Incentivizing Savings through the Tax Code: Lessons Learned from SaveUSA
Many American households don’t have enough savings to survive an economic shock, such as a job loss, large medical bill, or a car breakdown. The Corporation for Enterprise Development estimated that nearly half (44 percent) of all households are “liquid asset poor,” meaning that they lack adequate savings to live at the poverty level for three months if they were to lose their source of income. To encourage low- and moderate-income taxpayers to build savings, a pilot program called SaveUSA was launched in 2011 in New York City, Tulsa, San Antonio, and Newark. The program allows taxpayers at participating Volunteer Income Tax Assistance (VITA) sites to elect to deposit a portion or all of their tax refund into a special savings account, requiring them to pledge between $200 and $1,000. Participants are able to withdraw funds from the account at any time, but if they maintain at least the initial balance for one year, they receive a 50 percent match, up to $500. The program focuses on tax time because tax refunds, including Earned Income Tax Credit (EITC) and other tax credits, are often the largest amount of funds low- income households receive at one time. The program is an expansion of a New York City pilot program called $aveNYC, launched in 2008. SaveUSA is funded through the federal Social Innovation Fund and is operated by the New York City Center for Economic Opportunity in conjunction with the New York City Department of Consumer Affairs Office of Financial Empowerment.
The research organization MDRC released an interim evaluation report of SaveUSA in April. The report details participation data for all four cities for the first two years, as well as short-term outcomes from a randomized controlled trial conducted in New York City and Tulsa. In these two cities, eligible tax filers (those 18 years or over with incomes under $50,000 for filers with dependents and under $25,000 for those with no dependents) who were interested in participating were randomly assigned to either a SaveUSA group or a control group, which was not given the opportunity to open SaveUSA accounts. In Newark and San Antonio, all eligible filers were allowed to participate and no random assignment occurred.
For SaveUSA participants in all four cities, an average of $506 was pledged and directly deposited into participants’ accounts. Sixty-six percent of participants retained the amount pledged for their first year and received the matching funds, averaging $291. Nearly 40 percent pledged funds again in the second year, at an average of $293. Those who received a match in the first year were much more likely to pledge again in the second year. Seventy percent of those who pledged in the second year received the match at the end of the second year, averaging $348.
At the 18-month follow-up point in New York and Tulsa, SaveUSA group members were more likely to have short-term savings, with a difference of 7 percentage points over control group members. SaveUSA group members were found to have, on average, $512 more than control group members. The final evaluation report will be available in 2015, which will give us a better idea of the longer-term effects of the program, such as measures of financial security and material well-being. For now, we can say with certainty that tax incentives can encourage low-income earners to save, and that the idea is worth pursuing further. The Financial Security Credit, which has been proposed as H.R.2917, the Financial Security Credit Act of 2013. The March Action has talking points and background information to help you.