Saving

Live Chat: Savings as a Path Out of Poverty, Tuesday at Noon ET

Troy K. Schneider — Mon, 19 Oct 2009 16:39:00 -0400

Microcredit may have won a Nobel Prize, but evidence is mounting that savings-based programs are more effective tools for providing a pathway out of poverty.

In this week's New America/Politico Live Chat, Jamie M. Zimmerman, New America's deputy director of the Global Assets Project, will be taking questions at Noon ET Tuesday on the role of savings in international development, from the United States to Mexico to Uganda. For background on this issue and some promising pilot programs, please see the video from last week's event, "Savings as a Tool for International Development."

UPDATE: This online discussion has concluded. A complete transcript is available below..

New America Foundation: Jamie Zimmerman

* * *

Past Chats

Previous New America/Politico chats have their full transcripts archived:

Schwartz Fellow Dayo Olopade on the Obama Administration's faith-based initiatives
Education Policy Program staffers Lisa Guernsey and Christina Satkowski on the future of Head Start
Health Policy Program Director Len Nichols on the current state of health reform
Energy Policy Initiative Director Lisa Margonelli on the prospects for real progress with climate policy legislation.
Schwartz Fellow Nicholas Thompson on Cold War lessons for Afghanistan

From Africa to America, Low Savings Rates: Similar Ailment, Differing Solutions?

Leila Seradj — Mon, 05 Oct 2009 21:11:00 -0400

As the Program Associate for both the larger Asset Building Program at the New America Foundation, and the Global Assets Project, which is a joint New America-Center for Social Development venture, I sometimes feel like I have a foot in two worlds.

I'll give you an example. In a widely-circulated column last week, The Next Culture War, the New York Times' David Brooks asserts, in a nutshell, that it's time for a culture shift in America- a shift in the way we think about consumption. He reviews the thrift-oriented nature of America's past, and laments the materialism that characterizes U.S. society today. Brooks further highlights the misdirected nature of today's debate around morality and values- one that focuses too much on, say, prayer in school and theories of evolution, rather than taking on the economic values of a society that encourages excessive consumption.

Meanwhile, I'm in the midst of doing desk research for phase I of the multi-partner youth savings pilot project, of which the Global Assets Project is a part. While trying to find (in vain) the average savings balance per account in Ghana, I stumbled upon this article in Africa Renewal, a publication of the U.N., on boosting domestic savings in Africa.

Sub-Saharan Africa has, unsurprisingly, the lowest savings rate in the world, with a gross domestic savings rate of around 18% in 2005. And it's for reasons that may or may not seem obvious:

- Inadequate financial services: only 20% of African families have bank accounts. Large distances to banking institutions are a major factor, as bank branches are few and far between. Ethiopia, Uganda, and Tanzania, for example, each have less than one bank branch per 100,000 people;

- High minimum deposits and balance requirements;
- Considerable amount of documentation required, which many Africans do not have;
- Little incentive to save, due to low interest rates on savings in formal financial institutions.

As a result, banks tend to have fewer resources to make loans, and therefore charge high interest rates.

Samuel Gayi, a senior economist on Africa at the United Nations Conference on Trade and Development (UNCTAD), stated that while many households do hold savings, "The problem is that these are being held in the non-financial form. These are not being significantly channeled into productive investments."

How can Africans begin to exploit these assets? Gayi believes that what is needed is to "introduce new financial products or instruments that respond to the saving needs of households"; ones that "permit easy accessibility" and allow for "small transactions at frequent intervals."

This is what the Global Assets Project, along with its partners at Save the Children, CGAP, and CSD, are aiming to do, with its pilot project to initiate youth savings accounts in three respective African, Asian, and Latin American countries. While the selection process is still underway on the ground, its aim is to get young people to get in the habit of savings, with help from a savings match.

So while the discourse surrounding development in Africa has focused on ways to mobilize foreign assistance, it cannot afford not to think about bringing more accessible financial services, and about mobilizing savings, to the continent.

And I couldn't help but think that the juxtaposition of these two issues- low savings rates in the U.S. and Africa- could serve as a valuable lesson for Americans. Because while we have a hard time keeping money in the bank, most Africans don't save because they don't have access to the bank in the first place.

U.S. Savings Bonds for All

Alejandra Lopez-Fernandini — Wed, 09 Sep 2009 20:24:00 -0400

In his Labor day radio address, President Obama announced that beginning in 2010, taxpayers will have the option to purchase a U.S. Savings Bond when filing their federal taxes. The decision to increase access to what is possibly the most secure and low-cost, savings product sends important signals.

The Administration is showing a commitment to promoting economic recovery and household stability through common-sense means and is willing to act on implementation-ready, low-cost, practical, and scale-able proposals. You can find the full text of the White House press release here.

Why this is good news - especially for small savers

Returning the U.S. Savings Bond purchase option to the tax form will make it easier for more than 100 million tax filers to purchase this U.S. security with funds from their federal tax refund when they file their taxes. This maximizes simplicity and minimizes the hassle for the taxpayer who wishes to save a portion of their refund. Those who intend to save and are deterred by limited or unaffordable options can now commit the money to savings before they receive it and are tempted to spend it.

Our good friends and partners, the D2D Fund, have been a leading force behind the savings bond proposal (we are a member of the Savings Bond Working Group). D2D summarized in their recent report, Yes We Can: Inclusive Saving at Tax Time (page 7), the key features of the policy just announced by the President:

Easy - both to implement and to explain to savers
Inexpensive - requires no new annual appropriations, nor fees for citizens
Tested - has precedent; people know and trust it
Inclusive - will help all Americans, especially those most in need of and likely to benefit from saving

What's so special about a U.S. Savings Bond? I think my grandmother gave me one of those....

U.S. Savings Bonds have fallen somewhat out of fashion, at least from their heyday during the World Wars when they were marketed as war bonds to finance our nation's debt.

But sales of Series EE and I Savings Bonds, the most attractive types for smaller investors, have been stagnant for years, reaching a seven-year low in 2007 despite retaining a reputation as an easy-to-use and trusted brand. Here are some of the advantages of a U.S. Savings Bond:

Low purchase price--$50 minimum and no fees or extra costs
No risk to your principal investment (I-bonds are inflation protected)
Exempt from state and local tax
Secure, backed by the full faith and credit of the U.S. Government
No bank account or credit check needed for purchase
No fancy investment knowledge, just a desire to save!

For a quick overview, check out our two-page brief here.

Click here for a short video interview we conducted with Tim Flacke, D2D Fund Executive Director.

The asset building community has long advocated increasing access to affordable, simple savings solutions which fill a need for all savers, but especially for smaller sum savers who have more limited options. D2D also leads a successful pilot initiative which is showing the potential of Savings Bonds to meet the savings needs of low-income tax filers.

Our work is not over yet

While we have reached one critical milestone in increasing affordable savings options to all Americans, our work is not over yet. Some critical steps to getting the most out of Savings Bonds remain, including:

Restore Marketing

Outside of the D2D-led national pilot project, U.S. Savings Bonds are not widely promoted. The availability of bonds, and how to buy them, has suffered low visibility since Congress eliminated the program's marketing budget in 2003. According to D2D's 2009 pilot survey, 61% of respondents didn't know where to buy bonds at all. Renewed marketing of bonds would increase their profile among a wider sector of the population, and likely lead to more sales. The costs of restoring the marketing budget may be offset by the potential increases in personal household savings levels and reduced dependency on public sector supports during economic downturns.

Leverage Existing Infrastructure

Secondly, we must continue to leverage existing systems to streamline the delivery of critical asset-building policies. The IRS Form 8888 (also known as the Split Refund Form) is likely to be the place where Savings Bonds are offered to taxpayers. We believe the Form has further potential and will be best utilized when it can facilitate new account opening, as outlined in the Saver's Bonus and the SAFE-T Account proposals.

Continue Learning from the Pilot

Lastly, the D2D Fund pilot continues, and is currently accepting applications for next year. With many changes likely to happen incrementally, it's important that the field continue learning both about implementation and savings behavior.

More policies will be needed to help get families saving again, but this is an exciting and major first step by the Obama Administration as our national economy begins on the road to recovery by shifting from borrow-and-spend to save-and-invest. In his address, the President reinforced that the nation must depart from its current course "that put the interests of the short-term ahead of the needs of long-term." By mainstreaming the U.S. Savings Bond, countless households will have better access to a liquid saving option. That Savings Bonds are fully under an individual's control is a key ingredient in promoting a sense of security, a personal safety net that can be tapped in the event of an unanticipated expense, or to seed investment in a bigger asset purchase. We can think of no better way to back our own future than with a U.S. Security.

Yunus awarded Medal of Freedom: implications for bottom-up approaches in foreign assistance?

Shweta Banerjee — Fri, 07 Aug 2009 19:06:00 -0400

The recipients for this year Medal of Freedom have been announced and include Nobel prize winner, Muhammed Yunus. When Yunus (then the chair of the rural economics program at the University of Chittagong) launched the Grameen Bank as a pilot research project in 1976 in a post-war Bangladesh, his motive was to extend credit and foster micro-entrepreneurship amongst the poorest that were largely ignored by the formal Banking sector. Since then, Grameen has become synonymous with micro-credit and has inspired, along with other pioneers such as SEWA and ACCION, many other lenders to mushroom across the world. However, its own evolution as an organization reflects advancements in the microfinance field as a whole, which is increasingly shifting its focus from credit to savings.

The recently published "Portfolios of the Poor" (2009) provides an account of the transformation of Grameen Bank. In 1998, a devastating flood in Bangladesh only exacerbated the declining loan portfolio of the Bank. This spurred two major reforms. The first was loosening some ends of an erstwhile tight system of rules, making the terms of repayment more flexible. The second was to focus on savings and deposits. A personal savings account was introduced that allowed clients to save and withdraw from their accounts at any time. It also started to offer fixed deposit savings which would provide a good interest rate if the individual guaranteed to save at least $1 a month over five or ten years. Grameen has evolved from being a micro-lender to being a retail bank but one that tailors its products for the poor. In 2002, the total savings portfolio of Grameen Bank at $142 million was 68% of the total lending. In 2005, the savings had jumped to $460 million, surging ahead of the total lending which had also grown to be about $406 million.

In the February 2009 Budget overview, the Department of State and International Programs, USA, does not set savings led microfinance or micro entrepreneurship as a priority. The budget intends to put the United States "on a path to double foreign assistance" that will help the "world's weakest states reduce poverty, combat global health, develop markets, govern peacefully and expand democracy worldwide". In 2010 the projected expenditure, excluding food aid, is projected to be $51.7 billion - a 26% increase from $40.9 billion in 2008. The question here is: what kind of new initiatives would all of this extra cash launch? This is a good time to push for more investments in bottom-up approaches that focus on savings and asset building. It is necessary that recognition of innovation, such as that of Yunus, translate into investments in these types of poverty-reduction approaches through adequate funding.

To read more thoughts on asset building through America's foreign assistance from my colleagues at the Global Assets Project, click here and here. Ray Boshara's article on "Combating Poverty by building Assets" can be found here.

Shweta Banerjee is a consultant with the Global Assets Project at the New America Foundation.
Banerjee@newamerica.net

Much Ado About the Personal Savings Rate

Alejandra Lopez-Fernandini — Mon, 06 Jul 2009 22:20:00 -0400

The Personal Savings Rate (PSR) once again made headlines recently when the Department of Commerce released the May 2009 figure, which was a whopping 6.9%. For some perspective, April's 2009 rate was only 5.6% and the last time the PSR rate was this high was back in April 1993.

But what does a PSR of 6.9% actually mean? Are Americans really saving more than they have in over a decade?

The PSR measures personal savings as total disposable personal income less personal outlays (expenses). A lot happened in the last couple months that has pushed up personal income and pushed down personal outlays, which drove up the PSR.

For instance, one-time payments to seniors, veterans, and others as part of the stimulus increased personal income by 157.6 billion in May, and one-time tax credits to working low-income populations decreased personal outlays by 49.8 billion. Other big changes that pushed up the Personal Savings Rate for this year's first quarter were government unemployment insurance benefits, which increased 34% from the fourth quarter of 2008.

If we continue to save at the Quarter I 2009 rate, 4.3%, for the rest of the year, as a nation we would save $464.2 billion. This is a huge difference from Quarter I 2008 rate, 0.2%, which if continued throughout 2008 would lead to collective personal savings of $20.6 billion.

Pro's and Con's

The PSR data is useful for observing savings trends and to measure large movements in earning and consumption. It takes a lot to move from 0.4% in 2007 to 1.8% in 2008, that's clear.

But like all data analytics, it has a number of limitations.

The PSR measures savings by taking the difference between income and consumption. This means that it picks up not only reductions in spending (which lead to savings), but also increases in income -- even if they are temporary.

LA Times reporter Tom Petruno identified this shortcoming in a recent piece--and kudos, because he adds what is all too often missing from typical PSR discussions.

The PSR does not explain shifts in saving decisions, or monitor debt repayment.

As an aggregate measure, the PSR is more impacted by the behavior of high wealth households. It is less sensitive to income and consumption changes by lower-wealth households, and thus is a less useful measure for those interested in policy design to increase savings by those who need it the most.

Does the 6.9% mean we've returned to become a nation of savers? I'm not sure.

Consider this chart. You'll see increases in personal savings rates corresponding with recessions (and their decrease timed with the recovery).

Households of all incomes would prefer to save to protect against unexpected disruptions in income or to cover emergency expenditures, to acquire assets (such as a home, higher education, or to start a small business), and to build a next egg for retirement. They may be doing this, but the PSR doesn't capture it.

We know that about one quarter of all American families do not have three months worth of income in financial wealth resources to weather an unspecified emergency expense. Enacting policies to help more families save should remain a priority-our work should not be guided by a flawed measure.

Overall I think it's far too simplistic to say that Americans saved 6.9% of their income in May.

We'll keep watch for the monthly press releases and hope that as the nation recovers economically, households prioritize household saving for precautionary and asset-building purposes. The true test of whether we have reverted to more thrifty ways will be if we can maintain a strong savings rate through and well beyond the recovery.

Melinda Gates: "Saving Money is a Lifesaver"

Leila Seradj — Wed, 27 May 2009 17:25:00 -0400

In this week’s Newsweek, Melinda French Gates—co-chair of the Bill and Melinda Gates Foundation—makes the case for access to saving instruments as an oft-overlooked element of global poverty reduction. Citing the microcredit boom as opening doors for the poor, she cautions:

But loans are not enough. Savings accounts could help people in the developing world weather unexpected events, accumulate money to invest in education, increase their productivity and income, and build their financial security.

She continues:

Fortunately, this is a moment of opportunity. Innovation and new policy ideas are uniting in ways that will lower the cost of savings and bring safe financial services to the doorsteps of the poor.

Referring to agent and mobile banking as exciting innovations with much potential to bring financial services to the poor (including a safe place to save), Gates emphasizes the urgency of the moment to bring such innovations to billions around the globe.

We couldn’t be more in agreement. At the heart of the Global Assets Project is its mission to advance policies and innovations that advance low- to moderate-income individuals’ ability to build savings and assets. This includes instruments that could be channels to bringing financial services to the billions who lack it. From linking the many conditional cash transfer programs that are sprouting around the world to savings and access to financial service, to giving young people access to a place to save, to connecting remittance services to savings instruments—the possibilities are many.

Microwaves as Luxury, and a Tangled Safety Net: Thoughts from the Weekend NY Times

Leila Seradj — Tue, 12 May 2009 17:43:00 -0400

The recession has undoubtedly shifted a lot of paradigms lately, and I think all would agree that it's gotten Americans to sit up and take notice-- both individually (challenging their own habits of consumption and saving) and societally (coping with cracks in the safety net system). The New York Times has taken notice, as well-- two articles in this weekend's Times merit mention.

The first (Shift From Spending to Saving May Be Downturn's Lasting Impact) highlights the re-emergence of a culture of thrift-- and indicates that, unlike past recessions, it's here to stay for a while:

Consumers have lost a huge chunk of their net worth, in the housing bust and the stock market, and to resuscitate their retirement accounts or children's college funds they will have to channel more of their paychecks toward saving-- unless those asset markets soar again.

But it likewise signals a shift in attitude, one that is increasingly wary of a culture of consumption that has spun out of control. An April Pew Research Center survey, for example, revealed that more Americans were beginning to consider seeming necessities-- like microwave ovens-- as luxury items. (This culture shift was called for by Ray Boshara and Phil Longman in their book The Next Progressive Era, published last month.)

The second (For Victims of Recession, Patchwork State Aid) profiles the devastatingly complex and disconnected welfare system in the U.S. that covers some and neglects others, for reasons of chance or geography, characterizing it as:

...a hit-or-miss system of relief, never designed to grapple with the pain of a recession so sudden and deep. Aid seekers often find the rules opaque and arbitrary. And officials often struggle to make policy through a system so complex and Balkanized.

While untangling the government aid system will take years of work, one step in the right direction would be removing asset limits that penalizes welfare recipients for saving and asset ownership. The Asset Building Program has long encouraged asset limit reform, especially those that discourage benefits recipients from saving and owning assets. (See our 2008 and 2007 Assets Agendas for more on our approach to asset limit reform.)

PODCAST: The Promise of Savings-Linked Conditional Cash Transfers

Jamie Zimmerman — Tue, 12 May 2009 16:09:00 -0400

On April 29^th, the Global Assets Project hosted an event to launch its newest policy brief, "Savings-Linked Conditional Cash Transfers: A New Policy Approach to Global Poverty Reduction," at the New America Foundation. By request, we have created a 10 minute Podcast summarizing the paper and key points from the event, for those unable to attend the two-hour event or watch or listen to it in its entirety on our website or YouTube.

The event, which attracted almost 900 participants in house and (mostly) via webcast, explored the opportunities for linkages between CCTs and savings accounts, the potential impact on financial inclusion and economic empowerment as well as the possible challenges of such a proposal. While the concept of financial inclusion and economic empowerment through CCTs is still in its infancy, participants agreed that it is already building incredible momentum in both social policy and financial services fields.

The podcast , narrated by Jamie M. Zimmerman, includes highlighted remarks from the policy brief co-author Yves Moury (Proyecto Capital) and panelists Michelle Adato (IFPRI), Mark Pickens (CGAP), Marguerite Robinson, and Luis Tejerina (IADB). Please visit our website or contact us for additional information about the policy brief or the event.

Talking Tax Time with Tim Flacke: U.S. Savings Bonds

Alejandra Lopez-Fernandini — Mon, 11 May 2009 19:15:00 -0400

Last month Tim Flacke, Executive Director of the Boston-based nonprofit, Doorways to Dreams (D2D) Fund, and I sat down for a short conversation about the power of an existing but often overlooked savings product: The U.S. Savings Bond.

Click the box below to watch the video, and to learn about the strengths of the product. Specifically, we discuss why policymakers should consider tweaking the delivery and access mechanisms to make these bonds a more robust resource for all American savers, but especially small, first-time or risk-averse investors.

Want to learn more?
Click here to find our two-page issue overview on U.S. Savings Bonds.
Also, the staff and website of D2D is a superb resource. Be sure to check out the forward thinking paper by D2D founder, Peter Tufano and researcher Daniel Schneider.
Lastly, don't miss this NEW and moving 2-minute video of the impact of bonds--in the words of recent bond buyers.

Interested in other "Talking Tax-Time" videos?
Click here for Cathie Mahon and David Newville
Click here for David Marzahl and Melissa Koide

Weighing in on Microfinance and the Financial Crisis

Jamie Zimmerman — Mon, 23 Mar 2009 20:24:00 -0400

Signs point to toughening times for the microfinance industry. A recent article from the Economist has echoed my concerns that selling microcredit (as a concept or a product) will grow increasingly difficult as the global economy stumbles (or crashes and burns) on the heels of a debt-led recession in the United States. Not only in the concept politically less appetizing than it was back when Muhammad Yunus won the Nobel Peace Prize in 2006, the capital fueling the industry is drying up. The similarities and differences between subprime lending that fueled the US recession and the "sub, sub, subprime" lending happening in developing countries through microfinance institutions have been debated and analyzed for over a year now. But only recently has the engine of seemingly-endless capital to MFIs around the world starting slowing, sputtering to slow chug in some instances.

The Economist article argues that the microfinance industry is more insulated from the crisis than many of my colleagues working in the sector would currently state. Just because the Grameen Bank has not faltered in this financial crisis doesn't equate to an entirely healthy sector. Moreover, the decrease in capital, and the resulting liquidity constraints and challenges institutions will face, does not represent the variety of challenges that MFIs, or the microfinance sector, could and will likely face as a result of this crisis. While I commend the Economist for putting on spotlight on this particular problem, the article fails to provide readers with the bigger picture.

Fortunately, CGAP just released last week a more thorough analysis of the potential impacts of the crisis on microfinance. The Focus Note reviews not only the challenges of the institutions, but also those of the clients that frequent these institutions to gain capital for their micro-business or, in many cases, borrow to smooth consumption over time. Essentially, the Note paints a relatively more nuanced picture of the crisis on the microfinance industry and tempers its optimism that the industry is "insulated from the problems of the global economy" (as is speculated in the Economist). On the other hand, CGAP does share my view that this crisis will bring opportunities that could result in a better functioning industry, with potentially better outcomes for the poor.

In my opening remarks at the March 16 USAID panel on Microfinance and the Financial Crisis, I also outlined a number of challenges I either currently see or envision for the industry as the global crisis unfolds, many of which are reflected to some extent in the articles mentioned above, including decreased capital, weakening consumer confidence, increased pressure for tougher regulation, etc.. However, I foresee as serious opportunities for the industry. (Call me hopelessly optimistic, but I prefer to concentrate on opportunities whenever possible, particularly in troubling times.)

First, a debt-led global recession is indeed spurring some to cast a critical eye on debt-led poverty reduction like micro-credit. While this may be understandably worrisome for particular institutions, it's a huge opportunity for the microfinance field in general. The backlash against credit and subprime lending could very well lend itself to a microfinance industry whose health is dependent on a more diverse and balanced portfolio, particularly with an emphasis on savings. In fact, deposit-taking MFIs (who are less dependent on capital investments) are indeed the very institutions most insulated from the crisis so far. Next, the spotlight on savings is not limited to acknowledging the need for deposit-taking for an institutions fiscal health. The microfinance field as a whole is now paying long overdue attention to the other critical financial needs of the poor, namely access to effective and safe savings services. Finally, there is a growing recognition that all people, chief among them the poor and the vulnerable, need to save and create a safety net against economic shocks, rather than relying on credit alone. This is a lesson the US learned too late, but for the microfinance field, it's a very real opportunity to look at economic opportunity and resiliency in a whole new way.

(Transcripts and materials from the March 16 event, including perspectives from other panelists on this issue, can be found on the Microlinks site.)