Children's Savings Accounts: Why Design Matters

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Abstract

One way to achieve an ownership society is to endow all children with savings accounts starting at birth. This report shows that specific design features of a children's savings account program will impact the distribution of wealth. For example, non-taxability of account earnings distributes significantly more benefits to higher-income groups than to lower-income groups. Also, because many families experience mobility over their lifetimes, a significant portion of benefits conditioned on low annual income will accrue to middle- and higher-income families. Regardless, these accounts could be important in getting children banked and teaching them the value of saving and compound interest.

Introduction

Many elected officials in both the United States and United Kingdom have expressed heightened interest in fostering an ownership society. Endowing all children with savings accounts, perhaps even starting at birth, is one way of trying to achieve that goal. Proponents have ascribed many financial and social benefits to such universal accounts, including an introduction to the principles of saving and finance, an increase in the number of low- to moderate-income households that are banked, and a way to save for education, homeownership, or retirement. The overarching goal of these accounts, however, is to give all children a strong economic footing.

A question, then, for analysts is how well universal children’s savings accounts (CSAs) can help families make strides toward all these goals or whether CSAs are better suited to accomplishing some goals and not others. For instance, would children’s savings accounts allow holders to accumulate meaningful savings for an education or a down payment on a home?Would accumulated balances perceptibly stem growing wealth inequality? Of the wealth accumulated, how much is through private contributions and investment earnings and how much is through government redistribution? Or, would the greater role of CSAs be in extending financial education to all?

The answers to these questions lie in how CSAs are designed and what we might reasonably assume about the accounts’ performance and households’ participation. This paper uses the Urban Institute’s DYNASIM model to estimate the wealth-building impact of CSAs under alternative scenarios that vary the design features. The analysis begins with a “bare bones” CSA design that includes only a federal seed amount and then adds features—like supplemental grants, federal matches, private contributions, and non-taxability—one at a time to estimate their marginal impact. Most of the features we experiment with are similar to those in the ASPIRE Act, which proposes to establish CSAs for American children. The results highlight how the design of CSAs influences which children benefit from the accounts, the amount of new wealth that results from the subsidies, and the extent to which government or private saving is the source of wealth accumulation.

We begin by discussing the major design features of CSAs.We then present details of the ASPIRE Act. Next we describe the DYNASIM model, how we model private contributions to CSAs, and how we project account balances.We then describe the parameters of our simulations. Finally, we present estimates of account balances under the different CSA assumptions.

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The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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