Promoting the Vision

Introduction/Background

In recent years, the role that savings and
assets play in shaping people’s lives has increasingly captured the attention
of researchers, policy analysts and elected officials. Their interest in
savings and building wealth has grown along with an increased awareness of
specific policy tools and interventions, such as matched savings accounts
available for lower-income workers. The launch of the SEED Initiative in
October 2003 was an important marker in this process because it introduced the
concept of children’s savings into the broader discussion of family savings,
financial education, college and retirement savings, entrepreneurship and other
forms of asset building. SEED’s launch also coincided with the actions of a
small but influential set of policymakers who were interested in spotlighting
the larger issues of savings and social insurance. The unfolding of these
events has been constructive in advancing children’s savings accounts (CSAs),
even in the absence of a large-scale policy breakthrough. A review of these
developments will be helpful in considering the progress to date in enacting
children’s savings accounts and the opportunities for future policy gains that
lay ahead.

Executive Influence and Policy Response
The Bush Administration initially articulated
a compelling vision of an “ownership society” that the country should strive to
achieve. The president’s call for all Americans to have the opportunity to save
and build wealth, highlighted during his second inaugural address, was a
rhetorical rephrasing of a core objective of the asset-building field. His
approach emphasized the ability for more people to assume personal
responsibility and exert greater control over their economic futures. But it
also had crossover appeal – even political opponents of the president
appreciated the underlying message that expanding opportunities for people to
accumulate productive assets has broad social and economic benefits.

Unfortunately, the Administration never
promoted specific proposals that were capable of matching the president’s
vision for saving and wealth building. Instead, the president promoted a series
of proposals, such as an Individual Development Account (IDA) tax credit,
health savings accounts and Social Security reform. The latter two proved more
regressive than existing policy in terms of their distribution of benefits. The
policy debates over Social Security in Congress, which took shape in 2004 and
2005, eventually divided along party lines. Republicans supported the
president’s proposal to create individual accounts that would be carved out of
the existing system, and Democrats argued for the status quo. The partisan
positions around Social Security hardened quickly, but the debate motivated
some policymakers to search for innovative asset-building policy proposals that
could attract bipartisan support.

Children’s Accounts Change the Debate
Lawmakers from both sides of the aisle found
common ground in the concept of providing a savings account to every
newborn
child in the nation. This led to the 2004 drafting and introduction of
the
America Saving for Personal Investment, Retirement, and Education
(ASPIRE) Act,
which called for a system that would provide universal accounts at
birth.1 The ASPIRE Act was bold and progressive. It called for every
child to be given a $500 account at birth. Moreover, children in
lower-income
families would be given an additional $500 and the opportunity to have
their
annual deposits up to $500 matched by the government. The legislation
was also
bipartisan, attracting the original support of policymakers on opposite
sides
of the divisive Social Security debate. Initially the sponsors of the
bill
sought to distinguish it from the debate over Social Security. Over
time,
however, the sponsors recognized that it had the potential to be
included in a
legislative package that would have implemented changes to the
financing and
structure of the Social Security program. When the window closed on
Social
Security reform in 2006, however, the near-term prospects for ASPIRE
ended as
well. Still, the legislative proposal for universal savings had a
promising
debut. One reason for this success was the ongoing implementation of
the SEED
Initiative, which has raised awareness of the concept and potential of
children’s accounts. To take advantage of the momentum built by ASPIRE
and the
SEED Initiative, advocates began crafting new legislation. By the end
of 2006,
policymakers interested in children’s savings or savings systems had
produced
several new proposals. These included the Young Savers Accounts,
401Kids
Accounts, Baby Bonds, Foster Youth IDAs and Portable Lifelong Universal
Savings
Accounts (see Table 1). The introduction of these proposals reflected
the
growing perception that children’s accounts are a promising policy
intervention
that is likely to attract the ongoing interest of policymakers in 2009
and
beyond.

Lessons and Key Observations

Behavioral Outcomes in CSAs Are Real
Preliminary qualitative and quantitative
research assessing the SEED experience confirms the promise of children’s
savings accounts. For example, interviews with youth accountholders reveal that
just having an account improves self-esteem and encourages planning for the
future.2 Furthermore, research demonstrates that
“institutional” features that are a part of the program design of CSAs, such as
direct deposit, deposit matches and financial education, play a positive role
in promoting savings. In addition, increased financial knowledge gained through
education classes is helpful and contributes to the development of increased
fiscal prudence, future orientation and a sense of security among program
participants.3 SEED programs operate at 12 demonstration
sites across the continental United States
and in Puerto Rico. The 1,253 participants
from 1,073 households have accumulated close to $2 million in savings (See
Table 2). Each accountholder receives an initial deposit ($500 at most sites),
a 1:1 match on deposits (typically up to a $1,000 cap) and benchmark incentive
payments. The length of participation time varies greatly by site, as does the
ages of the accountholders, but the average account holds approximately $1,300
in combined accountholder and match deposits.

Account Management, As We Know It, Is Not Easy
The SEED experience also reveals a challenge
for future policy proposals to identify or develop more effective account
vehicles for children’s accounts and proffer best practices in managing them.
Most SEED sites had difficulty meeting the needs of their clients with existing
financial products. Although some negotiated directly with financial
institutions to develop appropriate products, others used the existing
infrastructure of state-run 529 College Savings Plans. Recent research confirms
the importance of institutional supports delivered through products such as
529s or 401(k)s.4 These savings plans have specific features
that make them more efficient and easily scalable, such as centralized accounting,
limited investment options, automatic deposits and streamlined consumer
education. However, although 529s permit a tax-advantaged account for
children’s savings, the qualified uses are restricted to postsecondary
education and training. In practice, most SEED participants viewed college
education as the primary purpose of their accounts, but the accounts were
originally conceived as having much broader and longer-term uses to encompass
all forms of asset building, including home purchase, retirement and business
startup. The lack of a comprehensive account vehicle for CSAs was the impetus
for the Young Savers Account (YSA) proposal, which was introduced in the Senate
in August 2007. Using Roth IRA rules, qualified uses for savings accumulated in
YSAs would include homeownership as well as retirement.

However, this general approach of providing
tax-free earnings on deposits in specific accounts has limits as well. Relative
to a direct match of deposits, access to a tax advantaged account is less effective
for households with lower incomes and lower tax liabilities. Monitoring the
data and outcomes of SEED participants is expected to shed light on the
effectiveness of various matched account structures, which in turn should
assist policymakers in crafting appropriate savings incentives for households
of all income levels.

A Public/Private System for Delivery of Children’s Accounts Will Work Best
An important inference from SEED research on
account management is that an accessible children’s savings system cannot be
delivered through private financial institutions alone. Many accounts that are
called “private” are defined by public policies. IRAs and 401(k)s, for example,
are government regulated and sometimes publicly subsidized. Any large-scale
effort to create children’s accounts, therefore, will require the public sector
to design the institutional framework that provides broad access, low costs,
legal protection and a uniform set of rules to ensure every child gets into the
system and is treated fairly. This new framework will require many different
roles, some of which can be done by private and nonprofit organizations.

Policy Recommendations

The arrival of a new Administration and a new
Congress in 2009 will bring with it a new set of federal decision makers and
will create opportunities to revisit a broad range of social policy issues. If
economic conditions remain poor, much of the initial focus will likely be on
ameliorating immediate economic hardships. Yet when policymakers turn their
attention to addressing long-term sources of economic insecurity, they will
need to consider ways to encourage more Americans to save for their future and
build up their asset base. This should, along with the growing awareness of the
potential role for children savings accounts, create an opening for policy
gains. The factors that will make children’s savings accounts a promising policy issue in 2009 include:

Tax Reform on the Horizon. The expiration of a number of tax provisions implemented in 2001
and 2003, including ones linked to the tax treatment of savings, capital gains,
dividends and estates, may trigger a larger tax reform effort that could
encompass a revision of current tax-based savings incentives and include the
consideration of ways to effectively encourage long-term savings through
children’s accounts.

Improved Communications of Value of Accounts. Advocates should continue to make the case
for children’s accounts in meaningful ways that draw upon the experience from
SEED and create a framework of what a national policy might achieve. They
should emphasize the very nature of savings to address the growing concern of
economic insecurity and how the steep decline in our personal savings rate
undercuts long-term economic growth. They should frame savings as a buffer to
smooth consumption during income declines as well as help people make
productive investments. Moreover, children’s accounts attract deposits, which
in turn can facilitate future planning and promote financial education. Account
ownership makes financial education real, an experience that appears to hold
true for adults and youths. These experiences may provide the common ground
that can serve as a basis for future policymaking.

Lessons from Abroad. In 2005, the United
Kingdom enacted its own version of
children’s accounts, known as the Child Trust Fund. Each of the 700,000
children born there each year receives a savings account, and the
effort is
already producing tangible results that may inform the design of a U.S.
policy. The Child Trust Fund was designed to ensure children have
savings
when they enter adulthood, promote the savings habit, teach children
the
benefits of saving and advance understanding of personal finance. This
has led
to an emphasis on using the accounts as a means to deliver financial
education
in primary and secondary schools, a link that should also be
instructive for U.S.
policymakers. In addition, recent policy reforms ensure that savings
seamlessly
roll over into other savings products once accountholders reach age 18.
Although
political and social conditions are distinct, the U.K.
experience represents a promising policy framework for U.S.
policymakers in that it is
universal in scope, seen as part of a lifelong savings platform, and
emphasizes
links to financial education and asset building.

Moving Forward

There are numerous more lessons to be drawn
from the SEED experience as well as opportunities for
legislators to compromise on the divisive issues that have
stymied policy breakthroughs. Still, there is much value in
being able to articulate a strong rationale for a universal
accounts-at-birth approach. Policymakers and advocates will be
wise to frame the approach of endowing newborns with an
account as representing a collective social investment in
every child and offering that child a stake in the broader
society. This investment can be used to help children learn,
plan for their futures and ultimately make productive
investments that will benefit them and society as a whole.
Accountholders grow up knowing they will have a modest pool
of resources at their disposal to deploy strategically and
help them succeed. Beyond individual benefits, these
investments could have significant multiplier effects,
especially when linked to increasing social engagement, increasing broad
financial understanding and expanding economic
opportunity.