Cash Transfers in the U.S. are Exploding: Here’s How to Make them Effective, During COVID-19 and Beyond
Editor’s note: This article is part of NextBillion’s series “Enterprise in the Time of Coronavirus,” which explores how the business and development sectors are responding to the pandemic. For news updates and analysis, virtual events, and links to useful resources related to the COVID-19 crisis, check out our coronavirus resource page.
The U.S., joining actions taken in countries around the world, has deployed direct cash transfers to families as a strategy for mitigating the hardship imposed by COVID-19. Indeed, the coronavirus pandemic has increased interest in cash transfers among governments, foundations, nonprofit organizations and other entities both in the U.S. and abroad. Cash infusions — policies or programs that provide money directly in some form — have been planned, introduced or adapted by over 130 countries in response to COVID-19.
Yet even before the coronavirus pandemic began, many households in America were financially insecure. In 2019, the U.S. Financial Health Pulse survey found that 135 million people struggled with at least some aspects of their financial lives, and an additional 43 million people struggled with all or nearly all aspects of their financial lives. Furthermore, the Urban Institute estimates that more than three in 10 households have debt in collections, and that number rises to more than four in 10 when we look at communities of color.
These underlying financial vulnerabilities were exacerbated by the pandemic and will not recede once the immediate response to COVID-19 is over. As such, cash needs to be an ongoing feature of how the U.S. supports the financial security of its families. New research from Aspen’s Financial Security Program draws from decades of experiences in the U.S. and internationally to distill a core set of features that define how cash transfer programs should be leveraged to deliver the fullest benefit to the families they’re reaching. This research is timely, as more stakeholders are considering adding guaranteed income — i.e.: programs that provide a steady, predictable and unrestricted amount of money to recipients — or other cash infusion components to programs and policies, and the U.S. Congress is considering an additional round of cash payments. It is critical that these efforts draw from the insights of established cash transfer efforts to make them accessible, responsive to the needs of recipients and their families, and scalable to more individuals.
Design Matters for the Successful Delivery of Cash
The CARES Act, the U.S. government’s initial round of COVID-related payments, included Economic Impact Payments (EIP) that provided $1,200 to qualifying adults and an additional $500 per child. But despite the extensive evidence within the cash transfer field demonstrating sound, effective design practices, these payments do not reflect the needs of the most heavily impacted communities.
For instance, many of these individuals have been forced to wait far too long to receive their checks. Early evidence from the implementation of the EIP shows that millions of households have either received a delayed payment — or no payment at all — due to the administrative design choices that prioritized households with a tax-filing history and direct deposit information on file. In contrast, this approach penalizes households with incomes too low to file a tax return, households with a member that has undocumented immigration status, and those that are outside the formal banking system. While the government established a portal to provide an alternative way for some (but not all) of these excluded households to receive EIPs, this creates additional hoops and barriers — and the portal has been plagued by fraudulent claims. On June 3, the IRS reported that 159 million Americans have now received their Economic Impact Payments, and the Committee on Ways and Means estimates that 30-35 million payments still need to be made.
Mounting Evidence Demonstrates That Cash is a Critical Tool
Fortunately, there is a decades-long history of cash transfer programs which demonstrates their effectiveness and highlights ways to improve their impact. This research shows that cash transfers:
- provide households with the cash needed to cover basic needs like household bills and utilities or to address postponed medical care;
- increase funds available for savings and investments;
- allow people to make the work arrangements that work best for them;
- reduce poverty and material hardship, especially for vulnerable populations;
- boost health outcomes; and
- improve educational attainment for children.
Two current guaranteed income programs (both in existence before COVID-19) demonstrate how cash can make a meaningful difference in people’s financial lives. The Stockton Economic Empowerment Demonstration (SEED) in Stockton, California provides $500 a month for 24 months to 125 low-income residents. On average, between February 2019 and March 2020 nearly half of the money (47%) went to food and utilities. But the funds have also created the space for residents to look for better jobs or step back from having to balance multiple jobs, and instead spend more time with loved ones. Similarly, the Magnolia Mother’s Trust (MMT) pilot provided $1,000 a month for 12 months to 20 Black women living in public housing in Jackson, Mississippi. Early findings reveal that the mothers used the funds to pay regular bills, pay down debt, and cover transportation and educational costs. And the benefits of the cash extended beyond purchasing power and credit improvement: Mothers also reported higher educational attainment by the end of the year-long pilot, and all participants reported worrying less and feeling hopeful about their future in five years. A second phase of MMT with a cohort of over 75 women was launched in mid-March. It promises critical insights about the impact of regular infusions of cash during a national economic emergency, and will offer a clear contrast to the design and administration of the one-time payments provided by the CARES Act.
New data from the Family Independence Initiative (FII) and LIFT, two innovative, multi-site U.S. nonprofits that provide cash infusions to their members, corroborate these findings. Like SEED and Magnolia Mother’s Trust, these cash infusions are unrestricted, meaning there are no limitations directing how the money can be used by recipients. The cash has allowed both organizations’ members to create slack in their monthly budgets and make progress on their individual and family goals. LIFT members that have received the transfers have reported greater savings and fewer late fees. Because of the flexibility of the funds, members are able to allocate the money differently from one transfer to the next, in accordance with their needs at the time.
Both FII and LIFT recognize the critical role of program design in affecting the outcomes for households. Their programs have undergone design changes to better reflect the needs of their members. For instance, FII stopped asking families to categorize how they planned to use their funds, because although the funds could be used for any purpose, this bucketing created a barrier when a person’s goals did not fit neatly into a pre-defined category. As a result of eliminating these perceived barriers, FII found that its families experienced greater upward economic mobility through increased earnings. Through their previous cash pilot programs, LIFT had also learned how a program’s design could create unintended friction for participants and add program administration costs. So their Family Goal Fund offers cash transfers without asking for receipts or providing the funds in the form of reimbursements for qualified purchases.
Three Core Features of Successful Cash Transfer Programs
Recently, Aspen Financial Security Program distilled these and other cash transfer program learnings into three core lessons. The following design principles can help organizations structure more effective programs providing guaranteed income, cash infusions and other safety net services:
- Incorporate the voices of intended beneficiaries into the design process. Input from impacted individuals — i.e.: those who experience the challenges and understand the barriers that cash infusions intend to solve — should inform program design. This can help ensure that the programs do not create unintended barriers that make the payments hard to access or utilize. The U.S. would be in much better shape in our COVID-19 response if this had been our starting point.
- Provide efficient payment platforms and systems. The difficulties with the U.S. government’s Economic Impact Payments have demonstrated the importance of ensuring that the systems that enable cash transfers are in place before the transfers begin. This includes offering multiple transfer methods, such as the use of debit cards, checks and other forms of payment, to meet the needs of the receiving population.
- Include consumer financial protections. Not all individuals have access to affordable and safe credit or to the financial services system generally. So in times of need, consumers turn to more expensive or lower-quality products. If a more universal or permanent cash transfer program is put in place in the U.S., it will be important to ensure that the systems in which these transfers exist are safe and accessible for all recipients. That means consumers should be protected when the transfers are made, and neither the mechanism for delivery nor for spending should be subject to fees or predatory practices that would undermine the savings and purchasing power that these programs aim to provide.
The Role of Cash in Household Financial Security
Financial insecurity will extend beyond this emergency and the “reopening” of the economy. It won’t be enough to only provide these cash infusions during the pandemic. The data make clear that households were already struggling before COVID-19 hit, and that financial vulnerability will not go away the moment people can safely return to work.
Looking toward the future, it will be important to ensure that the metrics we use to assess prosperity don’t conflate the strength of the economy with household well-being. For instance, even when the stock market was rallying and unemployment was at record lows, too many households across the country were financially precarious. The U.S. needs to reorient its measures around the real situations families face — and align policies and programs with their needs. If we’d done that earlier, we would have been poised to react to the current pandemic even faster. While the large-scale delivery of cash may have been an acute response to families destabilized by the economic disruption of COVID-19, it is clear that the need for these transfers is ongoing. Going forward, policymakers must prioritize cash transfers as a strategy to support the financial security of families and to enable them to weather any crisis in their lives — pandemic or otherwise.
Photo courtesy of Omid Armin.