An experimental Individual Development Account (IDA) had no effect on whether participants opened a retirement account or on the adequacy of their retirement savings, according to a newly published article in the Journal of Gerontological Social Work.
The article is the first to examine the 10-year follow-up effects of a randomized four-year test of a matching incentive program for low- and moderate-income households. The findings illuminate the financial peril many low-income households face in retirement, say authors Michal Grinstein-Weiss and Michael Sherraden.
“The bigger message is we need to do more for retirement,” Grinstein-Weiss, the associate director of the Center for Social Development and an associate professor at the Brown School of Social Work, said in an interview. “We need to do programs that are longer. We need to do programs that might be more automatic or offer more incentives.”
Researchers and policymakers must continue to seek ways to provide simple methods for low- and moderate-income households to save, the authors say. Sherraden is the founding director of the Center for Social Development (CSD) and the George Warren Brown Distinguished University Professor at the Brown School.
They examined the effects of the IDA program using data from CSD’s American Dream Demonstration experiment of IDAs in Tulsa, Oklahoma. The program ran from 1998 to 2003 and included financial education, encouragement to save, and matching funds for qualified uses, including contributions to retirement accounts.
At the 10-year follow-up, the median respondent in the IDA experiment held no balance in dedicated retirement savings, according to the article, “Effects of an individual development account program on retirement saving: Follow-up evidence from a randomized experiment.” Only about 12 percent had enough saved to replace 75 percent of one year’s baseline income.
Deposits for homeownership
The four-year matching incentive program was not only for retirement, but also for such asset-building efforts as homeownership and education.
Participants in the Tulsa IDA experiment were more likely to make deposits for homeownership than for retirement. The participants may have considered their home equity as a part of their retirement assets, the authors say. It is also possible that the qualified uses of the Tulsa IDAs—particularly the higher incentive for home purchase—diluted the effect on retirement saving.
The research shows that only 17 percent of participants planned to save for retirement. The age of the participants may have been a factor in families saving for retirement; the average age at the beginning of the study was 34, and people tend to put off retirement savings when they are younger.
Low-income households also tend to have limited access to structured, institutional and automatic systems that make saving easier. In Tulsa, most participants in the experiment lacked the opportunities that many employers offer for automatic enrollment or automatic paycheck deductions, which are known to increase retirement savings rates.
“More programs and policies need to be in place to help low-income people and the public in general to be prepared for retirement,” Grinstein-Weiss said in an interview.
Policy and research
The experiment’s results “highlight the need for a better understanding of the choices and constraints faced by lower-income households as they make retirement-saving and other asset-accumulation decisions,” Grinstein-Weiss and Sherraden report in the article. They say the experiment’s results should inform policy and research regarding the Old-Age and Survivors Insurance of the Social Security Administration and other retirement support programs.
“We know that Social Security is not enough,” Grinstein-Weiss said.
One forthcoming financial product that may hold promise is the U.S. Treasury Department’s new myRA (my Retirement Account) program. CSD is conducting research to help inform the rollout of that program.
In the meantime, advocates for older adults should support universal retirement saving programs and products, the authors say. Many low-income people will continue to find saving for retirement very difficult, they say, without access to safe, affordable and incentivized programs.
Grinstein-Weiss leads research on savings experiments including Refund to Savings, the largest such experiment in the United States. In March, she testified about retirement savings before the U.S. Senate Special Committee on Aging. She told the panel, “What we have learned from our research is that everyone—even those with very little income—wants to and can save when provided structured opportunities to do so, but there are many barriers that keep low- to moderate-income households from saving.”