What Can We Expect from Children's Savings Accounts?

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Abstract

Children's savings accounts (CSAs) are being promoted to improve financial literacy, increase the number of low- to moderate-income households that are banked, and encourage saving for education, homeownership, or retirement. This study uses projections from the Urban Institute's DYNASIM model to estimate the wealth building impact of CSAs. The results suggest that most CSAs will have small balances after accounting for inflation. Still, such accounts could help get children, particularly those in low-income families, into financial instruments that demonstrate the value of saving and of compound interest.

What Can We Expect from Children?s Savings Accounts?

Children’s savings accounts (CSAs) are being promoted to improve financial literacy, increase the number of low- to moderate-income households that are banked, and encourage saving for education, homeownership, or retirement. While the first two goals seem reasonable, the third may be somewhat optimistic. Can CSAs really amount to that much?

Mensah, Perun, and Quezada (2007) estimate that CSAs will average $4,081 at maturity (i.e., age 18) and range from $1,295 to $55,771 (see table 1). Estimates from Butrica and coauthors (2008) are significantly lower at around $2,000. Note, however, that Mensah and coauthors present account balances in nominal dollars, while Butrica and coauthors use real 2008 dollars. Estimates in the two studies are similar in nominal dollars. Specifically, for children born in 2008, the Urban Institute’s DYNASIM model projects average CSA balances of $3,822, ranging from $1,399 to $63,148. These results are similar to Mensah and coauthors. DYNASIM estimates in real dollars, however, are substantially lower. The average balance is $2,325, ranging from $851 to $38,409.

The projections in nominal dollars are surprisingly similar given the differences between these studies. Both propose CSA plans that include an initial federal deposit of $500, but differ with regard to supplemental grants, annual maximum contribution limits, and account fees. And the studies assume different contribution rates and rates of return. Also, DYNASIM captures variation across individuals and over time. In contrast, Mensah and coauthors base estimates on prototypes in which a family’s income position and savings behavior are determined in the child’s birth year and assumed to remain constant.

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