Keynote Address by Susan V. Berresford at the Harris School of Public Policy Studies, the University of Chicago
October 6, 2005
I am delighted to be here tonight. Your distinguished university has always been a source of fresh ideas, scholarly excellence and inventive practice. And the Harris School exemplifies the very best of that tradition.
Students and analysts of public policy are here at the Harris School to develop knowledge and innovations to address some of our nation's most serious social problems. Some of those problems were painfully on display recently in New Orleans. And certainly the response to Hurricane Katrina needs close examination. But the social and economic isolation of New Orleans' poor families surely draws our attention to profound policy failures.
With that in mind, I want to make a case tonight that newly minted and veteran policy professionals turn back to basic questions of public morality. By that I mean the fundamental values that frame our nation's aims and our responsibilities to each other. As we seek policy solutions, we must ask: What lies at the core of our national identity? What are the potentially unifying ideas that will allow us to build common ground and greater consensus? Can we break away from the comfort of hardened political views to embrace the need for balance?
To do so, I think we need to hold fast to three American ideals:
- We want a vibrant market economy that generates income and assets, and yet, at the same time, we need altruistic policies that safeguard the opportunity for all Americans to participate successfully in economic life.
- We want to honor the core principles in our Constitution and Bill of Rights, and we must demonstrate that they can serve our many-cultured democracy within its rich and complex immigrant legacy.
- We want national and community safety and yet, at the same time, we must protect our liberties so as to avoid repeating violations of human rights traded away in past periods of national unease.
In short, we want:
- An altruistic opportunity society
- A diverse, many-cultured democracy
- A safe and just nation
At the Ford Foundation, we strive to seriously engage with all three aims. But tonight I will focus on one. How to develop public policy that helps build an altruistic opportunity society that addresses persistent poverty?
I'd like to start by noting that a silent revolution in opportunity is taking place in American social policy. It is "silent" because it is a gradual, step-by-step process proceeding along many paths. "Revolutionary" because those incremental steps, taken together, constitute a fresh direction for social-policy thinking and practice.
For more than a half-century much of American poverty policy has been concerned with combating poverty through maintenance programs. Welfare, public housing, job training, food stamps and other measures were devised to enable poor families to maintain a minimum living standard. Some believed that these programs stigmatized recipients and others believed they fostered dependency. And most importantly, far too many poor families never got back on their feet or fell through cracks in the system.
Despite these shortcomings, maintenance programs remain important parts of the social safety net. Without them, suffering and poverty would be even worse than what we see today. And, of course, we can improve them.
Meanwhile however, new thinking has taken root alongside ideas about maintenance. It focuses on building the financial and asset-accumulation capacities of low-income individuals and families. In many ways, the new asset-building strategies hearken back to the past. In the 19 th century, the Morrill Land Grant Act and the Homestead Act of 1862 extended higher education opportunities and enabled people to own their own farms. After World War II, the GI Bill, federal home mortgage loans, and other programs helped create suburbia and a mass middle class. Those policies drove rapid post-war economic growth and produced a better-educated workforce and increased community and human capital. However, in their design and implementation, these programs often had limited value for minorities — a very significant shortcoming we must remember and return to—although they helped many others rise and prosper.
Today, we see the re-emergence of asset-building elements again in national policy. We know them as IRAs, Roth IRAs, 401k plans, Keogh plans, 529 college savings accounts and medical savings accounts. They enable middle class Americans to accumulate assets to meet retirement, education, housing, health and other needs. These programs prompt private action, and they are enabled by government tax policy that subsidizes asset accumulation.
But they bring scant benefits to low-income families since the poor do not benefit much from income-tax deductions. Their major, often only, tax liability is the fixed payroll deduction for Social Security and Medicare. So only 7 percent of those tax benefits go to families whose incomes are below $50,000. And let's remember that while the poverty rate based on income is officially at about 11 percent, the asset-poor account for about one-fourth of the population. Among minority households, that rate is almost one-half.
The question then becomes: will we once again try to create an altruistic opportunity society. Will we go beyond minimal maintenance programs and extend asset-building programs to low-income families? There are two reasons for an affirmative answer.
First, as a matter of simple fairness, we ought to be saying loud and clear, through policies and action: People who play by the rules should be able to secure the basic necessities of life in the 21 st century — education, health care, their own homes and a savings cushion for the tough times that are inevitable in a dynamic market economy. That simple principle appeals to many people and has bi-partisan support. It is consistent with American values and ideals.
Second, we are in peril if we disregard the poverty and marginalization of others in our midst. Simply stated, the U.S. will not prosper in the world economy unless it has an educated, competitive and creative work force. Other countries will overtake us as they do a better and better job developing their human and community capital.
The Ford Foundation supports a variety of programs whose goal is to establish asset-building vehicles that are easy to use and consistent with our country's culture. We also fund objective evaluations of them and, for the successful ones, seek ways that they can be scaled up to generate new national policy and practice. We see these innovations as add-on's to national policy and not as substitutes for basic, safety net maintenance.
Let me give a few examples. I will begin with the concept of Individual Development Accounts, or IDAs:
You can think of IDAs as subsidized savings accounts for the poor. Low-income individuals make deposits into an IDA account. Since most low-income families find it hard to meet their living expenses, much less put aside savings, their deposits are matched by the project sponsor. Sometimes the match is an even dollar for dollar; sometimes it is two or three dollars for each dollar deposited. Those matching dollars provide incentives to make saving a habit. At a later point, savers can withdraw their money for specific approved purposes such as buying a home, starting a business, or furthering their education. Many of the programs require savers' participation in savings clubs, financial counseling and homeownership classes.
When IDAs began as experimental policy, conventional wisdom said that poor people would not save or not save enough. Stereotypes about tight budgets, instant gratification, and others were trotted out. Also, by middle-class standards, even with triple matching, the sums low-income people can put away can seem quite small.
But those negative stereotypes now seem off-base.
We now know that if poor people have the incentives and structures to save, they will. We have found that even the very poor—those with incomes 50 percent below the poverty line—save at the same rate as people whose incomes are up to double the poverty line. And small sums can lever big change. Despite the relatively short period in which IDAs have been in existence, savers say they have helped them set goals for the future and have given them greater control over their lives. These are important but intangible changes; we should not minimize their importance. On the tangible side, some have already made withdrawals for down payments on homes, to enroll in schools, or start their own businesses.
Various Ford-supported experiments are under way to determine the best way to scale IDAs into a nationwide program that can be a centerpiece of national asset-building policies. We already see IDA's gaining political traction. The federal government is participating in IDA demonstrations and has encouraged states to set higher asset limits for those in public assistance programs to enable them to save. More than 40 states have passed some form of asset-friendly initiative, typically with bipartisan support. So, the idea has "legs."
Ford also now supports an exciting variant of the IDA idea, and that is the second asset-building example I want to discuss — Children's Savings accounts, or CDAs. The idea is simple: At birth, each child gets a savings account, seeded later with public money at key intervals and supplemented with periodic deposits by family, friends, other sources and the youngsters themselves. These can be matched in some of the models, and when the child reaches 18, the money is available for such purposes as post-secondary education, buying a home, starting a small business, or meeting a medical emergency.
Since a third or more of American children are asset-poor, this will help many low-income young people pay for college or other productive investments. Side benefits are considerable, too. Children and their families can have higher expectations and expanded future horizons.
One very important outcome would be greater advanced workforce preparation and higher college attendance and graduation rates for young people from low- and moderate-income families. Traditionally, young people from less well-off families went to public institutions. But now, public colleges and universities are raising fees as states contribute less and less to their budgets. Loans, and tuition assistance are available and sometimes grants, but too often low-income families are not aware of them. This is especially true of minority and immigrant groups. A Ford-supported study by the Tomás Rivera Policy Institute found that Latinos in major metropolitan areas were uninformed about college financial aid. Two-thirds of Latino parents did not get any financial aid information before their children left high school. We can correct that information imbalance. But beyond better information about loans, Children's Savings Accounts have the potential to help build people's confidence about taking on the costs of college.
Ford is supporting a national initiative with CSAs that is measuring their effects on children and their families, and, as success occurs, advocating for CSAs as a universal public policy. The CSAs are set up through partnerships with local community organizations such as Boys and Girls Clubs, Head Start programs, schools and others. And there is an experimental component to test the effect of tying CSAs to existing 529 college savings plans that mainly now serve middle- class families.
However, support for CSAs is already moving onto the fast track. In July 2005, a bipartisan bill was introduced in both the Senate and the House. Called the ASPIRE Act, it would deposit $500 into a Kids Investment and Development Savings account for every newborn baby. Those from households below the median income would get a larger government deposit and be eligible for added contributions. Account earnings would be tax-free and no withdrawals could be made before 18. After that, the account could be used only for such asset-building purposes as post-secondary education, buying a home, or retirement.
Inspired by the American IDA example, Great Britain has already established a Child Trust Fund for every newborn. The British government endows each baby with $400, up to double that for the very poor. Smaller payments are made when the child reaches 5, 11, and 16, and individuals can make tax-free contributions to the fund. At age 18, the child can access the account. So IDAs and CDAs already have developed significant political appeal.
Let me now turn to a third opportunity and asset-building area in which Ford has been involved: Access to homeownership.
For most Americans, their home is their single most valuable asset. So it should come as no surprise that most participants in IDA projects say they would use their savings to buy a home of their own. At one time, homeownership was virtually an impossible dream for poor families. No longer.
Fruitful partnerships among banks, nonprofit groups, and foundations are testing new ideas about homeownership. One Ford-funded program involves commercial banks, Self-Help, a nonprofit community development organization in North Carolina, and Fannie Mae. Our goal was to help very low-income families across the U.S. buy homes and to test new lending practices that enable banks to assist households not served by conventional mortgages. In the program, based on a special screening system, commercial banks and credit unions make loans to low-income families whose credit scores would normally block them from obtaining a mortgage. Self-Help purchases the mortgages from the lenders and resells them to Fannie Mae. The Ford Foundation provided $50 million to Self-Help to guarantee the $2 billion in mortgage loans Fannie Mae would purchase over five years.
Ford funds a study of the initiative by researchers at the University of North Carolina. One important research finding so far is that the demonstration has spawned a variety of innovative and flexible mortgage products. These new products have enabled more than 27,000 households in 48 states, who traditionally would not have qualified for conventional loans, to become homeowners. Almost half of the borrowers are from low-income, minority groups. A third live in rural areas and nearly 40 percent of the households are headed by single women. So these high-risk groups are being included where formerly they would have been excluded.
Another important finding is that the families in the demonstration are building wealth. Virtually all of the homes increased in value. For example, the median value of the borrower's equity (that is after subtracting mortgage balances) is over $25,000. Since their median down payment was about $1,700, their equity has increased more than ten-fold.
Further, the large majority of the borrowers—80 percent—have perfect repayment records, including two-thirds of borrowers with the highest credit risk. Contrary to the industry's expectations, their mortgage repayments conform to the standards of the prime lending market. If these results hold, we will see bank and secondary market policies change so that far greater numbers of asset-poor families can become homeowners.
Ford supports other organizations and programs whose work connects low- and moderate-income families to the financial system. For the past two decades we have helped to promote the growth and build the capacities of the community development credit union movement. These organizations are specifically chartered to focus on the financial needs of under-served low-income people and communities.
Ford also works with innovative new private, for-profit organizations, such as one called Pay Rent, Build Credit, which has a Ford grant to establish partnerships with community groups. The idea behind Pay Rent, Build Credit is simple. Rent payments don't build credit histories the way mortgage payments do. So many renters have a difficult time getting loans and mortgages, although their payment histories should justify higher credit scores. Pay Rent, Build Credit has a free Web site service that allows users to create their own credit files documenting payments for rent, utilities, cable bills, and others. The company makes its money by selling those verified reports, with client permission, to banks and other lenders.
I think each of these stories demonstrates the complex and fascinating world of policy innovation. It engages business, government and nonprofit organizations, as well as families' own efforts to improve their situation, and it takes time and patience. As a foundation, we can and do take the long view. Universities do this as well. Our role is important because so many policy makers in office face the demands of short time horizons driven by near-term political pressures.
We have been encouraged by legislative interest in these asset-building strategies. But our dedication to asset building for America's most disadvantaged began first with an idea, a commitment to moral principles. Ideas matter. Principles matter. So it is good to go back to the basics of our beliefs and dreams.
In a truly altruistic opportunity society, public morality would prompt us to construct many ways for disadvantaged people to strive and compete with a fair chance of real success -- not just treading water. And, among the means we would use are savings and homeownership -- crucial assets that help families cope with life's ups and downs in a dynamic market economy. Of course there are many other assets we would consider as well.
A true opportunity society would make sure these assets were attainable for all Americans through hard work and sacrifice. America's great investments in asset building such as those I mentioned earlier (The Morrill Land Grant Act, the Homestead Act, the GI Bill and post-war federal mortgage programs) were those types of national investments in the country's people and future. It is tragic that the racial prejudice of this country's past blocked these programs from helping minorities. But we can make a long overdue correction now if we place asset building centrally in national policy and ensure justice and fairness.
As I said earlier, I believe we have a new chance to reflect on and reaffirm our national aims, and find common ground where we have drifted apart. Shocks to our well-being and conscience, such as Hurricane Katrina and its aftermath, often create such moments in which public morality comes to the fore. I believe that our basic, national values embrace both caring for those in need and rewarding strivers. Too often we are told that we must choose between these ideas as foundations for policy. And too often, when we tilt toward strivers we get an uneven distribution of the rewards for strivers, favoring those who have more income and advantage. We can do better than that in the United States.
We can provide dignified and humane care for those who cannot cope or care for themselves. And we can provide incentives for people on the margins to join the modern economy and acquire assets. We know how to create these and other policies that respond to disadvantage in our midst. If we fail to do so, we put at risk our values and our nation's ability to remain competitive and prosperous.
I believe we can be
- An altruistic opportunity society
- A diverse, many-cultured democracy
- A safe and just nation
These ideals underlie the Ford Foundation's work on social policy today. I hope you in your own ways will help our country live up to these and its other noble aspirations.
Thank you.
The Ford Foundation is an independent, nonprofit grant-making organization. For more than half a century it has been a resource for innovative people and institutions worldwide, guided by its goals of strengthening democratic values, reducing poverty and injustice, promoting international cooperation and advancing human achievement. With headquarters in New York, the foundation has offices in Africa, the Middle East, Asia, Latin America, and Russia.