Spring, 1998, Vol. 4, No. 2

A New Welfare:

Building Assets, Changing Lives

By Erika Alexandra Melman, a first-year student at the Irving B. Harris School Graduate School of Public Policy.

The recent welfare reforms have sparked debate about how to best facilitate the transition of welfare recipients from welfare checks to paychecks. As the Temporary Assistance for Needy Families (TANF) bill comes into effect, many former welfare recipients will enter the job market, often with inadequate training and little work experience. In mediating the debate over how to ready these people for the workforce, a new debate has emerged. Why have welfare programs of the past failed to help recipients overcome the cycle of dependency? What are the institutional policies of welfare legislation that have kept lower socioeconomic classes poor? And, more importantly, how can these policies be rectified such that government and social policies create an incentive structure to reduce welfare dependency?

The most profound failure of former welfare policies is that they have traditionally concerned themselves with maintaining the poor's ability to consume through monetary transfers. These policies gave needy families food, shelter and enough money to maintain a meager existence, but no tools with which these families could elevate their status. Michael Sherraden, author of Assets and the Poor: A New American Welfare Policy, argues that poverty cannot be overcome through income redistribution. He says "Income may feed people's stomachs, but assets change their heads." He goes on to say, "Owning assets gives people a stake in the future-a reason to save, to dream, to invest time, effort, resources in creating a future for themselves and their children."

The acquisition of assets in the form of home ownership, microenterprise and education/training is the path to self-sufficiency. There are huge differences, however, in terms of asset ownership between the poor and the non-poor. The Corporation for Economic Development (CFED), based in Washington, D.C., reports that the distribution of assets in the United States is even more unequal than its income distribution. The top 10% of Americans earn 40% of all income, and that the top 1% own as many assets (measured by education, business and home ownership) as the bottom 80%. This inequality is abetted by the fact that welfare policies have historically discouraged the poor from saving.

Traditionally, welfare families were penalized if they saved over a certain amount of money, faced reduced benefits if they worked over a certain amount of hours per week, and were cut off from benefits if they became homeowners. On the other hand, the government has subsidized asset building policies for the middle and upper classes by supporting home mortgage deduction, preferential capital gains and pension fund exclusions (CFED). The US policy for asset building is discriminatory, favoring savings initiatives of the middle and upper classes and discouraging those of the poor. The question stands, how can the same mistakes of the past be avoided?

While many of Clinton's new policies are correctly geared towards helping the poor, more attention should be focused on policies of savings and asset investment. Fred Siegel and Will Marshall, both of the Progressive Policy Institute, a Washington, D.C. think tank, identify three key goals for social programs. A first priority is to halt the expansion of social programs that redistribute wealth and income, as these programs serve only to maintain consumption. Second, a more market-based approach to investment in human capital and asset-building is needed to empower the poor. Finally, a shift from federal bureaucratic endeavors to local enterprise must occur. Sherraden asserts that assets "connect people to the economy and society." His research indicates that asset acquisition makes people better citizens. Assets improve household stability; help people make the psychological connection between the present and the future; stimulate development of other assets, specifically education; increase political participation; and improve the welfare of offspring.

An initiative that embraces the ideas of investment in human capital through asset-building is the Individual Development Account (IDA). While current TANF legislation is based on the goal of getting people off welfare and into the workforce, most of the programs designed to aid former welfare recipients secure jobs do only that. These programs do not cultivate long-term employment goals. Furthermore, the focus is limited to employment which does not address the need for help in building multiple assets, including home and business ownership, as well as education and training.

The impetus to train former welfare recipients has brought about a more generalized discussion. Why just provide training for those not currently in the workforce or for those in the workforce but at a low skill level? Why shouldn't all incumbent employees have a chance to better themselves through training and classes targeted to their current and future work goals? And, shouldn't these people have access to other asset-building activities, such as enterprise and home ownership, to complement their education and training. These are the issues that IDA strives to address. IDAs can be established regardless of age. The accounts are started with a personal contribution and can be matched by a variety of other sources; employers, foundations, community groups, religious institutions and government at the state and federal level. These accounts are monitored by community organizations, non-profit institutions and local economic development organizations. Money can be withdrawn by the individual accountholder for uses that yield high returns to society: education, home ownership and business enterprise.

The idea of IDA, also referred to as Individual Learning Account (ILA) or a Family Savings Account (FSA), is increasingly surfacing in policy debates. Twenty-four states included provisions for IDAs in their most recent welfare legislation. These accounts would take the form of a restricted savings account, similar to an Individual Retirement Account (IRA). The primary difference in the format and goals of an IDA and an IRA is that IDAs are geared for use throughout the lifetime, while IRAs are meant for use in the latter part of life. Also, IRAs are intended to maintain economic security after retirement, while IDAs are meant to drive and enhance economic security throughout one's lifetime.

Finally, IDAs are fully portable and self-managed. What benefits does an employer receive by matching funds for an employee who may eventually proceed to another job? Why should a community-based organization make a monetary investment in an individual who may move to another county or state? The goal of universality for IDAs is why employers and community organizations must make an investment in their employees and citizens. If an employer makes an investment in an employee and that employee then moves on to another job, the employer must choose a replacement for that employee from an applicant pool. The understanding is that just as the employer made an investment in the employee who took his skills elsewhere, the employer will now be able to choose from an equally qualified applicant pool. The pool is made up of individuals who benefited from investments made by other employers along the line. Each employer has the incentive to make this investment knowing that other employers are doing the same.

The values on which IDA is modeled have their origins in American history. The Homestead Act, passed in 1862, guaranteed 160 acres of land in Americas' Western frontier to each settler who promised to live on and cultivate the land for five years. This act helped half a million families acquire land and homes. By entrusting these families with a stake in their future, the settlement and development of an entire portion of the country was realized. Another program in American history that invested in the public is the G.I. Bill, which subsidized World War II and Korean War veterans' efforts to educate themselves. This bill also had provisions to help veterans take out loans for homes and business. The G.I. Bill was vital to the economic expansion that occurred after World War II. The Joint Economic Committee of the U.S. Congress reports that "for every dollar the government invested in education under the G.I. Bill, the nation received at least $5 and much as $12.50 in benefits." Instead of relying on income distribution, the Homestead Act and the G.I. Bill made investments in people, empowering them to achieve personal change while producing widespread economic development for others. Such an investment is what the CFED calls "unleashing the common genius of the American people."

Acceptance of these types of policies requires Americans to recognize that pouring more money into social programs that fail to create a market-based incentive structure for the poor is outdated and a proven failure. Substantial social change will only occur if America and its leaders accept the defeat of past social programs and work to create new ones, such as IDA, to create an incentive structure for people to better themselves and their communities.

Erika Alexandra Melman is a first-year student at the Irving B. Harris School Graduate School of Public Policy.

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