Banking On Tax Time

This item was originally posted on The Huffington Post.

Tax day is a few days late this year. The procrastinators among us are thankful. But for those expecting a refund, they likely filed long ago. This is especially true for millions of families with low or modest earnings. Thanks to the Earned Income Tax Credit, the tax refund may be their largest cash infusion of the year. This tax season around 26 million households are expected to file for the EITC, which can raise their refund several thousand dollars (the maximum benefit is $5,666). This makes the tax time moment a valuable opportunity to manage family finances and potentially address one of the most overlooked needs of working families—increased savings.

The ability to build and access savings is a fundamental determinant of economic security, but this pursuit often presents challenges to low-income families. Obviously, there is less to start with at the beginning and they also face ongoing challenges of meeting immediate needs and juggling unexpected expenses. But many families also do not have access to the set of institutional supports that can facilitate and encourage saving. These include the most basic building block for saving—a bank account—and targeted incentives that provide an effective nudge. When these supports are in place, recent experience has shown that even very low-income households can save and embrace strategies to save. For many middle and upper-income households, those incentives are delivered through the tax code via deductions, deferrals, and credits that reward deposits to a range of tax-preferred accounts. Most low-income families, however, lack sufficient tax liability to benefit.

What is missing from current policy is an accessible platform with meaningful incentives to support savings that all families need, and from which those with the hardest time saving would benefit. This is where tax time comes in. Given the scale of resources delivered as tax refunds, the tax time moment can offer a valuable opportunity to engage low-income families in saving.

Policymakers have recently implemented a series of changes to the tax filing process which affirm this opportunity. This year Treasury ran a pilot program to provide tax refunds loaded onto prepaid debit cards rather than check, and some participants will have an option of depositing part of their refund into a linked savings account. The IRS is offering for the second year the option to purchase a U.S. Savings Bond through the “split refund” option. Still, it is a moment policymakers should strive to leverage further.

One promising way to do so would be to offer a Saver’s Bonus delivered at tax time that would provide a direct match to deposits made by eligible families to a range of savings products. These products would include retirement accounts as well as short-term Certificates of Deposit, so families can choose the option that is best for them. It would also allow filers to open an account directly on their form if they do not already have one. A legislative proposal modeled on this innovative approach will soon be introduced by Senator Robert Menendez (D-NJ). Over the past three years, the City of New York has been putting a version of the Saver’s Bonus into practice at the local level and it is now being replicated in several cities across the country.

At the onset of the pilot, program participants were facing a range of financial hardships, and many lacked even a savings or checking account. Their average income was $17,900, just above the official poverty threshold for a parent with two children. Despite these imposing challenges, by the conclusion of the third year, 2,200 people had opened an account, and 80 percent maintained their deposit and receive the match at the end of the year term. Significantly, over half of the participants continued to save after the program concluded.

$aveNYC was effective because it offered families a savings product that aligned with their needs and a simple, easily understood incentive at a “windfall” moment. The results show that a similar policy employing this concept could successfully catalyze the saving and saving behavior necessary for continued financial stability in the near term and economic mobility over the long term. By introducing a targeted incentive, The Saver’s Bonus can make the process of tax filing even more valuable—for procrastinators and planners alike.