March 25, 2015
How can we make America a better place to be a child and raise a family? That’s the question at the heart of the mission of First Focus, a national, bipartisan advocacy organization dedicated to making children and families the “first focus” of federal budget and policy decisions. It is also the question driving the publication of First Focus’ new “Big Ideas” book, Pioneering Change: Innovative Ideas for Children and Families. Pioneering Change includes 14 “big ideas” that policymakers could adopt to promote the well-being of children and families. At New America and CFED, we’ve long been saying that Children’s Savings Accounts (CSAs) are a key innovation that should be a part of America’s 21st Century strategy to promote increased opportunity and economic mobility. Pioneering Change and the folks at First Focus have clearly been listening, as three of the fourteen essays in the book highlight the idea of children’s savings and offer different suggestions for how to make this goal a reality.
In Upside Down: Higher-Education Tax Spending, CFED tackles higher education tax programs—what they are, how much they cost, who benefits from them and how they can be improved. These eight tax programs—which include the American Opportunity Tax Credit, the Lifetime Learning Credit and tax-subsidized education savings accounts—totaled about $32 billion in 2013. That’s an enormous amount, roughly equal to federal spending on Pell Grants. But unlike Pell Grants, these tax programs focus benefits on the highest-income households that need support the least. That’s “upside down.”
This upside-down structure is especially true of federally supported college savings accounts—529s and Coverdells—which cost the federal government $1.75 billion in 2013. The amount of savings in 529s has increased dramatically in the last several years, from just $19 billion in 2001 to over $200 billion in 2013. But very little of that savings belongs to low- and moderate-income families. All told, households making less than the median income own only 1.1% of all savings in these accounts.
In short, CFED argues that the $1.75 billion spent by the federal government on these education savings programs mostly functions to expand wealth inequality rather than educational opportunity. That need not be the case. The authors argue in favor of turning higher education tax programs “right-side up” which would include creating a savings account for every child at birth and allowing deposits into these accounts to qualify for the American Opportunity Tax Credit well before the child attends college. These programs would ensure that every family, not just those at the top of the income scale, can build savings for their kids’ education.
In Roth IRAs for Kids: Little Savers, Big Results, sitting Representatives Ruben Hinojosa (D-TX) and Steve Stivers (R-OH) strike an optimistic note in discussing the current atmosphere among federal legislators. “A conversation is occurring on Capitol Hill about the opportunity to build wealth in America and the difficulty for families to climb the economic ladder to join or remain in the middle class,” they note. “As policymakers, we must steer the discussion to what can be done and to what works.” Representatives Hinojosa and Stivers point out that huge numbers of Americans have insufficient savings, but that savings has big financial and non-financial impacts on American families. They cite research showing that savings has positive impacts on college attendance, economic mobility, and a child’s image and opinion of themselves.
The authors, co-chairs of the Congressional Financial and Economic Literacy Caucus (FELC), write that “financial empowerment can alleviate poverty and reduce inequality, while also providing Americans with the tools to be financially independent and self-reliant.” In order to achieve that empowerment they propose a simple change to the rules governing an existing savings product, the Roth IRA. The Roth Accounts for Youth Savings (RAYS) Act would allow parents to open up Roth IRAs for their children, creating a simple, flexible vehicle for children’s savings. The authors argue that such a plan might open the door for better administration of local CSA efforts—like Kindergarten to College (K2C) in San Francisco—which currently use standard savings accounts.
“RAYS would offer better long-term growth potential for these programs than standard savings accounts. RAYs would also offer more flexibility than other savings products aimed at children, such as the state-based 529 plans, Coverdell education savings accounts, and basic savings accounts. Whereas Coverdells and 529s can be used only for education expenses, RAYs could be used for higher education, homeownership, medical expenses and retirement.”
Representatives Hinojosa and Stivers acknowledge that just creating accounts won’t lead to participation and magical increases in the amount of children’s savings, noting that “only seven percent of workers (and two percent of workers who make less than $20,000 per year) have an IRA of any kind, even though IRAs have been available for decades.” But as their chart shows, they believe that coupling the availability of quality products with increased efforts to promote financial education and capability can start individual savers and the nation on a path to significantly improved results.
Reid Cramer and Elliot Schreur at New America build off many of the same insights in their essay, Ensure Every Child Has a Lifelong Savings Account. They argue that the potential benefits are too large to be left to chance and, therefore, a universal program is needed.
Like Reps. Hinojosa and Stivers, Cramer and Schreur posit that financial education has a critical role to play in creating financial well-being. But they argue that creating automated access to CSAs would make financial education easier and jumpstart the path to financial security. “[M]aking universal CSAs a reality would offer an avenue for greater financial inclusion,” the authors argue. “First, these accounts could offer access to a long-term savings platform. Second, these accounts would represent an affordable and safe point of entry into the world of personal finance. Third, the accounts would have the potential to be linked to mainstream financial services.”
Cramer and Schreur lay out several models for CSA programs, including K2C, SEED OK, and state-wide universal programs in Maine and Nevada that create a 529 college savings plan for all children at birth (Maine) and upon starting Kindergarten (Nevada). Their preferred approach remains the America Saving for Personal Investment, Retirement and Education (ASPIRE) Act, which New America has cultivated for more than 10 years. Under ASPIRE, each child would receive a seeded account at birth, with larger seeds going to children born to parents with lower incomes. The accounts would function as a magnet for contributions, with matching funds awarded to low-income families that sacrifice to save. All account contributions would grow tax-free and could be used to pay for postsecondary education, the purchase of a home or to serve as a retirement account.
An ASPIRE-like approach is necessary according to Cramer and Schreur because existing savings vehicles like Roth IRAs and 529 college savings accounts are deeply underutilized (less than three percent of Americans have a 529). The authors write:
“A new savings infrastructure, like the one the ASPIRE Act would create, should automatically provide a vehicle for saving with targeted and accessible incentives to every child in America, […] reviving an economy capable of producing long-term sustainable growth will require both increased saving and investment. But this change in Americans’ approach to finances will not happen by itself. We need a CSA policy that will provide the right set of incentives, institutions and vehicles to support saving.”
In the last 25 years, the children’s savings field has gone from one of academic theory and pilot programs to one of full-scale, publicly funded initiatives. The first national CSA convening in 2009 described CSAs as a “promising new tool” for expanding educational and economic opportunity. By the time of the second national convening five years later, CSAs were no longer just a promising tool. We are now seeing a national movement that is building toward the vision of universal CSAs for all children. As the authors of these papers demonstrate, there are many possibilities for realizing that vision, but the fundamental goal is always the same: expanding financial security and educational opportunity by ensuring that every family in American can save and invest for the future.