The ASPIRE Act of 2009

1. What
   does the bill do?
2. Why
   is a bill to promote asset building for children necessary?
3. Who
   is eligible? Will illegal immigrants or children who become citizens get
   accounts?
4. Will
   children born before the bill takes effect get accounts?
5. Why
   do wealthy people get these accounts?
6. Why
   do poor people who don’t pay taxes get accounts?
7. Is it
   unrealistic to expect those with low incomes to save when they already
   struggle to get by?
8. How
   much money will the government put into an account?
9. How
   much of the benefits will go to lower-income families?
10. Will
    assets in the accounts penalize people applying for public assistance?
11. Who
    can contribute to the accounts?
12. Why
    is there a limit on private contributions to the account?
13. Who
    will control the accounts?
14. How
    much will this cost?
15. Can America
    really afford this? How is this paid for?
16. Shouldn’t
    the government be encouraging households to spend, not save during a
    recession?
17. Are
    there restrictions on account withdrawals? How can money in the account be
    used?
18. How
    will the account be taxed?
19. Why
    is there a minimum account balance, even after age 18?
20. Has
    this been done before?
21. How
    do Lifetime Savings Accounts differ from the UK’s Child Trust Fund
    Accounts?
22. Will
    this raise college tuition?
23. What
    if my child needs money to pay for college before they are 18?
24. Who
    will manage this program?
25. Can
    the private sector offer accounts?
26. Why
    not let the private sector handle all of the accounts?
27. How
    much can a child save in a Lifetime Savings Account? What will they have
    when they are 18?
28. Where
    will money in Lifetime Savings Accounts be invested?
29. How
    will this bill help promote financial literacy?
30. What
    is the legislative strategy for moving this bill through Congress?
31. How
    is this year’s bill difference from previous versions?

1. What does
the bill do?

The America Saving for
Personal Investment, Retirement, and Education Act (“The ASPIRE Act of 2009”)
will provide a Lifetime Savings Account for every newborn child in 2010 and
beyond. Each account will be endowed with an initial $500 contribution, and
children living in households earning below the national median income will be
eligible for both a supplemental contribution of up to $500 at birth as well as
the opportunity to earn additional matching funds for amounts saved in the account.
All federal contributions will be readjusted for inflation every five years.

Withdrawals cannot be made
from the account until the account holder turns 18. After the account holder
turns 18, their account will be governed by rules similar to Roth Individual
Retirement Accounts (Roth IRAs). These rules allow for tax-free withdrawals without
penalty for select pre-retirement uses including post-secondary education and first-time
home purchase.

2. Why is a
bill to promote asset building for children necessary?

Success in America
today depends not just on a job and growing income, but increasingly on the
ability to accumulate a wide range of assets. Yet one-quarter of white children and half of non-white children grow
up in households without any significant levels of savings or resources
available for investment. It is the combination of
both income and assets that provides the means to take advantage of the broad
opportunities offered by a prosperous society. Owning a home, obtaining an
education, and building a stock of financial investments are some of the
essential elements of security and economic well-being because they provide the
basis for building and expanding wealth.

To
take full advantage of these opportunities, it is important to have a familiarity
with financial assets. A Lifetime Savings Account will get every child and
their family thinking about their future. Each child will grow up knowing they
own a modest pool of resources that can help them get started in life as a
young adult. For some, this asset pool can be used to seed profitable and
productive investments, for others, it may provide a sense of security many now
lack. The public investment signals that society has an interest in the success
of every child, and they, in turn, will be responsible to make appropriate
choices throughout their lives. By creating an inclusive system of children’s
accounts, the ASPIRE Act has the potential to expand opportunity, broaden asset
ownership, and fortify the American economy for the long haul by helping
children and their families plan to save.

Federal
policy has historically discouraged asset building among households with fewer
resources while heavily subsidizing it for non-poor households. This makes no
sense. A smart policy would encourage all Americans to own assets. 

3. Who is
eligible? Will illegal immigrants or children who become citizens get accounts?

Every
child born in the United
States after December 31, 2009 is entitled
to receive an account. Eligible individuals must be U.S. citizens or legal
residents according to Section 431 of the Personal Responsibility and Work
Opportunity Reconciliation Act of 1996 (the welfare reform bill). Children who
become citizens before the age of 18 will be eligible to open accounts and
receive account benefits.

4. Will children born before the bill takes effect get
accounts?

Only children
born after December 31, 2009 will receive accounts and be eligible for account
benefits.

5. Why do wealthy people get these accounts? 

Policies
that include everyone but are targeted to people with greater needs have proven
to be most enduring, while avoiding the stigma attached to means-tested
programs. So, getting everyone in the same system will provide the strongest
foundation for increased savings. While a Lifetime Savings Account will be
universally accessible to each and every child, the majority of benefits will
flow to families with modest incomes. Over the first ten years, approximately
83% of the benefits will go to families earning below the national median
income (around $48,000 in 2006).

Ensuring
that every child has an account will increase the opportunity to use these
accounts as teaching tools to facilitate financial education. Also, since a
family’s income level can fluctuate over the course of a lifetime, this
universal structure will ensure that children are not unfairly included or left
out of the program because their parents’ income level reached a high or low
point around the time they were born.

6. Why do
poor people who don’t pay taxes get accounts?

The value of assets is based
not only on the economic security they provide but in how they enable people to
make investments in their future and exert a stake in the broader society that
income alone cannot provide. The ability to move up and out of poverty often
depends on one’s ability to accumulate assets. But millions of Americans live
in households with few or no assets. One-quarter of white children and half of
non-white children grow up in households without any significant levels of savings
or resources available for investment. This represents an important dimension
to the problem of inequality, which is usually discussed in terms of income.
Wealth inequality is more severe than income inequality. According to the most
recent Survey of Consumer Finances, conducted by the Federal Reserve in 2007,
the top 10 percent of households in the U.S. ranked by income had a median
net worth of $1,119,000.  In contrast,
the bottom 20 percent had a median net worth of $8,100, nearly 140 times less
than the top 10 percent.  The median net
worth among all families was $120,300, which was still nearly 10 times less
than the top 10 percent. It’s not that the rich have too much; it’s that the
poor don’t have enough wealth to move their lives forward.

Public policy currently
offers many asset building incentives through the tax code. But these
incentives are not as accessible to the families that would benefit from them
the most. Many lower-income households simply do not have large enough tax
liabilities to take advantage of these tax expenditure programs.

7. Is it unrealistic to
expect those with low incomes to save when they already struggle to get by?  

Recent
findings from a national demonstration project of matched savings accounts for
low-income individuals found that the poor can save when given the right incentives
and savings products.  In the American
Dream Demonstration, a national study that established over 2,300 matched
savings accounts, low-income families were able to save a net average of $17 each
month over four years. In fact the poorest families ended up saving a higher
percentage of their incomes than families that were better off. Participating
families also saw a 5 percent increase in new homeownership compared to a control
group. Overall, saving is not easy for the poor and they typically can only
save small amounts, but even small amounts can lead to positive outcomes in the
lives of children. 

8. How much
money will the government put into an account?

There
will be an automatic contribution of $500 for every account. A child will
qualify for a one-time supplemental contribution if their household income
is below the national median income (around $48,200 in 2006). The maximum
supplemental contribution will be $500. The bonus amount will be evenly
pro-rated so that a child receives the full amount if their household income is
below 75% of the national median Adjusted Gross Income (AGI), or about $24,100
in 2006, and a lesser amount as the household income approaches 100% of the
national median AGI.

Eligible
account holders can receive a one-to-one match up to $500 on private
contributions to their accounts each year until the account holder reaches the
age of 18.

All
contribution amounts will be indexed for inflation every five years.

9. How much
of the benefits will go to lower-income families?

In
the first year, approximately two-thirds of the account benefits go to families
earning under national median income. Thirty-nine percent of the account
benefits go to families earning below 50% of national median income (about
$24,100 in 2006). Further, only 11% of the account benefits go to families
earning over 200% of the national median income (roughly $96,000). As more
cohorts become eligible for the means-tested matched savings, the percentage of
benefits to lower-income families increases.

Household
Income                                                               Percent of Benefits Distributed
over Time

First Year                       First 10 Years             First 18 Years

 

$0
– $24,100
(0%
to 50% of national median)                                 39%                                43%                                43%
25%
of all households

 

$24,101-
$48,200
(50%
to 100% of national median)                             31%                                39%                                43%
25%
of all households

$48,201
– $72,300
(100%
to 150% of national median)                           11%                                 7%                                 6%
18%
of all households

$72,301
– $96,400
(150%
to 200% of national median)                           8%                                    4%                                3%
14%
of all households

$96,401
and above
(0ver
200% of national median)                                  11%                                  6%                                5%
18%
of all households

 

10. Will
assets in the accounts penalize people applying for public assistance?

No. Amounts in accounts
will not be considered when determining eligibility for any Federally-funded
benefit.

11. Who can
contribute to the accounts?

Private, voluntary
contributions can be made to each account each year. These contributions will
be after-tax and can come from any source, including parents, grandparents,
friends, employers, non-profit organizations, and children themselves. The bill
allows for contributions up to $2,000 a year.

12. Why is
there a limit on private contributions to the account?

Earnings on contributions to
Lifetime Savings Accounts will be tax-free. These accounts are not intended to
be tax shelters but vehicles to build assets. As such, it is necessary to
impose a cap on how much money can be deposited into the account to prevent
these accounts for being used as shelters.

13. Who will
control the accounts?

Parents and legal guardians
will serve as account custodians and make investment decisions until the account
holder reaches the age of 18. The account holder’s custodian shall elect how
money in the Lifetime Savings Account is invested. If no election is made, a
life cycle investment option will be specified as a default.

14. How much
will this cost?

The estimated cost for this
bill is $37.5 billion over the first ten years (2010-19).  Accounts would start being created in 2010.
The cost in the first year when accounts are opened is $3.25 billion. Annual
costs will rise as each new participant is eligible for benefits. Over twenty
years, the total estimated cost is $86.5 billion (2010-2029). As a point of
comparison, the annual cost to the
government of allowing pension contributions to be excluded from income is more
than $111 billion.

15. Can America
really afford this? How is this paid for?

The cost of
the legislation in 2009, if approved, would be $3.25 billion, a small fraction
of the projected $3.1 trillion Federal budget in that year. However, this cost
is different than virtually all other proposals for new spending or tax cuts
because none of it would constitute a reduction in national savings – for the
first 18 years of the program, all “outlays” would be fully invested, which
would help spur the economy and promote long-term economic growth. In fact, the
bill should increase national savings
to the extent that its matching benefits and other incentives would encourage
families to save more. Nevertheless, the current federal budget deficit is a
significant public policy issue that will affect consideration of all existing
and proposed federal policies. The bill does not assume that the legislation’s
outlays would be offset by any particular revenue source. However, the bill
sponsors have expressed a commitment to pay for this proposal with other
budgetary offsets.

16. Shouldn’t the government be encouraging households to spend, not
save during a recession?

For
a number of reasons, the expenditures of government should necessarily increase
during a recession. The efficacy of pursuing balanced budgets over the course
of the business cycle remains a reasonable proposition, and there will be a
time to revisit this debate at a later date. As for now, it will be
irresponsible (fiscally and otherwise) for the government not to undertake
increased deficit-financed spending. This spending should be focused on three
primary objectives, including ameliorating economic hardship, creating the
conditions for the next economic recovery, and promoting robust economic growth
over the long term.

However,
increased government spending does not remove the importance of saving,
especially at the household level. This attention afforded to consumption as a
driver of the economy seemingly undermines the argument to increase savings.
But the case for saving is not intended to be a one-time shot in the arm like
flooding the economy with rebate checks. While it is true that declining
consumption in the near future will increase recessionary pressure on the
economy, it is also true that the economic health and stability of many
families will require they realign their spending and debt with their long-term
savings needs.

This
does not have to happen all at once. The recession will naturally push up
savings rates as economic uncertainty will drive people to prefer holding on to
more of their income (a liquidity preference is what the economists call it).
This preference is exactly what the increased government spending must counter,
so economic activity continues even though consumer spending declines.

Although
the spending of the American consumer is remarkable in many respects, it should
not be considered a birthright or an obligation. We can’t place the
responsibility of ending the economic slowdown on the spending households that
are already in debt and with low savings. We need to be thinking now about
creating the set of incentives, institutions, and policy supports that can
establish the long-term foundations of our economy.

In
the near term, government spending should offset declines in consumer spending
associated with the recession, but over an extended time horizon, there is a
strong case to be made for increased savings and a justification for a policy
response that enables greater savings to occur, especially for families with
lower incomes and fewer resources.

17. Are
there restrictions on withdrawals from Lifetime Savings Accounts? How can money
in a Lifetime Savings Account be used?

There are a set of
restrictions that apply to account withdrawals which are designed to ensure
that the accounts are used by the account holders for productive, asset
building purposes. No withdrawals can be made from the Lifetime Savings
Accounts until an accountholder turns 18 and a minimum balance equal to the automatic
government contribution (initially $500) must be maintained until the account
holder reaches retirement age, as defined by Roth IRA regulations.

Between the ages of 18
and 25 the only allowed use of the funds will be for post-secondary education
with distributions being made directly to post-secondary education providers.
After reaching the age of 25, homeownership and retirement security will be the
additional allowed uses in accordance with Roth IRA rules. Other distributions
will be taxed and penalized at a rate of 10% for earnings on private
contributions, and 100% for government contributions – that is, if you don’t
use the funds for a specified asset building purpose, you lose all the
government matching funds. 
Accountholders can access their private contributions without penalty
after age 18.

18. How will
the account be taxed?

Withdrawals will be taxed
according to Roth IRA rules. Qualified distributions from these accounts will
be tax-exempt. Non-qualified distributions will be subject to tax along with a
10% penalty and a 100% tax on government contributions. Voluntary contributions
to each account will be after-tax, and will not be tax deductible. Public
contributions and deposits will not be included in federal income tax
calculations.

19. Why is there a
minimum account balance, even after age 18?

The
bill requires a minimum balance in the Lifetime Savings Accounts held by the
ASPIRE Fund at all times until retirement age. This will ensure Lifetime
Savings Accounts serve as a savings platform for retirement security and
life-long asset building. The minimum balance required is equal to the
automatic contribution, initially $500. Rollouts to other accounts would be
permitted for balances above the minimum.

20. Has this
been done before?

The ASPIRE Act is innovative
in many respects, but it has historic precedents both here and abroad.
Internationally, the United
Kingdom will create a national system of
Child Trust Fund accounts. Every child born in the UK after September 2002 is eligible
to receive a voucher of 250 pounds and an additional 250 pounds if they live in
lower-income families. Funds will be invested until children reach the age of
18. Canada
has recently proposed helping lower-income families save for their children’s
education with Learning Bonds. This program will give low-income children a
$500 endowment into a Registered Education Savings Plan at birth and additional
$100 top-ups every year. In addition, families with low incomes will be
eligible to receive a matching grant on the first $500 saved into the account.

In the United States, historic
initiatives, such as the Homestead Act of 1862, the GI Bill of 1944, and the
creation of the Federal Housing Administration (FHA) in 1934, have expanded
access to important elements of wealth creation and produced tangible results.
The Homestead Act provided an opportunity to build wealth by developing
property. Of the million and a half people that successfully took the
government up on its offer, passing this wealth and property on to the next
generation proved to be one of the most enduring legacies of the Act. The GI
Bill offered veterans grants to pay for training and higher education, loans
for setting up new businesses, and mortgages to purchase homes. Through this
law, some $14.5 billion was spent by the federal government between 1944 and
1956 benefiting almost 8 million veterans. A congressional report has estimated
that the GI Bill generated returns of up to seven dollars for every dollar
invested, an impressive performance by any standard. The FHA was created to
help many Americans purchase a home. Through its mortgage insurance and other
financing products, FHA has played a role in the country’s rising homeownership
rate, which reached an all-time high of almost 70% in 2002.

Programs that have targeted
children, such as TANF and its predecessor AFDC, traditionally have focused on income security, and thus have taken the form of ongoing
children’s allowances. This approach, which is very important, is quite
distinct from complementary ones that focus on long-term savings and asset
building strategies.

21. How do Lifetime Savings Accounts differ from the UK’s Child
Trust Fund Accounts?

There are two main differences.
First, Lifetime Savings Accounts include matching of voluntary savings-this should
substantially increase incentives for saving. Second, Lifetime Savings Accounts
limit withdrawals to investment-related uses, whereas the UK program
allows funds to be used for any purpose once an individual becomes an adult.

22. Will
this raise college tuition?

Although
many children may have increased levels of savings that could be used to
pay for a college education, there is no clear evidence that this will lead to
corresponding tuition increases by colleges. Lifetime Savings Accounts,
rather, will be one of a number of tools-such as education savings
plans, tax credits, and student aid-that families can use to help make
college more accessible and affordable. A Lifetime Savings Account
may enable lower-income students to work fewer hours while in school,
thereby increasing their chances for graduating and completing college at
a faster pace. These accounts may also increase the competition between
and quality among colleges, who will have to compete for the
growing numbers of students that find themselves in a better position
to shop around for a college education. In addition,
many people may decide not to use their Lifetime Savings account for
education and instead use it to buy a home or build up a
nest-egg for retirement.  

The
bill stipulates that any amounts in Lifetime Savings accounts shall not be
taken into account in determining any individual’s eligibility for any Federally-funded
benefit, including student financial aid.

23. What if
my child needs money to pay for college before they are 18?

The bill allows for account
withdrawals only after accountholders reach the age of 18.

24. Who will
manage this program?

The bill creates a Fund
that will be established within Treasury and will be governed by a Board of
Directors similar in structure to the Board overseeing the Thrift Savings Plan
(TSP), the retirement program for federal employees. The Director of the Fund
will be appointed by the Board and shall have the same powers and
responsibilities as the Director of the TSP.

25. Can the
private sector offer accounts?

Yes,
they can. Account holders have the choice to either keep their accounts within
the ASPIRE Fund or transfer their accounts to private sector Lifetime Savings
Account providers. This rollout may occur at anytime after the initial account
has been opened. To maintain the account as a savings platform for retirement
security and life-long asset building, a minimum balance equal to the automatic
contribution (initially $500) is required in the Lifetime Savings Accounts held
by the ASPIRE Fund at all times until retirement age.

26. Why not
let the private sector handle all of the accounts?

The Thrift Savings Plan model
is more appropriate for handling small accounts because of its lower
administrative costs. In addition, those who lack experience with financial
investments may benefit from the simplicity of the TSP approach, with its
limited set of investment options. 
Research from the field of behavioral economics also demonstrates the
importance of having an initial default investment, which the TSP model is best
suited to serve as given its lower costs and simplicity. 

27. How much
can a child save in a Lifetime Savings Account? What will they have when they
are 18?

Account balances will depend
on several factors including how much money is saved in the account, where it
is invested, administrative fees, and the investment performance. As we have
seen over the past year, market conditions and investment performance can vary
greatly. There are real risks involved in any type of investment and money can
be lost. However, over the long run market investments are still one of the
best ways to build assets for families of all incomes. Furthermore,
historically most funds in the Thrift Savings Plan have performed well over the
long-term. A variety of different investment options will be available with
exposure to varying levels of risk. Products like lifecycle funds will also be
available, which automatically become more conservative in their investments as
the account owner approaches college age or retirement. Every financial
prospectus will include a detailed description of risk.

Assuming an average annual
return of 7% over 18 years with steady contributions of $300 (for a family that
qualifies for the match rate each year) can lead to an account balance of over
$20,000.  Assuming an average annual
return of 5% under the same conditions can lead to an account balance of over
$15,000. With a 3% return a family could still have over $12,000, which could
help them pay for the higher education expenses of their child. Under each of
these scenarios, a family would only have to contribute $25 a month to have
funds of these sizes available for their children when they turn 18. 

28. Where
will money in Lifetime Savings Accounts be invested?

A private sector
professional manager will oversee a range of investment options. These investment
options will be similar to those offered by the Thrift Savings Plan, including
a government securities fund, a fixed income investment fund, a common stock
fund, and other funds that may be created by the Board.

29. How will
this bill help promote financial literacy?

The
bill explicitly calls for the development of programs to promote financial
literacy among both children and parents alike. While parents and legal
guardians will serve as account custodians and initially make investment
decisions, children will have a stake in learning about an account that has
their name on it. Additionally, providing every child with an account will
facilitate introducing financial education into K-12 curriculum. Research suggests
an iterative relationship between account ownership and financial education,
that is, individuals are more likely to benefit from financial education when
an account is present.

30. What is
the legislative strategy for moving this bill through Congress?

The legislation will be
introduced in both the House and the Senate later in 2009. An initial version
of the bill was introduced in the 108^th Congress in July of 2004 and was reintroduced in the 109^th Congress in April 2005 as S. 868 and H.R.
1767.  In the 110^th Congress,
a new version of the bill was introduced in the House in 2007 as H.R. 3740 and
in the Senate in 2008 as S. 3557.   

31. How is
this year’s bill different from previous versions?

The new version of the bill
has made several technical adjustments which more effectively meet the legislative intent of the co-sponsors.