Sept/Oct 1996

Creating Stakeholders
with Individual Development Accounts 

By Robert O. Zdenek

Millions of Americans have built assets and improved their economic standing through higher education, business creation, and homeownership. Yet in order to engage in such efforts, most people need some savings or credit history. This fact of life keeps the door to opportunity shut for many low-income people. To help those for whom homeownership, college, or business creation may seem an impossible dream, the concept of the individual development account (IDA) has emerged.
The IDA concept was pioneered by Michael Sherradan, a professor at Washington University in St. Louis, based on his research demonstrating that accumulation of assets, rather than just income, plays a major role in allowing people to escape poverty and achieve wealth. IDAs are leveraged, restricted investment accounts that help low- and moderate-income individuals build savings. When IDA holders make deposits, those funds are matched primarily by external sources: foundations, corporations, religious institutions, and government. IDA savings can be used for education and training, homeownership, and development of home-based and micro-enterprise businesses.

Interest in the IDA concept is growing. Several CDCs and community-based organizations have launched IDA demonstrations. The Corporation for Enterprise Development (CfED) has begun an $11 million national IDA demonstration supported by several major foundations. The recent welfare reform bill passed by Congress paves the way for states to use block grant funds for IDAs and raise the limits on assets recipients may accumulate. And legislation recently introduced by Senators Dan Coats of Indiana and Carol Moseley-Braun of Illinois proposes a $100 million national IDA demonstration.

IDAs and Community Economic Development

Creating opportunities and resources for low-income residents is central to the mission of community economic development. In communities heavily disinvested over the past several decades, IDAs become part of a reinvestment strategy aimed at creating stakeholders in the community.

Recent years have seen growing interest in community development strategies emphasizing low-income residents' assets, skills, and gifts. "Even the poorest neighborhood is a place where individuals and organizations represent resources upon which to build," John McKnight and John Kretzmann write in their book Building Communities From The Inside Out [see Shelterforce #83]. "The key to neighborhood regeneration is to locate all of the available local assets, to begin connecting them with one another in ways that multiply their power and effectiveness, and to begin harnessing those local institutions that are not yet available for local development purposes."

IDAs help neighborhood asset development by strengthening the growing role of self-help groups such as homebuyer clubs, savings clubs, and peer lending groups. New Community Corporation (NCC) in Newark, New Jersey, is developing an IDA demonstration in which account holders who plan to use their IDAs to buy a home will be required to join a homebuyers club, to share advice, ideas, and support with other participants. Savings clubs have also been a major route immigrants and other ethnic groups have used to escape poverty. An IDA savings club, in which individuals work with each other to save a specified amount each month, can lead to greater understanding of economic concepts and savings, as well as providing the intangible but essential support participants need in order to progress.


The beauty of the IDA concept is that while it is simple in design, it helps achieve a number of important community economic development goals. These include:

IDA Design Principles

The Corporation for Enterprise Development (CfED) and The Center for Social Development at Washington University have identified a number of design principles that IDA programs should incorporate, including:

Supporting IDAs

Launching an IDA program will require the capability to raise external resources, both public and private sector, to provide as matching funds in each IDA account.

Government is an important source of funding for IDAs. IDAs, which emphasize economic self sufficiency, fit well with the stated goals of the recent federal welfare reform legislation. Under this legislation, states can allocate some of the federal funds for welfare reform to capitalize IDAs. Previously, welfare recipients without a state-approved waiver were penalized if they accumulated assets. This major change in public policy will allow former recipients to build savings as part of their economic self-sufficiency strategy. Some states use state-appropriated funds to support IDA programs, while others leverage private sector contributions to IDAs. The Corporation for Enterprise Development has been promoting a plan to create state IDA Reserve Funds to capitalize IDAs. The capital could come from either taxes or captured IDA funds that were not properly used.

Along with federal and state sources, contributors to IDAs may include foundations, corporations, individuals, and religious institutions. The Charles Stewart Mott Foundation and Joyce Foundation have played a lead role in several pioneering IDA demonstrations. Other foundations, including Ford and Annie E. Casey, are exploring how to finance the next round of IDA demonstrations to create greater awareness of asset development as an anti-poverty strategy. Another intriguing idea is to have individuals make monthly contributions to the IDAs of families, friends, or community residents, similar to the sponsorship model that Save the Children has pioneered. Finally, Federal Home Loan Banks can adopt the model of the Federal Home Loan Bank of New York's "First Home Club" program, which matches funds for first-time homebuyers.

IDAs offer a promising way to help low-income people develop financial and technical assets for their future. By engaging financial institutions that have a community development mission or focus (credit unions, community development banks, etc.), using welfare reform and state policy to generate public sector resources for IDAs, encouraging economic literacy efforts and constant training of IDA recipients, and making the IDA program as accessible and user-friendly as possible, IDAs can achieve significant impact.

[ Sidebar 1: Starting an IDA ] [ Sidebar 2: IDAs for Empowerment ]

Copyright 1996

Robert O. Zdenek is a board member of the National Housing Institute and economic development director of New Community Corporation, 233 W. Market Street, Newark, New Jersey 07103; 973-623-2800.

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