“I knew nothing of, like, the stock market—how it works, what it does,” Emily Suarez Del Real says. Nonetheless, the then-sophomore at Milwaukee’s Alexander Hamilton High School wrote an essay about why the stock market was important. It was judged among the 30 best such essays submitted in 2001 by Milwaukee Public Schools students, and she was sent to that summer’s Youth Enterprise Academy at the University of Wisconsin-Milwaukee.
The Academy’s ten-day program teaches students about personal finance and then engages them in activities stressing the benefits of saving, maintaining good credit, and investing well. Supported by public and private funding, it was developed by the Wisconsin Council on Economic Education and UW-Milwaukee’s Center on Economic Education, using materials from the National Council on Economic Education (NCEE).
“We had ‘fake stocks,’” Suarez Del Real explains. Throughout the course, students were also taught economics in general. Those who successfully complete the program each receive a $500 U.S. Savings Bond, and each summer’s top five students—Suarez Del Real was one—are invited to form their own Youth Enterprise Investment Club that manages a genuine portfolio initially worth $10,000.
Ten thousand dollars. “It was like a whole new world to me,” Suarez Del Real says. “My mom’s a single parent, and when I’d come home with this stuff, it was a real eye-opener for both of us.” Among other companies, Suarez Del Real’s club of high-schoolers owned stock in Harley-Davidson, Kohl’s, and Johnson & Johnson. “For a while, we were into biomedical. It wasn’t doing very well, so we sold,” she recalls. NCEE senior fellow Mark C. Schug, who teaches at the Academy and goes to the club’s meetings, “didn’t hold our hands,” she notes. “The students do it themselves. In fact, he was against some of our picks, but he let us go with them.”
At a February meeting of Investment Club No. 8, student members vote to buy 25 shares of Reebok, 25 shares of Johnson Controls, and 50 shares of Cubic Corporation. They already own Pfizer and Wal-Mart. During the meeting, students sit around a table in a conference room full of economic textbooks and resources at UW-Milwaukee, sipping Kiwi Strawberry Snapple as they hear each other’s reports about particular companies. Of Cubic, Matt says, “I don’t know how much to buy, but I think we should buy.” As his colleague Srdjan reports positively on Reebok, Yee says, “Dude, we should get it now, so if it goes up . . . .” Srdjan asks Schug if the club could, if all members agree, sell the stock before the next meeting just by calling Schug, in case it underperforms. After encouraging longer-term thinking, Schug agrees to do so, if the club wants.
On the same night, in a nearby conference room, the decidedly more conservative Club No. 9 decides to take no action on any stocks. Tai begins this meeting by also wondering whether the club could, if all members agree, sell any underperforming stocks between meetings. After also encouraging longer-term thinking, volunteer John Syburg says the club could probably do so, if members approve. Later, after Abby points out that Garima spelled Citigroup wrong in the minutes of the last meeting, Tai conscientiously reports on Microsoft’s most recent numbers, causing Abby to look at Paul and observe, “Tai’s such a little stockbroker.” He certainly appears to be; most of the club members do.
When the members graduate from high school, they can designate their share of the fund to any college or university to which they have been admitted. Suarez Del Real is now a freshman majoring in psychology at Milwaukee’s Alverno College.
While the two 2004 clubs were roughly holding steady in value, as of February, in Suarez Del Real’s earlier group, “We each got $1,400. We went down,” she says, giggling slightly in embarrassment before noting that it was a very difficult market at the time.
She certainly knows something about the stock market now.
A New Consensus on Helping the Poor
The economic education Suarez Del Real received has a straightforward goal: to help her build wealth. It is one example of a broad array of philanthropic efforts based on a simple but profound strategy: If you want to help lower-income Americans rise economically, find ways they can accumulate assets.
This strategy is emerging as a new consensus across the political spectrum. Foundations and corporate donors that support the kinds of programs described in this article run the gamut, including companies like Deloitte, JCPenney, New York Life, and Goldman Sachs, and such foundations as Ford, MacArthur, Mott, Ewing Marion Kauffman, Schwab, Donner, and Walton.
MacArthur president Jonathan Fanton has explained that his foundation is trying to determine “how we best enlist people to help themselves, how we harness market forces to address social programs.” Success will require “building strong institutions of civil society.” Government “has a role as well,” but “we know that it cannot deliver all services or fix all problems . . . there is no substitute for local initiative, local imagination, and local responsibility.” At the same time, “government and civil society are not enough. In a country where business and free enterprise are the engines that fuel the economy, the private [business] sector is the indisputable third partner with government and local communities.”
What is needed, then, are ways to better integrate the less well off into the economy. One way is to teach financial literacy—how to manage personal finances, save, and invest. Another approach is to teach the basics of entrepreneurship so that the poor can start their own businesses. Some funders back the idea of subsidized Individual Development Accounts that would function similarly to the IRAs that middle-class Americans use to save and invest. Other funders, noting that low-income workers’ Social Security contributions already function something like an Individual Development Account, point out that those “contributions” would be far better put in actual investments controlled by workers, and so the donors support Social Security reforms that would make such investments possible.
We’ll consider each of these approaches in turn and look at some of the best existing programs that can be either supported or replicated by funders.
American schools, of course, should already teach the basics of financial literacy, but given that so many schools can’t adequately teach the three R’s, it is no surprise that many schools in predominantly poor communities are failing to instruct students in economic literacy. Although it’s difficult to determine precisely how much financial literacy exists either among Americans at large or the poor, certain behavioral indicators—consumer debt levels, for instance, and the usage of banks and credit unions—suggest that low-income citizens are less well equipped in this area than their economic advancement requires.
A major national survey in 1999 for the National Council on Economic Education found that half of all adults would receive a failing grade for their knowledge of basic economic principles, the economy, and key economic terms. Only 16 percent scored an A or B, and the numbers for blacks and Hispanics trailed those for whites by a large margin.
Over 1,000 students were also surveyed, and they averaged an even lower failing grade than the adults, with 10 percent earning an A or B and the same racial discrepancies appearing.
Yet without the basic financial literacy that Suarez Del Real was taught, a person can’t make informed decisions about spending, saving, budgeting, managing credit, getting and keeping insurance, investing, paying taxes, and planning for retirement. Financial illiteracy not only hurts the individuals involved; it also makes them much more likely to impose costs on other individuals or society at large. Similarly, while welfare reform has had much success using work requirements to spur the poor toward self-sufficiency, with work comes money, which means that the long-term prospects of welfare reform require the working poor to possess sufficient financial literacy to be able to make good use of their money. Likewise, all the additional ways to aid the poor we’ll consider are dependent on the financial literacy of the persons aided.
One danger arises from America’s daily bombardment by “messages that emphasize consuming, spending, and living. The groups least able to counter the effects of those financially destabilizing messages are inner-city young people,” write John Bryant and Michael Levin in their 2002 book Banking on Our Future: A Program for Teaching You and Your Kids About Money. Jennine Auerbach, national project manager of the NAACP’s Financial Empowerment Initiative, agrees. She tells Philanthropy, “What we need students to learn is what a credit card is, how it works, and how it can mess up your life.”
Bryant is chairman and CEO of Operation HOPE, founded after the 1992 L.A. riots to bring banking to the inner city. It has since helped provide economic literacy to tens of thousands of inner-city youth there and elsewhere. He and Levin write:
“America’s economy would skyrocket if the unempowered gained knowledge about how money and banking really work. Renters would become homeowners, free to invest the equity in their homes as they saw fit. The rate of personal bankruptcy would dramatically decline. New markets for useful consumer goods from furniture to appliances would develop. America would be a better and richer—not to mention fairer—place if everyone could participate knowledgeably in the worlds of business and personal finance . . . . Without this information, our kids are doomed to reenact patterns of poverty. With this knowledge, the same children can live their dreams.”
The National Council on Economic Education, to take another group in the field, both catalogues and produces financial literacy materials. Since 1949, the Council has promoted economic literacy among students, their teachers, and individuals and families. Through its EconomicsAmerica program, NCEE helps schools, school districts, and states set economic education standards, train teachers, develop curriculum, and evaluate results. Each year, its network of state economic education councils and university economic education centers trains approximately 120,000 teachers serving an estimated 8 million students. About 2,600 public school districts, teaching some 40 percent of the country’s students, are helped by the network.
With support from Household International, NCEE is also now partnering with the National Center for Neighborhood Enterprise (NCNE) in Washington, D.C., to help grassroots groups teach financial literacy. Founded in 1981 by Robert L. Woodson Sr., the National Center works to empower neighborhood leaders around the country, who in turn reduce violence, strengthen families, revitalize low-income areas, and spur economic development. By the end of 2004, some 120 workshops will have been held by grassroots community groups affiliated with the National Center, and many more such groups would like to hold workshops if they had the necessary support.
Nonprofits toil in this area largely because of gravely deficient economic education in schools. One scholarly study of economic education in Wisconsin—a state that has set standards for financial literacy and officially requires them to be implemented—concluded that economic education receives short shrift in [the state’s] system of public education. They are areas of study scarcely mentioned in state law, weakly represented in state regulations, overshadowed in practice by educators’ attachment to the study of government, shunned by teachers in training, and entrusted primarily to social studies’ teachers who most likely know little about either area and regard market systems generally with ambivalence or suspicion.
Economic education in venues other than schools is not only possible, it may sometimes be preferable. “Evidence shows that faith-based and other community-based organizations provide the most comfortable setting for many people” to achieve financial literacy, according to a national field study commissioned by the Fannie Mae Foundation. “More importantly, in under-served populations, these organizations offer hope, motivation, and emotional support, which are necessary for learning that leads to feelings of increased opportunity and personal efficacy.”
A typical example of such work is Crown Financial Ministries in Gainesville, Georgia. Through about 40 representatives across the country, Crown offers a variety of seminars and workshops to introduce what it considers “biblical principles of financial management and stewardship” to churches and communities. Its full-day “Single Parent Ministry” seminars in particular are well-suited to helping people move from dependency to self-sufficiency.
The National Endowment for Financial Education is another example. It has partnered with 115 nonprofit groups to provide economic education outside of schools, including Boys & Girls Clubs, Children’s Scholarship Fund, Habitat for Humanity, the National Alliance To End Homelessness, the National Council for La Raza, and the National Urban League. Allstate, for instance, supported NEFE’s preparation of 82,000 NAACP Financial Empowerment Guides.
In a similar vein, New Focus National in Allendale, Michigan, trains churches to deal better with the many requests for assistance they receive. Biblically based and heavily reliant on personal relationships, the “New Focus model is to use churches and volunteers to bring about long-term financial stability for people who come to the church for help,” operations director Dennis Cochran tells Philanthropy. After an initial interview, a New Focus participant goes through a six-week personal financial assessment in the “Steps to Change” phase. Then comes a 12-week “Steps to Financial Freedom” phase with classes and “financial coaching.” Then, says Cochran, “our work really begins.” Partipiants are connected to the congregation as a whole, which provides assistance, requires accountability, and “models healthy behavior.”
There is no shortage of off-the-shelf curricula that grantmakers can help make available to the poor through schools and nonprofit groups. Almost all of this material is already being used effectively by various economic educators, and some is already tailored specifically for use by the poor. “Distribution and teacher training” are most in need of support, according to Dara Duguay, executive director of the Jump$tart Coalition for Personal Financial Literacy.
Education in Entrepreneurship
Teaching the disadvantaged how to start their own businesses is another promising avenue to asset accumulation. A study by the Kauffman Center for Entrepreneurial Leadership notes that “if and when [schools] teach about” business at all, it is largely in terms of skills “necessary for employment (’take a job’) rather than entrepreneurship (’make a job’).”
People are not born with entrepreneurial skills. They can be taught, and they also happen to be desired. A 2002 survey of students in 68 schools, commissioned by the Ewing Marion Kauffman Foundation, found no noticeable differences among whites, blacks, and Hispanics when they were asked questions about entrepreneurship. Although fewer Hispanic and African-American students than Caucasian students knew an adult who owned his own business, interestingly, over half of African-American students had thought of starting their own business, a higher figure than that for Caucasian and Hispanic students.
As with financial-literacy efforts, what entrepreneurial education does exist in schools is not impressive, but much good teaching material is already available. Aaron Bocage, president of the Education, Training, and Enterprise Center in Camden, New Jersey, says “the best way to support this field would be to invest money in making sure the information is available to everyone,” such as by helping make it available online or on CD-ROM. “So much of our resources end up going to printers,” he adds. Another area in need of support is data collection and evaluation of programs.
The most obvious example of an existing curriculum is the national nonprofit Junior Achievement program, which began organizing clubs in middle and high schools shortly after World War I. Ever since it has offered a growing number of supplementary entrepreneurship classes and programs in schools and elsewhere, mostly through volunteer teachers who share their experiences in “real world” business. In its 2002-03 program year, more than 113,000 volunteers taught over 172,000 classes to 4 million students at nearly 21,000 host sites, including about 2,500 non-school ones. The group estimates that 43 percent of those students attend an urban school; a little over 19 percent are black; nearly 16 percent, Hispanic.
The National Foundation for Teaching Entrepreneurship (NFTE) focuses on educating youth from low-income, urban families. Steve Mariotti, a former Ford executive and entrepreneur who then taught for eight years at a public high school in the South Bronx, founded NFTE in 1987. From his school experience, Mariotti came to believe the innate “street smarts” of urban youth and their enthusiastic receptivity to the concept of “ownership” could easily be developed into academic and “business smarts.” Poverty, he says, “is cured in the minds of the poor.”
NFTE estimates it has served over 94,000 low-income youth in 46 states and 12 foreign countries. Its 108-hour programs are offered both in schools and after school at community-based groups. It also has a 54-hour intensive summer business camp program. Small-scale studies of its work have been conducted by Brandeis, the David H. and Charles G. Koch Foundations, and the Harvard Graduate School of Education, and NFTE says it would like to conduct more extensive evaluations. The Harvard study compared roughly 150 Boston public high school students who participated in a NFTE program with an equal number of peers. It found NFTE graduates much more interested in attending college and possessed of higher professional aspirations.
Individual Development Accounts
A third, experimental way to help the poor accumulate assets is to support Individual Development Accounts, or IDAs. Modeled on Individual Retirement Accounts, IDA deposits and the earning they accrue are either tax-exempt or -deferred and can be withdrawn only for a limited set of purposes that require long-term savings, such as buying a new home, paying for education or job training, or opening a small business.
This idea was first floated in the late 1980s and is now most often linked to Michael Sherraden, director of Washington University’s Center for Social Development, who sees IDAs as part of a larger “asset-based welfare policy.” The political strategy behind this “wealth-accumulation” idea in general and IDAs in particular “has been diligently bipartisan, an approach that has been instrumental in gaining widespread support across party lines and ideologies,” according to Brandeis professor Thomas M. Shapiro in The Hidden Cost of Being African American: How Wealth Perpetuates Inequality.
Ray Boshara, director of the New America Foundation’s Asset Building Program, is another observer who sees “an emerging consensus behind wealth accumulation.” He adds, “If you want to be hip, in fact, you could say there’s an emerging consensus behind the ‘ownership society,’” to use the term President Bush has given to describe much of his domestic policy. “There is some fear among liberals that wealth-accumulation ideas will be co-opted by others, but it’s too good an idea to be co-opted or itself owned by one party or another.”
“Wealth accumulation by the nonpoor occurs within a variety of institutional structures,” wrote Sherraden in his seminal 1991 book Assets and the Poor: A New American Welfare Policy. He points to such examples as the Homestead Act, the G.I. Bill, Individual Retirement Accounts, 401(k) plans, and the deduction for interest on mortgages of homes. These opportunities help most Americans accumulate assets, but “the poor have few such structures within which to accumulate assets. For impoverished welfare recipients, asset accumulation is not encouraged. In most cases, it is not even permitted.” Means-tested welfare programs have “asset tests” that effectively “prohibit accumulation of more than minimal financial assets.”
In 1998, the federal Assets for Independence Act (AFIA) authorized the U.S. Department of Health and Human Services to conduct a five-year IDA demonstration project. Nonprofits across the country could participate as intermediaries, provided they also raised money from either the states or private donors. “This idea’s been put on the table in large part because of philanthropy,” Sherraden says, and Boshara observes that “it’s been local foundations that have bolstered IDAs.”
There are now over 500 IDA programs with roughly 20,000 accountholders nationwide. Most are run through community-based organizations and jointly funded with public and private money. “Confusing many economists and others who claimed that poor people could not save because of their circumstances or values,” writes Brandeis’s Shapiro, the AFIA “demonstration program provides compelling empirical evidence of poor families sacrificing to put aside money to create better lives for themselves.”
To try to gauge the potential effectiveness of IDAs, 11 large foundations funded the American Dream Demonstration (ADD) project from 1997 to 2001. It made IDAs available in 14 places through programs run by 13 competitively selected groups. At the end of 2001, ADD had 2,364 accountholders. Sherraden’s center oversaw the research on the program and in its final report found that “ADD suggests that the poor can save and accumulate assets in IDAs.” The extent of the savings were modest, however:
- Average monthly net deposits were $19.07;
- The average participant had total net deposits of $528;
- The average participant saved about $1 for every $2 that could have been matched;
- With an average match rate of about two dollars to one, participants accumulated approximately $700 per year in IDAs; and,
- The average participant made a deposit in about six of every 12 months.
Cleary, IDA matching contributions can only be successful if the working poor can take advantage of them, and many either cannot or do not. “There is a limit to how much the lowest-income individuals are able to save,” writes Michael D. Tanner of the Cato Institute. “Given the large proportion of fixed costs in the average household budget, low-income workers simply don’t have much discretionary income. Evidence from employer-sponsored savings plans, such as 401(k)s, shows that even with fairly generous matching grants only a minority of those eligible can be induced to participate.”
Social Security Reform
The lack of disposable income that appears to be a problem for IDAs is not a problem for another policy proposal—individualized Social Security accounts. Workers are already required to “save” the monies that go to Social Security; the question becomes whether it’s in the working poor’s best interest to have them continue to send that money to the Social Security Administration or invest it themselves.
Given that African Americans have shorter life expectancies than whites, Tanner writes, “millions of African Americans are being deprived of the opportunity to pass on their wealth to their children,” making this “a civil rights issue as well as an anti-poverty one.” Blacks “are underrepresented among Social Security beneficiaries and overrepresented among Social Security taxpayers,” observe Harry Alford, head of the National Black Chamber of Commerce, and John C. Goodman, president of the National Center for Policy Analysis.
Because the present Social Security sytem cannot be sustained once the baby boomers begin to retire, changes are inevitable. And any change, observes Cato Institute senior fellow Jagadeesh Gokhale, formerly senior economic adviser to the Federal Reserve Bank of Cleveland, will especially affect “low-income Americans, who disproportionately depend on Social Security for their retirement income.”
Unfortunately, the current, unreformed Social Security system prevents asset accumulation by the working poor in three ways. First, it takes income from them that they could save—in IDAs or other mechanisms—and invest on their own, at better rates of return than Social Security provides. Second, it acts as a disincentive to individuals’ saving for retirement on their own. Third, Social Security benefits typically end at death, so that unlike genuine savings they can’t be passed on to heirs.
Under an individualized Social Security proposal put forward by President Bush’s Commission to Strengthen Social Security, all workers could contribute 4 percent of their eligible earnings, up to $1,000 a year, into a private investment account. Other proposals would allow progressively more contributions from the lowest portions of earned income, giving low-income workers even better opportunities to save, invest, and accumulate real assets.
It’s hard to see why the various funders and groups supporting Individual Development Accounts shouldn’t welcome Social Security reform. IDA advocate Michael Sherraden confessed to the President’s Commission, “I have spent a good part of the past 15 years thinking, studying, and writing about assets and the poor. From the outset, I suspected that, sooner or later, this work would connect with a discussion of individual accounts in Social Security.”
The present system’s inequities aren’t small. One RAND Corporation study several years ago calculated that, given differences in life expectancy and marriage rates, the net lifetime income transfer through Social Security from African Americans to whites is as much as $10,000 per person. “A single, low-income African-American male born after 1959 is likely to lose money in the current Social Security system,” writes Heritage Foundation research fellow David C. John. Because Social Security benefits make up such a large proportion of the “savings” of the poor yet can’t be inherited, two prominent economists have estimated that Social Security doubles the share of wealth owned by the richest 1 percent of Americans. And, Tanner notes, another study has found that the concentration of wealth in the country “would be reduced by as much as half if real wealth were substituted” for the poor’s Social Security “wealth.”
Reform of the nation’s largest social program can only come through the political process, and the challenge may seem overwhelming at the moment. Yet the same was true of America’s welfare system until less than a decade ago, and unprecedented reform did occur, with the greatest benefits flowing to the poor who had been trapped in a system that kept them out of the work force and forbade them personal assets. That reform would not have come about without sustained philanthropic support for research, pilot projects, and public education campaigns.
Sharing the Wealth
Today, most foundations and other donors are seeing their considerable assets rise along with the recovering stock market. And in the 1990s, of course, total foundation assets more than doubled. It is fitting that an increasing number of funders are exploring ways to help ever more Americans like Suarez Del Real accumulate assets that can likewise grow in value and be passed down the generations.
Crown Financial Ministries
Education, Training and Enterprise Center
Jump$tart Coalition for Personal Financial Literacy
National Council on Economic Education
National Endowment for Financial Education
New America Foundation’s Asset Building Program
New Focus National
Operation HOPE’s Banking on our Future
Martin Hartman is a visiting fellow at The Philanthropy Roundtable. He is writing a guidebook on philanthropic strategies for helping the poor.