Three Considerations for Children's Savings Accounts

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Abstract

A primary goal of children's savings accounts (CSAs) is to provide children, especially in low-income families, a strong economic footing. The ability to do that, however, depends on how CSAs are designed and how much families contribute. This study uses projections from the Urban Institute's DYNASIM model to estimate the wealth building impact of CSAs under alternative scenarios that vary the design features. The results highlight three points relevant for any asset-building proposal or program: incentives make a difference, targeting can be difficult, and nontaxability matters for all subsidies.

Three Considerations for Children?s Savings Accounts

A primary goal of children’s savings accounts (CSAs) is to provide children, especially in low-income families, a strong economic footing. The ability to do that, however, depends on how CSAs are designed and how much families contribute. This fact sheet estimates the impact of CSAs on families’ savings and identifies key considerations for their design.

The findings are based on Butrica and coauthors (2008), using projections from the Urban Institute’s DYNASIM model. Their CSA plan includes (1) an initial federal deposit of $500 for all newborns, (2) an initial supplemental grant up to $500 for households at or below the national median adjusted gross income (AGI), (3) private contributions up to $1,000 per year, and (4) a dollar-for-dollar government match on private contributions for households at or below 120 percent of the national median AGI. Government grants and interest earnings are not taxed. (The paper also considers an alternative scenario in which accrued interest is taxed.)

Butrica and coauthors (2008) estimate that such CSA accounts will average only $2,413 in 2008 dollars at maturity (i.e., age 18). Even assuming twice as many CSAs as normal would receive contributions, average account balances would still be modest—only $3,653. More importantly, however, the authors find three points relevant for any asset-building proposal or program: incentives make a difference, targeting can be difficult, and nontaxability matters for all subsidies.

Incentives Make a Difference

A government match will significantly increase both the rate and level of private contributions to CSAs. Butrica and coauthors (2008) project that for children in low-income families, a government match will increase the percentage of CSAs that ever receive a contribution from 1.7 to 10.0. A match would also raise the average contribution per year and per CSA from $39 to $346 (in 2008 dollars). For children in higher-income families, a government match would increase the average contri- bution rate from 6.8 to 15.5 percent and the average contribution from $596 to $741—though it is not clear whether this is new saving.

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