Big Idea: Give Every Child a $500 Savings Plan
The 2012 presidential race is well underway, and we're talking about the important issues—whether Mitt Romney is offending bakers or Obama once ate dog meat. The snarky back-and-forth of the campaign trail may be entertaining, but this is our once-every-four-years chance to mix it up over the big challenges the United States is facing. We're launching the Campaign for Big Ideas to make the run for the White House smarter, bolder, and a lot more ambitious.
Rick Santorum, Newt Gingrich, Rahm Emanuel and Chuck Schumer walk into a bar. Sounds like the beginning of a bad joke, doesn’t it?
But just a few years ago, a scenario uniting a group of Republican and Democratic partisans may not have seemed so far-fetched. Before the Great Recession and the Occupy movement highlighted our problems with economic inequality, crushing debt, and the failure of many to save enough money for a rainy day, those four politicians found common ground over a bold proposal to tackle those problems.
They supported legislation called the America Saving for Personal Investment, Retirement and Education Act. If passed into law, ASPIRE would open a tax-advantaged savings account (similar to a Roth IRA, contributions to the account are allowed to grow tax-free) for every child born in the United States, and funnel at least $500 of federal money into the account immediately.
Today, 27 percent of families are living in “asset poverty,” which means they don't have the savings necessary to live at the poverty level for three months if they lost their income. For a family of three, that’s about $4,500. Living paycheck to paycheck, these families do not have the resources to cover basic expenses for three months if faced with a layoff or other expensive emergency. It’s not just emergency savings that Americans lack: One-third of households never save for retirement, and only about 55 percent of the workforce is covered by their employer’s retirement plan.
The ASPIRE Act could help reverse the dismal savings performance of millions of Americans. It would provide an opportunity for kids to learn the benefits of saving early on in life. Armed with that knowledge, this empowered generation would be educated enough to avoid the web of payday lenders and check cashiers that strip wealth from too many vulnerable households and enter adulthood with concrete means to attain their dreams of a college education, homeownership, and a secure financial future.
To combat wealth inequality, the ASPIRE Act would be progressively structured, so children of low-income parents would receive an additional initial deposit of up to $500, for a total of $1,000. In order to attract account contributions, the amounts invested would grow tax-free. Contributions to the accounts could come from anywhere, so community groups could raise funds to support savings—extended families, churches, the Girl Scouts, any neighborhood association could choose to raise money and invest in their children. Matching funds on contributions of up to $500 each year would provide another incentive for low-income families to contribute. To prevent wealthy families from sheltering their income, no account could receive more than $2,000 in a single year.
The United States isn't the first country to highlight the importance of savings accounts for kids: The United Kingdom instituted a similar policy a few years back. Although the current austerity craze halted the creation of new accounts, grandfathered accounts still exist. Millions of children will gain unfettered access to them on their 18th birthdays. That’s not the best or most politically palatable approach—imagine the attack ads: "My opponent wants to create a trust fund so that every child can buy a mountain of crystal meth on their 18th birthday!"
Instead, the ASPIRE Act ties account access to those moments in life when savings make the biggest difference in trying to get ahead. It’s devised to support long-term financial security, not to fuel Project X-style graduation parties. The act allows each child to use the account for post-secondary education upon turning 18. This is a crucial component—even today’s college students and graduates with savings accounts struggle with tremendous debt burdens. What’s worse, the specter of that debt prevents many children of low- and moderate-income families from even attempting to attend college.
Students who expect to attend college and have savings accounts are three to six times more likely to attend four-year colleges than similar students without savings. Having savings opens the door to college attendance for millions of children, and enough savings can deflect the crushing debt that ties up so many graduates.
After college, the account would open again at age 25 so the holder could purchase a home. In the long run, it would function much like a Roth IRA-style retirement account.
The ASPIRE Act awaits reintroduction in both the House and the Senate this year. Very early in his term, President Obama gave a speech at Georgetown University in which he called for an end to the “era of borrow and spend” and a transition to a new era, “one where we save and invest.” One might have thought his former chief of staff, Rahm Emanuel, had sold the president on the ASPIRE Act. Unfortunately, Obama has not embraced any pro-savings policy nearly so bold.
Judging by their rhetoric, leading Republicans eager to denounce the president have forgotten the power of making investments now that pay off in the future. Not so long ago they knew all too well. In a 2005 op-ed, Sen. Rick Santorum wrote that, “the government has long provided short-term assistance to those who require it. Does it not make sense to give young Americans the opportunity to have a head start in life, enabling them to have security in the long run? By making every young person an investor, KIDS accounts will expand opportunities, encourage self-reliance, promote savings and give every family a personal stake in America's economy.”
To answer his question, yes, that does makes sense.
Illustration by Bijan Berahimi