Joining the 'Ownership Society'

The bad news first. California now ranks last nationally in home ownership. It also has the fourth worst "asset poverty" rate in the nation, meaning that nearly a third of the state's households are on such a financial brink that they'd fall below the poverty level within three months after an unexpected hardship like a job loss or medical emergency.

California's future economy depends on more people gaining access to home ownership and higher education. But it's difficult enough to survive without savings or assets, let alone thrive. Living from month to month makes it impossible to send kids to college or make long-term investments.

What's needed is an opportunity for these families to participate in the investor class. Or, as President Bush put it, to become part of the "Ownership Society."

What would it take for California to achieve the vision embodied in Bush's rhetoric -- a commonwealth where all 35 million California residents can save and invest in themselves throughout their lifetimes?

Here's where the good news comes in. Sacramento leaders from both parties are starting to explore an emerging class of policies known as "asset building" that are also winning remarkable bipartisan support in Congress and elsewhere.

Asset building is about extending the reach of government incentives and financial tools available to higher income people. Today, for example, government spends over $300 billion per year to help individuals and families acquire assets through home mortgage deductions, tax incentives, business investments and retirement savings programs. That's a sound way to build American wealth. The problem is that more than 90 percent of that money goes to households making over $50,000 per year.

The goal of asset-building efforts is to grow the middle class by giving similar opportunities for investments, housing purchases and higher education to lower-income individuals and families.

In Kentucky, a bipartisan proposal called "Cradle to College" would provide every child born in the state with a savings account designed to help pay university tuition. Illinois and other Midwestern states encouraged banks to offer savings accounts for noncitizens. Some states have created incentives for housing and retirement.

In one case, California policymakers are watching a developing idea in Washington state, where a group of Democratic and Republican legislators are crafting a state-sponsored 401(k)-style savings program for the majority of workers who don't have employer-based retirement plans. The Washington proposal would allow workers to divert some of their income before taxes into investment accounts that they could maintain from job to job. Since many companies don't offer retirement plans because they're too complex and costly, the Washington program would allow companies to opt into a system administered by the state and, if they choose, offer matching funds to employee contributions.

For workers who have them, financial experts say these 401(k) savings programs are an essential opportunity to make up the shortfalls of Social Security. But in California, only 39 percent of the state's workers participate in such a program. The Voluntary Retirement Accounts, as they're called, should be an obvious step for California. Not only is there an opportunity for substantial assistance to California workers, but the cost to the state is minimal.

Washington lawmakers estimate their program will be self-sustaining after a start-up cost of about $5 million to $10 million.

It's also an opportunity that thousands of California workers would pursue. Until recently, there was considerable debate about whether families or individuals living on month-to-month incomes would set aside money for savings. After all, economists estimate that even the average American savings rate is at .4 percent of pretax income, the lowest level since the Great Depression. But a series of pilot projects -- including in California -- demonstrates clearly that low-income individuals and families will set aside significant savings when there are incentives such as matching funds.

In Silicon Valley, more than 1,300 savers with average median income of $24,000 have saved more than $1.5 million since 2000. With financial training and matching funds, more than 100 of these savers bought homes in high-priced Northern California. And more than 500 used their savings to buy homes, go back to school or start college funds for their children.

Eric Castro-Calderon, a librarian, and Sylvia Olano, a lab technician, are beneficiaries. The San Francisco couple -- parents of a young daughter -- have dreamed of buying a home ever since they left Peru in 2000. In 2003, they approached the nonprofit Earned Assets Resource Network (EARN), which matched each dollar they put into a home savings account with $2. They also participated in financial training classes, obtained a credit card to build their credit and began setting aside money from each paycheck. After several years, they had enough to purchase a three-bedroom home in Antioch.

"We never dreamed that it would be possible to own a home in the Bay Area," Olano said. "Our eyes were opened to this possibility." Even more than most states, California badly needs to spur widespread asset development. A study last year by the Asset Policy Initiative of California found that two-thirds of the state's 58 counties had more than a quarter of residents living in asset poverty. In 15 percent of California's counties, more than 35 percent of residents live in asset poverty.

But while the need to broaden asset ownership is great, the promise is even greater. When families -- including very poor families -- own assets, they are more likely to work harder, enjoy better physical and mental health, make educational plans for their children, feel more confident about their futures, take better care of their property and take part in community affairs, according to recent research. What distinguishes asset-building solutions is their ability to grow the nation's economic pie over time, instead of just redistributing finite resources.

Today's asset-building programs have a legacy in the nation's post-war GI bill and, even earlier, in the Homestead Act of 1862. America's broad middle class still owes much to these two government social programs. The Homestead Act, designed to kick-start a fledgling nation, gave 160 acres of land to many Americans willing to occupy and cultivate it for five years. Today, 25 percent of American families can trace their wealth to the Homestead Act. And in 1944, the GI Bill helped millions of Americans buy a home or go to college. Today, economists estimate that the GI Bill generated a 7-to-1 return on every dollar invested by the government.

Politicians on the left should be attracted to asset-building policies today that give government a similar opportunity to grow the middle class and profoundly shape the life quality of American workers. But politicians on the right should also recognize that the same asset-building policies have new roots in President Bush's call for an "Ownership Society."

In his Inaugural Address last January, the president declared, "We will widen the ownership of homes and businesses, retirement savings and health insurance, preparing our people for the challenges of life in a free society." The best way to achieve the president's goal is to give more people access to the financial tools that are still limited to a small share of the population.

There are many short-term steps California can take inexpensively, such as the voluntary retirement accounts and outreach efforts to enlist the 22-percent of Californians who have no bank account at all.

But there is also tremendous potential for bold investments to change lives in the future.

The best example is Kids Accounts -- a government created savings program designed to provide every child born with opportunities like higher education, home ownership or retirement savings. They are a model for California and already a new reality elsewhere.

Beginning next year, each of the 700,000 children born in the U.K. will receive about $400 in a "Child Trust Fund," with the poorest one-third getting about $800. Kentucky's initiative would establish a 529-style college savings account for every newborn in the state. Finally, bipartisan legislation called the ASPIRE Act -- led by unlikely U.S. Senate bedfellows Rick Santorum, R-Penn., and Jon Corzine, D-N.J. -- is pending in Congress. It would create a savings account at birth for each of the 4 million children born in the United States each year.

California should also create an investment account at birth -- a California Kids Account -- for each of the 540,000 babies born every year in the state. Research shows that a small amount, especially over time, can go a long way. The California accounts could be established with as little as a one-time $300 deposit. Parents would be encouraged to add up to $1,000 per year in the tax-free accounts that could be accessed only at age 18 for college education, first-time home ownership or retirement savings.

For a family that is able to save $50 per month, that investment would grow to nearly $19,000 when the child turns 18. If the child does not use the account for college, it grows to $34,000 by age 30 and $185,000 by age 65.

The cost to the state would be about $160 million per year. But policymakers must realize that this is an investment, not just an expenditure without a return. Like the GI bill, this policy would increase wealth to a broader population and make an even more valuable return in the economy and the quality of life for all Californians. The cost of ignoring the state's lagging wealth problem is far greater.