest, in an account they would control themselves, a portion of the payroll taxes they already pay. The poor would not have to make any additional contributions, and would thus help build wealth where it is needed the most.
Last year's President's Commission to Strengthen Social Security proposed personal accounts where average workers could accumulate $100,000 to $175,000 by the time they retired. These funds would supplement traditional Social Security benefits, and could be passed on to spouses, children, or a favorite charity upon death.
With the majority of American workers as shareholding investors, there would likely be dramatic effects on attitudes toward business, the government, and people's individual stations in life. Perhaps most important, the latest research indicates that newly saved wealth would make Americans not only richer, but also happier, healthier, more familial, smarter, and more active citizens.
It is up to policymakers to turn this asset-building blueprint into a reality.