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.