Connect Every Child to a Lifelong Savings Account

Cramer, R. (2014). Connect Every Child to a Lifelong Savings Account. Solutions 5(6): 19-22. https://thesolutionsjournal.com/article/connect-every-child-to-a-savings-account/

Perspectives Connect Every Child to a Lifelong Savings Account

by Reid Cramer

Mary Constance

Endowing every child with a lifelong savings account has the potential to end cycles of intergenerational poverty.

W

hile poverty is traditionally associated with immediate economic hardship, it is particularly debilitating if it persists over time and is passed on across generations. This is true throughout the world. People can still succeed despite short dips in income, but it is much more difficult to thrive without the array of individual resources and assets that can mitigate the effects of chronic income shortfalls. Instead of focusing exclusively on interventions that strive to raise income in the short term, policymakers should be looking for solutions that can interrupt sustained poverty and ultimately promote

economic mobility in the long term.

In addition to other essential foundations of a stable economic ladder, such as increasing access to educational opportunities and promoting public health, policymakers should add to this set of policy priorities those that help people accumulate a broad array of productive financial assets.

Building savings over the life course is a key contributor to financial security and upward economic mobility. This is because savings can be deployed in a variety of productive ways that make a significant difference in people’s lives. They offer the means to make the type of investments

that can eventually lead to greater economic stability, mobility, and prosperity. One of the most effective ways to encourage these outcomes is to start the process of saving early in childhood. Recent research has confirmed that the presence of savings plays a key role in facilitating economic security and mobility, the effects of which are especially pronounced in children.1 For example, a report published by the Pew Charitable Trusts showed that children of low-income—but highsaving—parents in the United States are more likely to experience upward mobility than children of parents with both low incomes and low savings.2 The idea of universally endowing every child with a savings account starting at birth was initially proposed

by Michael Sherraden in his 1991 book, Assets and the Poor. Sherraden argued that traditional welfare programs, which provide only income supports, were not enough to help families climb out of poverty. What were needed to bring about meaningful improvement in the long-term economic conditions of low-income families were asset-building policies like children’s savings accounts (CSAs).3 In theory, children’s savings accounts could increase a sense of financial inclusion, promote financial literacy and fiscal prudence, protect against economic shocks, improve access to education, improve health and education outcomes, and help develop a future orientation.4 Sherraden’s assets-based perspective helped drive the development of a series of large-scale demonstration projects and policy proposals in a number of countries across the globe.

In recent years, there has been a proliferation of efforts to expand opportunities for children to save.

Philanthropic institutions have financed the development of pilot projects to model and study the impact

www.thesolutionsjournal.org | November-December 2014 | Solutions | 19

Perspectives

Providence of British Columbia

Canadian Education Minister Peter Fassbender talks to preschool students and their parents about British Columbia’s Training and Education Savings Grant.

Canada also provides strong child savings options to low income families through its Canada Education Savings Program.

of these accounts and saving opportunities. States and municipalities have followed these initiatives and deemed them promising enough to mount their own efforts. Outside of the United States, a number of children’s savings policies have been developed and implemented at scale.

In the U.S., a large-scale demonstration project called the SEED Initiative (Saving for Education, Entrepreneurship and Downpayment), implemented in 12 states with almost 1,200 participants,

confirmed that children in lowincome families can and will save; that universal, automatic access to accounts is critical to success; and that these accounts promote positive behavioral and attitudinal changes in children.5 Since 2007, the State of Oklahoma has run a program called SEED OK, which is the first randomized controlled trial of a universal and progressive children savings account program in the country. Over 2,600 newborns were randomly assigned to either a treatment or control group.

20 | Solutions | November-December 2014 | www.thesolutionsjournal.org

The treatment group was automatically enrolled in Oklahoma’s 529 College Savings Plan and was provided with a $1,000 initial deposit. The SEED OK experiment demonstrated that automatic account opening is a highly successful strategy for inclusion of a full population. Follow-up research has found that SEED OK increased young children’s social-emotional development as early as age four among families that have low education, low income, receive welfare benefits, and rent their homes.6

Perspectives In 2011, San Francisco launched the Kindergarten to College (K2C) program, which opened accounts for every kindergartner in the city’s public schools. K2C accounts are opened with a $50 seed deposit. Parents and students can contribute up to $2,500 each year and earn matching funds on the first $100 of contributions each year in the ongoing program.7 Additional efforts are underway at the state level, where Maine and Nevada, to name only two, are running largescale programs designed to connect very young children (either newborn or entering kindergarten) with savings accounts that are particularly focused on helping to meet post-secondary education expenses.8

on family contributions. Low-income families are eligible for an additional C$2,000 grant.

In the developing world context, the potential for connecting children and young adults to savings accounts and other financial services is being explored in the innovative YouthSave initiative, which is dedicated to developing and testing savings products accessible to low-income youth in Colombia, Ghana, Kenya, and Nepal.11 These accounts are being assessed in terms of how they help youths stay in school, transition to adulthood, increase their financial capability, improve their nutrition and health, and benefit household well-being.

Initial results have been promising.12

Building savings over the life course is a key contributor to financial security and upward economic mobility.

Internationally, the United Kingdom launched the Child Trust Fund (CTF) in 2005 that awarded £250 to every newborn in their own savings account, which can receive deposits of up to £1,200 per year.9 The account cannot be accessed until the child reaches the age of 18, upon which point he or she will have full and unrestricted access to the fund.

The CTF was closed to new children in 2010, but existing accounts provide a rich base for research and insight. In another example of a CSA program, Canada leverages its college savings product by providing matched savings and seed deposits for lower-income parents through the Canada Education Savings Program (CESP).10 The program provides a progressive, universal matching grant of 20, 30, or 40 percent (up to C$7,200)

Learnings from these diverse experiences in the field can help inform future policy efforts. There are many ways to design a large-scale children’s savings account policy.

Choices in policy design features, such as participation, intended uses, and account features, will impact program costs, scope, and ultimately outcomes. Ideally, a children’s savings policy would be universal, meaning every child, regardless of income or background, would be automatically given an account at birth in order to ensure that no one is left out of this foundational system for saving, developing assets, and building wealth. The principle of universality would also build a sense of unity and participation in the nation as a whole, both essential features for maximizing the impact of the policy.

The key is to support the savings process with the right set of incentives and institutional structures.

The ASPIRE Act (America Saving for Personal Investment, Retirement, and Education), introduced with bipartisan support in four consecutive U.S. Congresses between 2004 and 2010, represents a promising proposal to bring this aspiration to reality.13 In concept, the ASPIRE Act would offer a seeded account to every child born in America. Lower-income families would be given a larger seed and be eligible to have their contributions matched. Eventually the funds could be used for restricted purposes, such as paying for post-secondary education, buying a home, and serving as a source of income in retirement.

Creating an opportunity for every child to save and build assets over her lifetime is a concept whose time has come. Supporting saving early in life is a promising way to develop a robust culture of saving. In order to achieve a more financially secure, savingsoriented, and financially inclusive society, children’s savings accounts should be made universally accessible to all families.

The case for connecting every child to a lifelong savings account is strong. The underlying research shows unequivocally that the act of saving leads to many positive outcomes throughout the life course. The numerous experiments and trials testing the effects of savings on the lives of families and children support these positive conclusions. A policy reorientation towards savings and away from an exclusive focus on income supports, especially if achieved by promoting children’s savings through policies such as the ASPIRE Act, would pay dividends in terms of the greater long-term economic security for millions of families in the U.S. and around the world.

www.thesolutionsjournal.org | November-December 2014 | Solutions | 21

Perspectives

krosinsky

The YouthSave initiative develops and tests savings programs in developing countries, assessing its accounts in part by how well they help youth to stay in school, such as this primary school in Mathare, Kenya.

References 1. Urahn, S et al. Moving on up: why do some Americans leave the bottom of the economic ladder, but not others? (The Pew Charitable Trusts, Washington, DC, 2013).

2. Cramer, R, O’Brien, R, Cooper, D & Luengo-Prado,

savings, and accumulation. (Center for Social Development, Washington University in St. Louis, Missouri, 2009).

6. Nam, Y, Kim, Y, Clancy, M, Zager, R & Sherraden,

Development, St. Louis, MO, 2014).

9. United Kingdom’s Child Trust Fund [online]. https:// www.gov.uk/child-trust-funds/overview.

10. Evaluation Directorate, Strategic Policy and

M. Do child development accounts promote

Research Branch. Formative evaluation of the

M. A penny saved is mobility earned: advancing

account holding, saving, and asset accumulation

additional Canada Education Savings Grant and

economic mobility through savings (The Pew

for children’s future?: evidence from a statewide

Canada Learning Bond. SP-951-05-10E (Human

Charitable Trusts, Washington DC, 2009).

randomized experiment. CSD Working Papers No.

Resources and Skills Development Canada, Canada,

3. Sherraden, M. Assets and the Poor. (M.E. Sharp, New York, 1991).

4. Cramer, R & Newville, D. Children’s savings

11-33 (Center for Social Development, Washington University in St. Louis, Missouri, 2011).

7. Phillips, L & Stuhldreher, A. Kindergarten to

2009).

11. YouthSave [online]. http://youthsave.org/.

12. Johnson, L et al. Savings patterns and performance

accounts: the case for creating a lifelong savings

College (K2C): a first-in-the-nation initiative to

in Colombia, Ghana, Kenya, and Nepal. (Center for

platform at birth as a foundation for a ‘Save-and-

set all kindergartners on the path to college. (New

Social Development, Washington University in St.

Invest’ economy. (New America Foundation,

America Foundation, Washington DC, 2011).

Washington DC, 2009).

5. Mason, LR, Nam, Y, Clancy, M, Loke, V, & Kim, Y. SEED account monitoring research: participants,

8. Clancy, M & Sherraden, M. Automatic deposits

Louis, Missouri, 2013).

13. America Saving for Personal Investment,

for all at birth: Maine’s Harold Alfond College

Retirement, and Education Act of 2007 (U.S.

Challenge. CSD Policy Report 14-05 (Center for Social

Government Printing Office, Washington DC, 2007).

22 | Solutions | November-December 2014 | www.thesolutionsjournal.org