Big Ideas to Help Kids?

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.