ROC Your Refund
City of Rochester, New York
City of Rochester; CASH (a community collaborative led by the Empire Justice Center and the United Way of Greater Rochester); Behavioral Insight Team
“If the EITC could instead be distributed in smaller, monthly checks instead of as an annual lump sum, low-income families might be better equipped to break out of crippling debt cycles. And poverty. Today, changing the way the EITC is distributed depends on further research into the saving habits of low-income families.”
Week to week, families in poverty can experience big income swings. These unpredictable dips in earnings make it difficult to save and cover unplanned expenses. In 2015, the Federal Reserve reported that less than half of low-income families--meaning those earning under $40,000 per year--save any portion of their income. Compare this with the 90% of high-income families--or those earning more than $100,000 per year--who are regular savers. A similar report by JP Morgan Chase found that 65% of American families lack the money needed to weather income dips and expenditure spikes. Many American families are one unexpected crisis away from falling into poverty.
The Earned Income Tax Credit (EITC) was first introduced by Congress in 1975. Since then, it has become one of the government’s largest anti-poverty programs. In 2016, the Center for Budget Priorities reported that the EITC helped lift 5.8 million Americans out of poverty. And while the EITC helps families in poverty cover immediate needs, it also encourages work and higher earnings: the EITC is structured so it always makes sense for an individual to earn an extra dollar of wage income. In addition to incentivizing work, the EITC comes with a number of other benefits. Neumark and Shirley (2017) and Agan and Makowsky (2018) found that women who receive an EITC see higher long-term wages and are less likely to engage in crime.
Similarly for children, Dahl and Lochner (2012) and Bastian and Michelmore (2017) found that being part of a family that received EITC improved children’s reading and math abilities and increased the likelihood they would graduate from high school and college.
But there is one looming issue we need to better understand. The EITC is delivered each year in a single, lump-sum payment. Though the tax credit could be used to help families work through unexpected monthly expenses, the lump-sum payment makes it difficult to do so. Research shows that low-income families use the majority of their EITC to pay back accumulated debts. Over the rest of the year, families revert to using credit cards and predatory lending services to cover dips in income and to pay for rent, groceries, and utilities. If the EITC could instead be distributed in smaller, monthly checks instead of an annual lump sum, low-income families might be better equipped to break out of crippling debt cycles. And poverty. But changing the way the EITC is distributed depends on further research into the saving habits of low-income families.
The ROC Your Refund program is offered by the City of Rochester and CASH, a community collaborative led by the Empire Justice Center and the United Way of Greater Rochester. It encourages low-income taxpayers to save a portion of their annual EITC income, which it distributes to them each month– like a bonus paycheck. Participating clients save a portion of their EITC in a savings account. In addition to helping clients kick start a savings account and access basic banking services, the City of Rochester also provides personalized financial and workforce counseling to clients. And to encourage participation, the program matches the portion of the EITC low-income families put away. With a more consistent stream of income, families in poverty will be able to better manage their difficult financial situations.
What is the impact of offering a matched savings program on the financial and personal wellbeing of those who receive the EITC?
- Individuals who participate in the ROC Your Refund program and save a portion of their annual EITC will be less dependent on credit than those who don’t.
- The program will help reduce clients’ financial stress and improve their housing stability.
- Participants who receive matched savings will be more likely than non-participants to save in the future.
Research Study Design
LEO’s study of ROC Your Refund is a randomized controlled trial. To be eligible to participate, applicants must receive an EITC, have at least one dependent child, and agree to contribute $200 to a savings account. Once individuals are deemed eligible, they enter a lottery to determine the rate their savings will be matched. This study uses two treatment groups and one control group.
In the lottery, participants have a 50% chance of entering a treatment group and a 50% chance of entering the control group. Clients randomized into the first treatment group receive financial counseling and a 50% match rate for their EITC savings. Clients in the second treatment group receive financial counseling and a 25% match rate for their EITC savings. Participants keep their match if they maintain their savings throughout the year. Those in the control group receive financial counseling, but no match for their EITC savings.
At the conclusion of the study, LEO researchers will conduct a follow-up survey of all participants, as well as track participants’ outcomes through administrative data. The survey will gather information on participants’ spending habits, financial status, and housing history. To determine the impact of the program’s financial counseling and the matching of EITC savings, the outcomes of participants will be compared across the treatment and control groups.
(Photo credit: ROC Your Refund)