Income, Institutions, and Saving Performance in Individual Development Accounts

Publication Date: 2001
Published by: Microfinance.com
Document Type: Paper

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Are income and savings correlated?

Individual Development Accounts (IDAs) are saving accounts for low income group. They aim at increasing savings by matching subsidies. The paper discusses the theory of saving of very poor people, which predicts that higher income households save a larger portion of their income. The theory ignores that the rate of saving is also affected by the expected change in income and subsistence requirement.

The paper describes the IDA's participation in American Dream Demonstration (ADD). It reviews the income and savings of the participants and identifies the six institutional factors that are important in determining saving behavior in IDAs:

• The existence of access to institutionalized saving promotes savings in the employees.
• Financial education increases savings of all types. Very poor people respond more to information received.
• The effect of incentives on savings is mixed.
• The statistics show a negative relationship between direct deposit and savings.
• Expectations of the staff and the peers cause more savings by low income people.

• There is no direct relationship between incomes and saving in IDAs.
• People save the same amount regardless of the income.
• The institutional factors may have minimized income factors in ADD.