Cascade Policy Institute

This proposal is one of ten winning reports from the 1996 Oregon Better Government Competition. The 1994 and 1996 Competitions were organized by the Portland-based Cascade Policy Institute. Opinions expressed are those of the author(s) and not necessarily those of Cascade staff or advisors, nor should they be construed as an attempt by Cascade Policy Institute to influence any election or legislation.

September 1996 Draft

PERSONAL ECONOMIC SECURITY ACCOUNT (PESA)

by

David B. Foster

Salem, Oregon

EXECUTIVE SUMMARY

A revolutionary new tool is now available to provide greater protection from poverty than the current array of public welfare programs. The tool, a Personal Economic Security Account (PESA), is a low risk, highly secured financial investment that would be established at birth, reach a level adequate to weather most anticipated risks of a lifetime by age 25, and mature throughout a person's life to provide a retirement pension.

Primarily a voluntary program, the PESA concept is similar to an Individual Retirement Account (IRA) in design and investment security, but is more flexible in use. A PESA has three components. It focuses on personal risk management through life, makes available funds for personal enterprise development, and provides for an individual's retirement. It is not realistic to believe poverty can be totally eliminated, but a PESA can offer an effective and efficient antidote.

THE PROBLEM OF POVERTY

Despite more than sixty years of experimenting with public welfare programs, poverty remains a serious problem in the United States. A new anti-poverty strategy is needed to replace entitlements and social services with personal responsibility and a personal risk management tool.

Before the 1930s, the United States government did little to help citizens avoid poverty. It began experimenting with public welfare under President Roosevelt's New Deal during the Great Depression of the 1930s. Those efforts turned into a full-fledged campaign thirty years ago with President Johnson's War on Poverty. Since 1965, the U.S. has spent more than $3.5 trillion to ease the plight of the poor.¹ During Fiscal Year 1995, the federal government spent nearly $200 billion on assistance programs.² During 1992, an average of34 million Americans (13 percent of the population) participated in one or more of seven federal poverty programs each month. More than half depended on one or more of the programs during all of 1991-1992.³ And yet today, nearly 40 million Americans live in poverty.⁴

Several new tools for fighting poverty have emerged in recent years. Congress and state legislatures have proposed numerous modifications to the current public welfare system. As this paper is being written, Congress is debating a major welfare reform bill. Creative ideas like Individual Development Accounts (IDA),⁵ Medical Savings Accounts⁶ and Privatized Social Security⁷ are also gaining attention. While each addresses a part of the problem, none offers a comprehensive personal financial risk management tool to effectively and efficiently help prevent poverty.

BACKGROUND ON ASSET BUILDING CONCEPTS

The antidote for poverty involves building personal financial assets rather than providing income subsidies. The importance of asset building for the non-poor in America is well understood. Asset building concepts like the PESA have been written about, studied and implemented in various forms in the United States and other countries for many years. Asset building advocates Karen Edwards and Michael Sherraden of the Center for Social Development note,

Taking the long view, asset-based policy has appeared in many forms, dating back as far as the Homestead Act of 1862. In modern social policy, the United States promotes asset accumulation for the non-poor through the tax system, especially through tax deductions for home mortgage interest and tax deferments for retirement pension accounts.⁸

Americans are familiar with specialized asset building programs like Individual Retirement Accounts, deferred compensation plans and other retirement pension programs. Singapore and Chile currently utilize personal savings programs in place of American style social service entitlement programs. After forty years of experience, Singapore enjoys a 30 percent higher home ownership rate than the United States because individuals may use their personal asset funds as a down payment.⁹ Chile replaced its government-managed social security system with a private pension model fifteen years ago; the model has been tremendously successful.¹⁰ National political rhetoric, from President Clinton to Representative Gingrich, now incorporates aspects of asset building into federal welfare reform initiatives. The Corporation for Enterprise Development champions Individual Development Accounts through its newsletter and networking.¹¹ The tra! ining accounts in Oregon's JOBS-Plus Program are a simple form of an asset account.¹²

Michael Tanner of the Cato Institute, a Washington, D.C. think tank championing the privatization of social security, predicts that the current federal Social Security system will be replaced within five years.¹³ A growing number of Congressional delegates support legislation proposed by the Corporation for Enterprise Development for a demonstration Individual Development Account program. Iowa has implemented a demonstration IDA project and Virginia has legislation in process.¹⁴

Across the land, people are realizing that asset building strategies must replace income maintenance programs. The time is ripe for an asset building anti-poverty strategy and Oregon should blaze the trail.

The following proposal is presented to encourage and invite discussion. The author acknowledges that much further development of the concept is needed.¹⁵

AN EFFECTIVE AND EFFICIENT ANTI-POVERTY TOOL

A Personal Economic Security Account (PESA) will provide a broad spectrum antidote for poverty. Similar to an Individual Retirement Account (IRA) in structure, the PESA concept offers a personal safety net to replace public welfare programs. A PESA fulfills three critical personal financial management functions: risk management, personal enterprise development and retirement security.

The basic function of a PESA would be personal risk management, i.e., a rainy day fund. A Basic PESA is a low risk, highly secured financial investment that ideally would be created at birth and reach a level by age 25 to adequately weather most of the anticipated personal economic risks of a lifetime, including periods of:

• Unemployment


• Heavy medical expenses (incurred with the high deductible of a medical insurance plan, as with a Medical Savings Account)


• Other personal financial downturns

• Disability (disability and workman's compensation insurance provisions covering the maintenance of the PESA and securing the individual in case of short or long- term disability should be built into the PESA)

A portion of this Basic PESA would be available to finance personal enterprise development. A PESA is an asset, like a savings account or equity in a home. To ensure that sufficient funds would be available for its primary risk management function, only a portion of the PESA, e.g. 20 percent, would be available for personal enterprise uses. Still, this 20 percent offers a substantial nest egg to self-finance personal development activities, such as:

• Higher education, continuing education or re-training expenses


• Investment in business or micro-enterprise development


• Down payment and closing costs for a home


• Creation of a dependent child's PESA.

Finally, a PESA could serve as a retirement fund. The Basic PESA would be left invested and assuming a historic rate of return from the market, in addition to any self-paid interest on monies borrowed for emergencies or personal enterprise development, a Basic PESA could provide a subsistence-level retirement income similar to current Social Security income benefits. To achieve a more comfortable retirement fund, individuals should enhance their Basic PESA account during their productive years with additional investments. A portion of this investment would be required, as a replacement of the current social security taxes. An additional portion would be encouraged by government through tax credits for investing in one's PESA and could replace the current array of pension programs.

Upon retirement, individuals could leave the funds invested where they are or use the account to buy an annuity that would provide a monthly income for life, as with the Chilean private social security model.¹⁶ Or individuals might do a combination of the two, leaving part invested and using part for an annuity. Currently, many pension plans are not mobile and sometimes become insolvent before paying benefits to workers. The PESA would solve mobility and security problems.

The monthly statement from the firm(s) investing an individual's PESA funds would resemble the one-page monthly report of a checking or credit card account. The statement would report the accumulation and activity of funds in the three PESA categories:

• Balance and earnings of the Basic PESA;


• Accumulated balance due on personal development loans from the PESA and monthly payment required including interest; and


• Latest enhancement investments and cumulative balance of the retirement portion of the PESA.

Individuals needing resources to weather tough times would not visit the local government social service department. Instead, they would seek financial counseling from their personal accountant or investment program representative on how best to manage PESA assets through the years.

CREATING A PESA

The PESA approach requires a substantial shift in Americans' habits, policies, laws and institutions. It depends on personal voluntary actions encouraged by tax incentives more than government programs and coercive laws. It would be one system to replace the current dual ssytem which provides asset building subsidies for the wealthy and income maintenance for the poor. The legal mechanisms implementing the PESA implementation must be carefully and comprehensively crafted to balance the respective roles of the family, society and the individual. A culture of savings will be encouraged as individuals learn government is not responsible for their personal economic well-being.

Parents would start a Basic PESA for a child with either a lump sum investment at birth or through annual investments. Society would encourage establishment of the PESA through income tax credits and exemptions, deferred taxes on investment earnings, and the phasing out of all current public social service programs after a major educational campaign.¹⁷ A more complete description of how a PESA would be established and the respective roles of the family, society and the individual is described below.

FAMILIES' ROLE IN CREATING THE PESA

Creating a Basic PESA for each child will be understood as a fundamental responsibility of parenthood, anticipated before a couple has children. Families would establish a PESA for each child. Parents would either invest a lump sum of at least $15,000 up to a maximum of $45,000 before birth (net $10-30,000 with tax credit), or contribute roughly $1000-3,000 annually to each child's PESA (net $650-2000 with tax credit).¹⁸ Parents, grandparents, family members, even friends could provide gifts from their savings or the personal enterprise development portion of their own PESAs to finance the future economic security of a child. Over the long term, PESA assets could be inherited from generation to generation.

SOCIETY'S ROLE IN CREATING THE PESA

In order to have an effective self-managed anti-poverty tool, society must adopt implementing legislation and encourage families and individuals to establish a PESA. Society will fulfill four responsibilities in the creation of a PESA.

I. Legislate the PESA Concept

Congress and state legislatures will establish the PESA concept in practice.

Provisions similar to the current Individual Retirement Account statutes, or the proposed Individual Development Account legislation now being considered by Congress, would institutionalize the PESA concept.¹⁹ Tax laws, welfare laws and any programs that subsidize the dependency of able-bodied citizens need to be amended, repealed and phased out over a reasonable transition period. Thousands of pages of law on current social service programs should be amended or repealed, reducing the burden of government substantially. A thorough analysis of the difference in cost between the current public welfare system and the PESA approach is needed to determine the extent of savings realized by taxpayers.

The laws enacting the PESA should stipulate when and how a person may access their account. It should also provide guidelines for retirement withdrawals. A required retirement age is not needed with a PESA. Individuals may retire at any time providing they have sufficient assets to support their manner of living.

During the transition period from the current public welfare system to the PESA system, a major campaign to educate citizens about the PESA concept and its personal responsibility focus should be undertaken. Public service announcements about social programs would be replaced with announcements and educational spots on the PESA system. Political leaders, teachers, religious leaders and parents must help make taking care of oneself a cultural expectation.

II. Level of Risk Management

Congress and legislatures must decide what constitutes a reasonable minimum level of personal risk management for the PESA concept. The PESA should be designed to weather the common economic downturns faced by individuals. Nearly half of all 1992 public assistance recipients remained in programs for less than eight months.²⁰ The current public welfare system requires an individual to become totally destitute, to lose all assets, before assistance can be offered; individuals are helped only after they fall deep in financial trouble. The PESA approach addresses risk with a preventative, self-managed safety net on the front end of the trouble.

For discussion purposes, the author recommends that a Basic PESA should equal at least three year's worth of subsistence wages.²¹ The 1995 poverty income threshold for a family of four was $12,156. Thus, in 1996 dollars, a minimal PESA should have an amount in it equal to $45-50,000 in today's dollars, when an individual becomes financially independent at age 25. Enabling legislation should allow a Basic PESA three times this amount at age 25, since the lower amount represents only a minimal, subsistence level of support. These thresholds should be periodically revisited, e.g., once every four or five years, to keep the amount relevant to inflation and deflation. Since each adult would have their own PESA, a couple would have the funds in two PESAs to protect themselves from economic ruin. The PESA would represent a personal asset, so surviving family members would be able to enjoy enhanced protection upon a spouse's death, rather than lose benefits as currently happens with the public welfare system.

III. Encouraging PESA Investments

Congress and legislatures must decide the extent to which government should subsidize PESA's. The current public welfare system provides benefits without considering whether or not individuals have assumed responsibility for their own well-being; benefits flow without regard to personal effort. With the PESA system, personal responsibility and self-reliance values would be reinforced by society through tax incentives for investments to an individual's PESA. This public subsidy of a basic PESA should not exceed one-third of the total contribution. To be fair and equal to all families in the nation, society should only be expected to provide economic incentives (tax credits or deductions) to benefit a maximum of two children per family. This would limit the financial burden faced by society of encouraging personal PESA development to a sustainable level. But parents should be allowed to create as many PESAs as they have children. If parents can afford to have more than two children, they should establish accounts for their additional children without public subsidies.²²

Congress can cover the cost of encouraging the establishment of a Basic PESA by eliminating the current federal tax deduction of $2,250 for each dependent child, and replacing it with a dollar tax credit for each three dollars invested (up to a maximum $1,000) for annual contributions to a couple's first two children's' PESAs. If a lump sum investment was made, the subsidy should be no more than one-third of the maximum allowable up-front investment. The maximum subsidy should be adjusted periodically for inflation and deflation. The sum of investments, as well as any earnings on the Basic PESA, should be available to the individual tax free after age 25 to use in time of need or for personal enterprise development opportunities.

Congress should also replace the current 12.3 percent Social Security tax with a 10 percent pre-tax investment in a PESA for retirement. Tax liabilities on the retirement portion of a PESA should be deferred on contributions and earnings until the funds are withdrawn late in life.

Individuals should also be allowed to invest an additional ten percent of gross income each year, up to $3,000, in pre-tax dollars. Congress should replace the personal individual income tax deduction, IRA deduction, Earned Income Tax Credit, and other income deferrals with a single PESA tax credit of one dollar for each three invested, to a maximum of $1,000. Tax liabilities on earnings of the retirement portion of a PESA should also be deferred until the funds are withdrawn late in life. A detailed comparison of federal budget impacts should find that the PESA system would be more simple, efficient and effective than current deferral programs.

IV. Securing the PESA System

For individuals to meaningfully self-manage personal economic risks with their PESA, society must carefully regulate and monitor the institutional risk of the companies that hold PESA investment funds. Legislation should specify which financial instruments offer the desired level of security, and regulate those instruments well. It must ensure that the financial institutions participating in the program minimize their fund-holding members' exposure to risk. To discourage foolish appropriation of the funds, the legislation must stipulate when an individual may borrow from the account and how the loan would be paid back.

The legislation should establish a PESA oversight board similar to the Administradora de Fondos de Pensiones Superintendency that oversees the Chilean private Pension Fund Administration companies.²³ This body would ensure that participating investment companies engage in no other activities to curtail conflict of interest, guarantee a diversified and low-risk portfolio for PESA funds, and prevent theft or fraud in the system. Lessons on how to establish the PESA concept are readily adaptable from IRA and other pension laws, from proposed Individual Development Account legislation, and from the models on privatized asset funds in Chile, Singapore and Bolivia.

Government must play a critical role in creating the PESA framework. The on-going administrative costs of a personal anti-poverty strategy like the PESA, though, should be significantly less than current public welfare programs. Only those truly dependent in our society (i.e., persons with severely debilitating physical, developmental or mental disabilities) may require a social service delivery system. With implementation of the PESA's private safety net approach, the number of persons truly dependent in society should be reduced to a level that can be managed by private charitable organizations.

THE INDIVIDUAL'S ROLE IN CREATING THE PESA

Individuals play three important roles in the PESA concept. They help fund their Basic PESA while dependent youths, they manage the fund wisely once becoming adults, and they enhance their PESAs through their working years to enjoy a financially secure retirement.

I. Youth Investment in a PESA

Each individual will be expected to invest time and energy in creating their Basic PESA during youth. Individuals seem to value that which they have created or earned themselves more than that which is given them. For this reason, each child will be expected to invest in his or her Basic PESA as a rite of passage through the ten transitional years between childhood dependence and adulthood economic independence (ages 15-25). For discussion purposes, a minimum investment of $360 and maximum investment of $1,000 per year is suggested. This amounts to about $30-95/month. Even at 1996 minimum wage standards, the minimum suggested represents less than 8 hours work per month, or 2 hours per week. The investment and the earnings accrued to the Basic PESA would be exempt from taxes.

Expecting youths to contribute to their own PESA also addresses a major social problem in American culture. While Americans celebrate "youth," many young people lack any meaningful function in our society. Children no longer work beside parents in the field gathering food to assure survival; many families fail to even give children chores. Youth, for many, represents a privileged age outside the essential workings of society, i.e., just a period before adulthood. No one should wonder that many choose gangs, drugs and other anti-social behaviors to fill their purposeless lives.

Expecting teenagers to help create the Basic PESA would provide a good investment for their future and offers them a meaningful role in society. Implementation of the PESA concept may also reduce crime, boredom and idleness, drug abuse, and other youth related social problems. Recognizing the long-term value of the contribution that young people can make, private enterprise may be expected to sponsor PESA employment programs to assist them in making their annual investment. Only if the private sector fails to step forward should government initiate programs so that youths have an opportunity to help create their PESA accounts.

II. Adult Management of the PESA

As an adult, each individual will need to carefully manage their PESA. Since the 1930s, Americans increasingly came to expect that government would always be there for support in times of need. In contrast to these expectations of entitlement and dependency, the PESA system would actually help individuals self-manage risk. After a generation-long transition period, government social service programs would be phased out as the PESA concept was fully implemented. Thus, a PESA must be respected and tended wisely, almost the way a sailor cares for the life jacket or an aviator the parachute. High risk behaviors that endanger the PESA must be avoided or an individual will face the natural consequence of impoverishment.

The PESA would be a personal asset available to the individual for uses specified by the enabling legislation. When tapping a Basic PESA, assets would be borrowed in the same way that an individual takes out a personal loan from a bank or a credit card. Individual would then pay themselves back at twice the current earnings rate of the account if it had been left untouched, e.g., 8-10 percent. The payback rate would probably still be less than the market rates on home equity and personal loans, and would tap good times to help cover risky times making the PESA work as an effective personal savings program. Cumulatively, the PESA investments would create a capital fund that would ensure consistent access to money at favorable rates compared to market rates.

III. Adult Investment in a PESA

Each individual will be responsible for enhancing their PESA account for retirement. An individual should enjoy a retirement benefit similar to the one under the current Social Security system, if the Basic PESA is managed appropriately. And like Social Security, this minimal benefit is not adequate for a comfortable retirement. As mentioned earlier, individuals would be encouraged to enhance their Basic PESA account through their productive years to create a more comfortable pension in two ways. First, each person would be required to invest 10 percent of their gross income in their PESA as a replacement to the current 12.3 percent Social Security taxes. Provisions for nonworking spouses should be encouraged by the PESA system, too, with similar tax credits and exemptions.

An additional investment of up to ten percent of gross annual income to a maximum of $3,000 would also be encouraged to replace all other retirement programs. This enhancement, which would also allow an accompanying tax credit of one dollar for each three invested (maximum $1000 credit), would create more than a decent retirement fund; it could replace all other current pension plans. The PESA tax credit should replace the current income tax deduction for the taxpayer (and spouse, in the case of a nonworking spouse). These investment and tax credits amounts are suggestions only and others could be considered; Chile encourages a greater level of savings in their model by exempting 20 percent from taxation.²⁴

Tables 1 and 2 show the responsibilities of family, society and the individual in creating the three parts of the PESA, as well as anticipated results from these investments.

HURDLES TO IMPLEMENTATION

Many legislative changes are required to transition from the current system to the PESA. While some political constituencies may balk at converting from a public income subsidy welfare policy to a private risk management strategy, political ideology does not appear to be a barrier. The simple and useful PESA concept stands as a promising alternative to the failing welfare approach that currently faces all political parties. The PESA is ultimately just a tool; future Americans will consider their PESA as fundamental to personal financial management as a credit card, a checkbook, savings account, or mutual fund.

Some may challenge the PESA approach by asking, "What if parents and individuals fail to fulfill all their respective roles and become impoverished?" This concern warrants a treatise itself. First, the failure of current public welfare programs stems in part from a common belief that someone else will come to save us when we are in need. As the PESA concept is phased in over a generation, citizens will be weaned from their dependence on public welfare and toward a system that encourages personal risk management. Secondly, the PESA is available to each generation. If an individual's parents do not make use of the PESA, the individual can implement the concept for their children. Any set of parents may control poverty in their family within their generation. Thirdly, the question is incorrectly worded. It should read, "What is the appropriate role of government in supporting citizens who fail to take advantage of the opportunities that society offers them to avoid poverty?" In a society based on personal freedom, individuals should not be forced to use the PESA concept. For many reasons (e.g., personal, religious, cultural), some individuals may not use the PESA just as some prefer to keep their cash in a coffee can under their bed rather than in a bank. Poverty may haunt these individuals' lives. But government should not be expected to guarantee individuals a poverty-free life. Government need only make sure an appropriate antidote like the PESA is available.²⁵

Some may criticize elimination of the social safety net for those unable to care for themselves, i.e., persons with severely debilitating mental, physical and psychological conditions. The PESA concept should significantly reduce the number of persons needing assistance, from 13 percent to approximately 5 percent or less of the general population.²⁶ This reduced level of dependency may realistically be addressed by nongovernmental charitable organizations, churches, nonprofit advocacy and care groups, etc. A growing movement of non-government agencies is already responding to declining public service levels.²⁷ If government must intervene to assist private charities, the burden should be significantly reduced from current levels and may be addressed through expansion of public-private partnerships rather than direct government service provision. Finally, remember that every individual will have a PESA, not just those who are "able-bodied." If parents, family members and friends create a Basic PESA for each dependent, anyone could earn more from their PESA account annually than Supplemental Security Income (SSI) currently provides.²⁸ The PESA concept can be designed to provide a reasonable safety net for all citizens.

The biggest hurdle to implementation may be the need for commitment to a generation-long transition period. Current welfare reform proposals are rightfully being challenged because they change systems "mid-stream" for people. The Washington-based Urban Institute recently published a study suggesting that more than a million children would be pushed into poverty, and the conditions of millions more already in poverty would be worsened, if the welfare reform legislation pending in Congress is passed.²⁹ The elimination of housing assistance programs cannot be fully implemented for decades because current programs involve long-term affordability and financing commitments on the part of government. Drastic change will hurt, not help, those in need.

To implement the PESA concept, a generation long transition strategy should be designed. As a key precursor to implementing the PESA strategy, the concept must be further studied, details and specifics proposed, and enabling legislation adopted. Implementation of the concept should begin with a two-year campaign for personal responsibility at all levels of society. A parallel campaign should educate citizens about the PESA concept: how it works, how it benefits the individual and society. A pilot program to test the concept would also be helpful, to work out possible bugs.

After two years, everyone can reasonably be expected to know about their role and responsibility in the PESA and how the PESA works.³⁰ All children conceived before the campaign started will have been born, so the program can begin the transition from the old system to the new by replacing all the old child-based subsidies and tax benefits with the new tax credit provisions of the PESA system. At this point, individuals should be allowed to voluntarily convert their Social Security and retirement programs into the new PESA program, and all new workers would be required to play by the new PESA rules. The old public welfare system should be fully phased out after 25-30 years.

There may be many more steps, but these steps indicate the kinds of actions needed to ease the cultural transformation. The PESA concept represents not only a major shift in public policy, but a cultural change away from patterns established since the 1920's. At least a generation of carefully cultivated social change will be needed to fully implement the PESA concept.

BENEFITS OF IMPLEMENTING THE PESA CONCEPT

While PESA implementation may face some hurdles, there are many benefits of instituting the concept. With full implementation of the PESA concept, each citizen would enjoy an asset account adequate to weather common economic risks of a life time. In addition to its economic value to the individual, the PESA strategy provides a tremendous boost to an individual's personal psychological health. Public welfare recipients report how demeaning an experience the use of food stamps or public assistance is to them.³¹ The psychological impact of applying for food stamps in a long line at the Post Office as opposed to borrowing from an individual's own PESA account in times of economic trouble differs tremendously. The public welfare approach demeans individuals where the PESA approach reinforces self-reliance and bolsters psychological health.

Society wins with the PESA concept too. The PESA resolves the long-standing conflict in values that occurs with a free people dependent on government for economic security. No longer will Americans claim to be a nation of free, market-oriented individuals, but cling to a social welfare system. As current public welfare programs are phased out, the federal budget should be reduced to some degree, helping to ease the federal deficit. Also, the PESA concept would provide a huge pool of capital to fuel a national economic boom. After fifteen years of operation, the Chilean Pension Savings Account has already accumulated an investment fund of $25 billion in a developing country with 14 million people and a Gross Domestic Product of $60 billion.³² There should be many benefits to implementing the PESA concept.

RECOMMENDATIONS FOR THE 1997 OREGON LEGISLATURE

Oregon will not be able to fully implement the PESA concept without Congress amending welfare, tax, and other federal laws. With Oregon representing about one percent of the national population and having a reputation for successfully pioneering new ideas, Oregon could pioneer the PESA by developing and testing some of the features of the concept. Five implementation strategies for Oregon are suggested below:

1. The 1997 Oregon Legislature should create a nonpartisan PESA Task Force, whose mission would be to develop a specific PESA model and ready Oregon to implement major federal welfare reform currently under consideration in Congress. The Legislature should staff and fund the Task Force with savings from Oregon's innovative welfare reform initiative, the JOBS Plus Program. ³³ Oregon saved $9 million with the JOBS Plus Program last year, of which $7 million will be redistributed to local welfare reform initiatives in 1996. At least half a million dollars of the savings in each of the next two years should be dedicated to developing a statewide PESA initiative.

Key responsibilities of the Task Force should include drafting a specific PESA proposal for legislative review, monitoring federal developments related to welfare reform and asset building concepts, and beginning the public education campaign on personal responsibility and the utility of the PESA concept. Because the PESA strategy will significantly alter the missions of more than one state agency, the Task Force and its staff should report directly to the Governor's Office or the Legislature.

1. The Legislature should direct the Oregon Options Program to begin negotiations with the federal government for a waiver of welfare regulations, social security taxes, and other provisions that would be replaced by the PESA concept. If Congress fails to adopt the PESA concept in the near future, Oregon will need waivers of several federal provisions in order to implement portions of the PESA concept.


2. After a two-year public campaign on personal responsibility and the PESA concept, the Legislature could implement a 100 percent tax on the federal dependent child income tax deduction benefit and concurrently institute a commensurate Oregon income tax credit for contributions to a child's savings for any child born thereafter. Initially, these funds should be established to permit borrowing for post-high school training or education. After federal legislation catches up with Oregon's leadership, the Legislature should permit roll-over of the savings accounts into a national PESA program. Even if these contributions were deposited in a child's passbook savings account at a FDIC-insured financial institution, Oregon would begin to experience the dramatic changes inherent in becoming a savings culture.


3. A parallel strategy to educate every Oregon student about principles of family financial well-being should be initiated. The Legislature should require every Oregon student, prior to high school graduation, to demonstrate competence in family financial management. The requirement should include basic skills like balancing a check book, understanding basic financial documents, filling out a income tax form, etc. The student should also be required to demonstrate an understanding of how personal choices affect the long-term economic well-being of a family, how to plan for and work toward personal financial goals, how the PESA concept works, the relationship of risk and reward in financial terms, etc. To avoid poverty, citizens need to be taught and to learn these concepts before they assume responsibilities of adulthood and parenthood.


4. The Legislature should also direct the Department of Human Resources to use a portion of the savings from its JOBS Plus Program or other welfare reform resources to create a pilot Individual Development Account Program. An IDA is similar to a PESA but focuses on building an asset for a specific goal, e.g., job training, a home purchase down payment or micro-enterprise development expenses. While not a holistic anti-poverty tool, a pilot IDA program would be similar to the PESA and would move the state toward the PESA concept. The welfare reform legislation passed by Congress while this paper was being written includes provisions for states to implement IDA programs. As Congress block grants welfare resources to the states, Oregon has a tremendous opportunity to champion asset building concepts. And Congress is expected to adopt a $100 million federal pilot IDA program in the near future. Oregon should get ready to serve as a pilot for this intermediate step toward a complete anti-poverty strategy like the PESA.


5. The Legislature could also begin phasing out subsidy programs where the public benefit achieved does not match the cost to the taxpayer. Pick ten a session and repeal them. There are dozens of provisions, established through the political process to benefit a particular constituency at the public's expense. By carefully reconsidering each provision and sunsetting those which fail the public benefit test, the Legislature can begin to lighten the taxpayers' burden and move toward a culture of private risk-management consistent with the PESA concept.


6. Assuming that Congress catches up with Oregon's leadership in the PESA concept, the 1999 Legislature may be the first state ready to adopt and begin implementing the PESA concept developed by the Task Force and staff.

As the specific details of a PESA proposal are refined over the next two years, many other action steps will become obvious. The 1997 Oregon Legislature only needs to commit to action and begin to ready Oregon for revolutionary welfare reform in Congress. With a fully developed proposal, Oregon's leadership may drive Congressional reform.

SUMMARY: THE PESA CONCEPT

The PESA concept may be the most important innovation in personal financial risk management to date. It would provide citizens with a comprehensive tool to self-manage the risk of impoverishment throughout a lifetime. During the vulnerable and dependent years, from conception to age 25, parents would manage their children's risks with their PESAs. Once an adult, the PESA concept would provide individuals with a risk management fund sufficient, if wisely managed, to sustain them through a lifetime of the usual threats to economic well-being. The PESA would even serve as a personal enterprise fund and provide a retirement pension.

The PESA is an antidote for poverty, not a cure. A society based on individual freedom should not force anyone out of poverty. Society should, however, offer an effective, holistic approach that individuals can use to self-manage risk. The PESA provides this opportunity in a manner that is philosophically consistent with key aspects of American political and economic values and traditions. Political leaders, government officials, social scientists and advocates for the poor should waste no more time seeking an answer to the question, "Can poverty be cured?" Individuals, families and society need only carry out their respective roles under the parameters set by the PESA concept and poverty can become a rare phenomenon within a generation.

ENDNOTES

1. Ending Welfare As We Know It, Policy Analysis #212, Cato Institute, 1000 Massachusetts, Avenue NW, Washington, D. C. 20001. Tel.: (202) 842-0200.

2. Federal Expenditures by State for Fiscal Year 1995, Issued June 1996, US Department of Commerce, Economics and Statistics Administration, Bureau of Census, U.S. Government Printing Office, Washington, DC.

3. Aid to Families with Dependent Children (AFDC), General Assistance, Supplemental Security Income (SSI), Medicaid, food stamps, federal or State rental assistance and public housing.) From a Census STATISTICAL BRIEF, No. 95-27, Issued November 1995, U.S. Department of Commerce, Economics and Statistics Administration.

4. 1995 Statistical Abstract of the United States, U. S. Department of Commerce, Bureau of Census, Washington, D. C. Also see, Poverty and Income Trends: 1994, by Richard May and Kathryn H. Porter, March 1996, ISBN 1-57291-014-3, published by the Center on Budget and Policy Priorities, 777 North Capitol Street, NE, Suite 705, Washington, DC 20002. Tel.: (202) 408-1080.

5. Individual Development Accounts (IDAs) are very similar to the PESA, just more specific in their use. For information on Individual Development Accounts, contact Center for Social Development, Washington University, Campus Box 1196, One Brookings Drive, St. Louis, MO 63130. Tel.: (314) 935-7433; FAX: (314) 935-8511.

Also, contact the Corporation for Enterprise Development, 777 N. Capitol Street NE, Suite 410, Washington, D.C. 20002. Tel: (202) 408-9788; FAX (202) 408-9793. Ask for a copy of their most recent quarterly newsletter. The Summer 1996 edition provided details on dozens of IDA projects underway across the country.

For a local example, Housing Solutions, a non-profit affordable housing provider in Portland is currently initiating an IDA project directed at home ownership. For more information contact Housing Solutions, 2900 SE 122nd, Portland, OR 97236. Phone: (503) 248-5200.

6. For more information on Medical Savings Accounts, contact the National Center for Policy Analysis, in Dallas, TX. Tel.: (214) 386-6272.

7. For information on privatizing Social Security, contact the Cato Institute, 1000 Massachusetts, Avenue NW, Washington, D. C. 20001. Tel.: (202) 842-0200.

8. Individual Development Accounts: Emergence of an Asset-based Policy Innovation by Michael Sherraden, Director, and Karen Edwards, Project Coordinator, of the Center for Social Development, Washington University, Campus Box 1196, One Brookings Drive, St. Louis, MO 63130. Tel.: (314) 935-7433; FAX: (314) 935-8511.

9. Social Policy Based on Assets: Singapore's Central Providence Fund, by Michael Sherraden, Washington University, St. Louis; Presented at the Annual Conference of Asian Studies, April 6-9, 1995.

10. Empowering Workers: The Privatization of Social Security in Chile, By Jose Pinera, 1996, published by the Cato Institute, 1000 Massachusetts, Avenue NW, Washington, D. C. 20001. Tel.: (202) 842-0200.

11. IDA's, note 5, op. cit.

12. For more information on Oregon's JOBS Plus program, Division Administration, Adult and Family Services, Department of Human Resources, 500 Summer St NE, Salem, OR 97310-1013. Tel.: (503) 945-5600.

13. Piñera, op. cit.

14. For Iowa IDA demonstration project information, contact David Perret, IDA Project Coordinator, State Department of Human Services, Hoover State Office Building, 5th Floor, Des Moines, IA 50319. Tel.: (515) 281-4187. For the proposed Virginia IDA program, contact David Caprara, President, The Empowerment Network, 1606 King Street, Alexandria, VA 22316. Tel.: (703) 548-6619. Many other demonstration projects are underway. Contact the Corporation for Enterprise Development for more information. (See endnote #5.)

15. This paper provides only the seed of the PESA idea and asks readers to forgive the absence of answers to all their questions on details. The PESA concept represents a significant departure from our current understanding of "welfare" as an issue for the poor, and advocates a universal approach to personal and family economic welfare. The author anticipates much discussion and wrestling with the particulars will precede implementation.

16. Piñera, op. cit.

17. One reader noted that the PESA proposal replaces one class of public expenditures for another. This is partially true. To implement the PESA, the author suggests that current personal, dependent and social security tax deductions be redirected to encourage building a financial risk-management asset for the family. But the PESA is also proposed to replace all social service programs for able-bodied citizens, thus eliminating a long list of government expenditures for personal risk management. Furthermore, the author acknowledges that Congress and Legislatures should re-evaluate the public purpose achieved by a lengthy list of government subsidy programs. In his book "Assets for the Poor," Michael Sherraden identifies more than $700 billion in federal subsidy programs, with more than 80% of these resources going to the non-poor. Clearly there is plenty of room for decision-makers to phase out public subsidies, while keeping an incentive for creating a PESA.

18. When originally discussed by the author in the unpublished End Poverty paper, the PESA was designed to generate about $150,000 to cover three years of risk management. In developing this paper, however, the author acknowledged that comparing a $50,000 per year tax free asset with a subsistence income provided by current public anti-poverty programs was not appropriate. For this reason, the author has proposed a range of asset accumulation in this paper, assuring a minimal sustenance level but allowing a larger "quality of life" level as well.

Furthermore, the dollar figures used in this proposal are provided only to indicate the utility of the PESA concept. Assumptions and amounts involved may change as an actual program is developed and adopted by the legislature and Congress.

19. For information in IDA legislation, contact the Corporation for Enterprise Development, 777 N. Capitol Street NE, Suite 410, Washington, D.C. 20002. Tel: (202) 408-9788; FAX (202) 408-9793.

20. U. S. DOC, op. cit.

21. Piñera, op. cit.

22. The PESA concept requires rethinking the privileges, rights and responsibilities of individuals in society. Current anti-poverty programs assume that each person is "entitled" to receive public assistance when in need; the current system provides benefits to individuals. With the PESA approach, government only provides incentives to parents and individuals for establishing a risk management asset fund for the individual to tap when in need. Since there is no presumption of entitlement to public assistance in the new approach, the policy questions change. Instead of wrestling with how much is a fair amount for individuals to receive from various public assistance programs, the policy question asks, "How much should parents and individuals be subsidized to encourage establishment of a PESA?" Policy makers will need to determine how to fairly distribute these subsidies to families. For example, is it fair and equal treatment for one family to receive subsidy for one child and another for six children? What is fair for a family that has twins, triplets, etc. What should be the subsidy for a family on fertility drugs that has quintuplets? Much further study into the budget implications and fairness of subsidies for a particular number of children is needed.

23. Piñera, op. cit.

24. Piñera, op. cit.

25. A Nation of Victims, by Charles Sykes, St. Martin Press, New York, 1992. Also, unpublished paper, End Poverty, more fully discusses the author's understanding of the personal responsibility value and the PESA antidote for poverty.

26. Current poverty programs fail to clearly distinguish persons unable to care for themselves from the rest of the population. While the U.S. Bureau of Census estimates 13 percent of the population took advantage of public assistance programs in 1992, national studies estimate that persons with serious mental, physical, and developmental disabilities impairing life roles constitute about 1-2% each. Many of these individuals are able to live purposeful, meaningful, and productive lives despite their disabilities, while others require supportive services or institutional support to even survive. One may conclude from this information that far less than 13% of the general population should be dependent on public assistance if an alternative form of personal risk management were available to able-bodied, able-minded citizens. The author knows of no studies that distinguish those on public assistance in this way, but assumes, based on the national studies of disabled populations, that about 5% of the population will always require some type of charitable income or service support, either from private, non-profits or government programs.

27. The sources for information on non-profit and non-governmental programs responding to persons in need are many. See the books, Heal America, by Richard Cornulle, and Assets and the Poor: A New American Welfare Policy, by Michael Sherraden for many examples. Also, there are many national, state and local non-profit and non-governmental programs operating. The National Council of Community and Economic Development (NCCED), (11 Dupont Circle, Suite 325, Washington, DC 20036. Tel.: (202) 234-5009) is one such organization with members nationwide.

28. Supplemental Security Income (SSI) provides a subsistence income of about $4-500 per month for eligible individuals. Assuming under the author's proposal that the parents take full advantage of the proposal (meaning they establish the maximum allowable Basic PESA of $140-150,000 by age 25) and based on historic rates of return from the market, the individual could continuously withdraw at least $500 per month without tapping into the corpus of the asset account. The mechanisms for this structure need not be too complex. The PESA could be managed by a responsible party in trust for the dependent individual throughout his life, with monthly checks forwarded to care givers and housing providers.

29. See "Potential Effects of Congressional Welfare Reform Legislation on Family Incomes," by Sheila Zedlewski, et.al., The Urban Institute, 2100 M Street NW, Washington, DC 20037. Phone: (202) 857-8709.

30. Ibid. #10. When Chile implemented its privatized social security system, individuals who were already in the public social security system were permitted to voluntarily convert to the privatized system. Within a year, thirty percent of the workforce had converted. After fifteen years, over ninety-percent of the workforce was utilizing the privatized system.

1. "Welfare Mothers Stress Importance of Building Self-Esteem if Aid System Is to be Restructured", by Joe Davidson, The Wall Street Journal, Friday, May 12, 1995, Page A-14.

32. Piñera, op. cit.

33. JOBS Plus, note 12, op. cit. This is only one possible source of funding for the task force. Reallocation of current resources, Oregon Lottery Funds, and private grants are other possible sources.

TABLE 1. SUGGESTED MINIMUM PESA

TABLE 2. SUGGESTED MAXIMUM ALLOWABLE PESA