WASHINGTON — A new program to promote savings of low-income Americans is attracting increased attention on Capitol Hill as Congress remains deadlocked over adding private investment accounts to Social Security and lawmakers search for other ways to help Americans save for their retirement.

The savings tool that some lawmakers are beginning to shift their political capital to is individual development accounts or IDAs, which Congress authorized in 1998 as part of government aid for the needy. Participating financial institutions offer IDAs to low-income individuals and match their contributions to the accounts on either a partial or one-to-one basis, but several proposals attracting attention on Capitol Hill would require the government to contribute to IDAs.

IDA holders receive their free money under one condition: they must undergo financial literacy education that is intended to prepare them for a life of cautious savings and no debt. President Bush has steadily increased the yearly budget for IDAs, but this year Sen. Rick Santorum has been the accounts’ most tireless promoter.

IDAs are state-sponsored in Pennsylvania, home of Santorum, the Senate’s third-ranking Republican and head of its Social Security subcommittee. He has leveraged his leadership to pitch two IDA proposals, one that would make government-funded IDAs available to anyone who meets income requirements (typically around $38,000 per year for a family of four) and one that would bestow an IDA on every child born in America.

"IDAs are one of the most promising tools that enable low-income and low-wealth Americans to save, build assets and enter the financial mainstream," Santorum told members of his subcommittee at an IDA hearing last month.

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When introducing his bills, each of which has Democratic co-sponsorship, Santorum spoke of "a holistic approach" to retirement savings that begins with IDAs and continues on to Social Security. "You’ve got to keep your legislative options open," he said on the issue last month.

More welfare or path to financial security?

But economists who endorse IDAs when banks foot the bill were less enthusiastic about government-matched contributions, which they said could become a new welfare subsidy.

"I don’t see it as a savings plan, I see it as a way to transfer money to low-income people," said Barry Bosworth, an economist for the nonpartisan Brookings Institution. "If you tell someone, ‘you set aside money ... we’ll double it,’ I think a lot of people would do it. But what we’re trying to teach people is the benefit of savings not when you get an extraordinary return, but a reasonable return."

The nonprofit Corporation for Enterprise Development runs IDA pilot programs under which low-income residents of major cities have opened more than 10,000 privately administered accounts. CFED’s most recent study, in 2001, found an average monthly savings rate of 2.2% for their IDA holders, the majority of whom made no more than $2,000 per month.

The Earned Assets Resource Network has also started IDA pilots as part of its work with the California state government and Citibank to generate low-income savings opportunities. IDA holders in EARN’s programs "put away 6% of their gross income, while the national savings rate is effectively zero," said EARN director Ben Mangan.

Mangan exaggerates the national savings rate, but not by much. The average savings rate for all Americans in 2004 was less than 1% of U.S. gross domestic product, according to government figures.

Especially worrisome to fiscal conservatives is the easy access to IDAs. Social Security benefits cannot be spent until retirement, but both of Santorum’s plans permit IDA accountholders to take money out for any purpose, from education to home purchasing to Christmas presents.

Bosworth was also concerned that universal IDAs could yield a government-sponsored windfall for financial advisors and investment firms before giving much tangible profit to individuals.

"That’s exactly what happened in the student loan program," Bosworth said. "Who turned out to be the best beneficiary of student loan programs? It was banks," benefiting from the government’s quick sale of loans to private interests.

Will Beach, an economist at the conservative-leaning Heritage Foundation, supports IDAs in principle but contends that once Congress begins to implement programs on a nationwide basis, it turns "hand-up" programs into "hand-outs."

Beach dismissed any attempts to link IDAs to individual Social Security accounts, despite Mangan and Santorum’s fondness for a "three legs of the stool" outlook, in which IDAs and Social Security accounts are supplemented by pensions to secure Americans’ retirement savings.

Part of the mix

Like many other IDA administrators, Mangan was both wary and welcoming of the political firestorm over Social Security. He said the president’s privatization plan has brought welcome attention to the issue of asset-building; on the other hand, Mangan charged, IDAs have been unfairly caught up in the public scrutiny of Bush’s proposal.

Though IDAs were created to increase savings and assets for poor Americans and not as a part of the Social Security issue, some legislators who have signed onto Santorum’s bills refer to universal IDAs as a partial fix for the national asset vacuum that throws Social Security’s solvency problems into such sharp relief.

"I think that’s part of the risk for the (IDA) field - that we’ll be inadvertently linked to the privatization of these accounts that the field as a whole really believes ought to remain risk-free," Mangan said.

Key lawmakers leading the Social Security debate say that the IDA plan will be considered in a broad range of options being studied.

The IDA concept is "something I’m willing to look at, but also something that’s tremendously costly," said Sen. Chuck Grassley, R-Iowa, chairman of the Senate Finance Committee, which has been holding hearings on the national savings rate and Social Security but not yet produced a consensus plan.

Grassley noted there are myriad ways to encourage asset building, including increasing the ceiling on contributions to 401(k) plans, and said "we have such a poor rate of savings, that (I will consider) all of the above."

Grassley suggested IDAs with government-matched contributions as part of his 1999 proposal to partially privatize Social Security, but six years is an eternity in politics and at that time, Grassley had two Democratic cosponsors.

His counterpart on the other side of Capitol Hill — House, Ways and Means Committee chairman Bill Thomas, R-Calif. — has indicated he will take a similarly broad approach to addressing the issue.