Children’s Savings Accounts

An innovative idea to help break the cycle to poverty is Children’s Savings Accounts (CSAs). Children’s savings accounts are small accounts that can be opened at birth for every child born in America. The purpose is to provide a savings account that would grow throughout childhood that could then be used when the child reaches a certain age. This money could then be used to fund post-secondary education, buy a home, or save for retirement.

Why Create Children’s Accounts?

Children’s accounts are strategic and effective solutions that brings politicians from across the political spectrum together to change the lives of millions of low-income families. Right now, two of five American children will never complete a year of college. People with bachelor’s degrees earn over 80 percent more than those with who have not attended college. Typical tuition and fees for a public four-year college were nearly $9,000 annually in 2014. Children’s accounts can help to insure that all children can attend college if they so choose.

Research has shown that children provided with CSAs score better on socio-emotional development indicators, perform better in academics, save more for college, are more likely to attend college, and have less student debt.  One study found that low- and moderate-income children with $500 or less in savings were three times more likely to enroll in college and four times more likely to graduate than children without savings.  Children’s savings accounts also help promote financial literacy, especially when paired with financial education.  For these low-income children, it’s a chance to be a part of the American dream.

CSA legislation appeals to both conservatives and liberals alike, having been supported by Senators Ron Wyden (D-OR), Chuck Schumer (D-NY), Jeff Sessions (R-AL), Chris Murphy (D-CT), Marco Rubio (R-FL), Chris Coons (D-DE), and Mark Kirk (D-IL), former Senators Rick Santorum and Chris Dodd, and former Congressmen Patrick Kennedy, Rahm Emanuel, and Newt Gingrich.

The Child Trust Fund in the United Kingdom

In 2005, the United Kingdom created the Child Trust Fund (CTF), which was the most developed CSA program in the world. For children born after September 1, 2002, parents of every child born in the U.K. would be given a voucher from the government for up to 250 pounds to be redeemed in a share or cash-based savings account. Low-income families would be eligible for an additional voucher. The government then would make another 250 pound contribution at age 7. All the accounts were tax free. The accounts were frozen until age 18, at which time the child could spend the money as he/she sees fit.

The program was a great success. As on January 2011, 6.3 million child trust accounts had been created with over $2.3 billion pounds saved. Unfortunately, due to drastic budget cuts, the British government announced in 2010 that it would end the CTF in January 2011. While existing accounts would remain open (with no new government contributions), children born after December 2010 would not be eligible for the CTF.

CSA Legislation in the United States

The U.S. is the only economically developed nation that does not provide any direct monetary support to families with children. The U.S. has the resources to guarantee financial stability for all of its children and yet it is the only such nation that refuses to do so.

However, there have been efforts to change that. While ideas for CSAs have been floated for years, the key piece of legislation on CSAs in America is the Americans Savings for Personal Investment, Retirement, and Education Act (the ASPIRE Act). The accounts in this legislation, called KIDS Accounts, would provide an account for every child born in America. Here is an outline of what the most recent version of the ASPIRE Act would include:

  • An initial $500 contribution from the government made at birth, with an additional contribution from the government of up to $500 for children living in households below the national median income.
  • A dollar-for-dollar match for contributions made to accounts held by children in households earning up the national median income, with a $500 per year match limit.
  • Parents, grandparents, the child, or friends could contribute up to $2,000 per year into the account, and the account itself would remain tax-free.
  • Accounts are redeemable beginning at age 18 for education, age 25 for homeownership or retirement.
  • Financial literacy training would be developed for those who contribute to and benefit from the CSAs.
  • All funds in KIDS accounts would not be considered in asset tests for federal assistance programs such as SNAP and TANF.

The Corporation for Enterprise Development (CFED) estimates that an initial contribution of $1,000 to a CSA at a six percent interest rate would grow to $3,000 by age 18; by adding $50 per month, it would increase to $22,000 by age 18. Former Sen. John Corzine (D-NJ), a supporter of an earlier version of the ASPIRE Act said, “Every American child should grow up knowing that when they reach adulthood, they will have the ability to invest in themselves and in their own education. This proposal will promote savings, enhance financial literacy and help realize the American ideal of equal opportunity.”’

The most recent House version of ASPIRE, H.R.4682, was introduced by Rep. Patrick Kennedy (D-RI-1), along with Reps. Jim Cooper (D-TN-5) and Tom Petri (R-WI-6) in 2010. The Senate version, S.3577 was introduced by Sens. Chuck Schumer (D-NY) and Chris Dodd (D-CT). Unfortunately, neither bill was not acted upon before the 111th Congress adjourned.

Other Initiatives

Savings for Education, Entrepreneurship, and Down payment Initiative Accounts (SEED) was a demonstration program run by CFED, the Center for Social Development at Washington University, the University of Kansas School of Social Welfare. The program was a ten-year “national policy, practice and research endeavor to develop, test, inform and promote matched savings accounts and financial education for children and youth.” The SEED accounts were long-term accounts established for children at birth and allowed to accumulate over their lifetime. SEED accounts are opened with a $500 deposit for most program sites. The accounts included a one-to-one match, typically up to $1,000. The savings accumulated in these accounts may be used for funding higher education, the purchase of a home, the start of a small business, or to pay for retirement. Financial education was also a key component of the program. The program was wound down in 2008, after opening over 1,300 savings accounts.

Lessons learned from SEED were that CSAs appeal to a bread spectrum of people and families at all income levels can save. However, the results also showed that saving is not easy for everyone and that program design can have a significant impact on the success of CSAs.

Additional Resources:

RESULTS' 2011 Economic Opportunity Campaign PowerPoint Presentation

Asset Building for Children from the Corporation for Enterprise Development (CFED)

Children’s Savings Accounts policy paper from the New America Foundation

Building Assets from Birth (PDF) from the Center for Social Development at Washington University