May 14, 2014
Josh Barro has an interesting column for the New York Times today on how we can promote savings for renters. Homeownership, he acknowledges, is a method of “forced savings”: “Every month, you write a check to the bank, part of which goes to pay interest, and part of which goes to reduce the balance of your loan. Over time, you own more of the home. In a country that doesn’t save enough, forced saving is a real virtue of owning a home.” Renters miss out on that built-in wealth-building opportunity.
Barro goes on to present a creative idea to help renters save too: “Why not also allow landlords to participate in myRA, with tenants able to roll a retirement savings contribution into their rent checks?” MyRA is a proposal from the Obama administration that would improve access to retirement savings accounts through the workplace for employees who are currently underserved. (MyRA also happens to be the topic of a new policy paper that my colleagues put out this week, which you should read here.)
I agree with Barro that building a savings option into the act of paying rent is a good idea. Automation helps people do something they likely wouldn’t consciously do otherwise. In fact, it’s such a good idea that the federal government has been doing something very similar for over 20 years, through its Family Self-Sufficiency Program.
FSS is run by the Department of Housing and Urban Development (HUD) and allows low-income households participating in rental assistance (the Housing Choice Voucher Program or public housing) to build up their savings while they work on economic goals, like getting a better-paying job, earning an educational credential, paying off debt, and more. So where does the "forced savings" come in?
All rental-assisted households must pay 30% of their adjusted income to their landlord (or the housing authority, in the case of public housing). That means if a person’s income goes up, so does their rent payment. (Insert the muted sobbing of economists here.) The FSS program changes all that by establishing an escrow account for each participant. In FSS, when a participant’s income goes up, the housing authority deposits a credit amounting to the difference between the baseline rent and the new higher rent into that account on behalf of the tenant. (Just for the purpose of illustrating how this works, let’s say you came into the program earning $100/month and thus paying $30 in rent. If your income doubles to $200, rent becomes $60 – but in FSS that new $30 goes into your escrow account.) At the end of the allotted five years in the program, if the participant has met the established goals (which include sustained employment, staying off cash welfare assistance for 12 months, and other personally defined goals), they graduate, receive a check for the value of the escrow account, and can use the funds to purchase a home, a car, open a retirement or college savings account, or pursue another financial goal that makes sense for them and their family.
If that sounds good, you might be wondering why we aren’t doing more of it. FSS only serves roughly 69,000 families out of the millions receiving rental assistance, due in large part to funding constraints. FSS certainly isn’t perfect, and I’ve detailed a number of these issues in this policy paper from a few months ago. Barro’s proposal to open myRA up to renters has the potential to be very effective, but why not expand on an existing successful initiative to give renters an opportunity to save?