Wealth Management

Wealth inequality starts at birth. Lawmakers debate whether child savings accounts can help

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An unequal distribution of wealth in the U.S. can make it so some children are behind from birth.

Now lawmakers are considering whether federal children’s savings accounts can help.

One proposal — the 401Kids Savings Act — would create savings accounts for all newborns. Low- and moderate- income families would receive federal contributions if their modified adjusted gross incomes falls under certain thresholds. Children in households that qualify for the earned income tax credit would receive additional aid. All families would be eligible to contribute up to $2,500 per year.

By the time some children turn 18 — particularly a qualifying low-income newborn born to a single parent — up to $53,000 may be accumulated for their benefit, according to the proposal.

Children’s savings accounts are currently available statewide in seven states — California, Illinois, Maine, Nebraska, Nevada, Pennsylvania and Rhode Island.

At the end of last year, there were 121 children’s savings account programs in 39 states serving 5.8 million children.

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The programs are aimed at helping to reduce unequal wealth distribution among American child households, which research shows is prevalent among Black and Hispanic households as compared to white households.

“All the evidence from existing programs shows that money not only unlocks opportunities for kids, it’s a smart investment that goes right back into the economy down the road,” Sen. Ron Wyden, D-Oregon, and chairman of the Senate Finance Committee, said at a Tuesday hearing.

However, implementing a federal program may come with significant costs to taxpayers, said Sen. Mike Crapo, R-Idaho, who is the ranking member on the committee.

“Expanding options to save is a worthy goal, but we must do so in a way that does not exacerbate already out-of-control government spending, or create another unsustainable government program,” Crapo said.

State child savings accounts show promise

Even without federal funding, children’s savings accounts have shown the ability to help families build wealth, William Elliott, a professor of social work at the University of Michigan, testified on Tuesday.

Existing programs provide small initial deposits ranging from $5 to $1,000, he said.

In the SEED for Oklahoma Kids experiment, which deposited $1,000 on behalf randomly selected newborn participants including low-income and Black families, the average child now has about $4,373 in their account at age 14.

“Even when family savings are minimal, significant assets accumulate in these types of accounts,” Elliott said.

The money doesn’t just help improve financial preparedness for college, he said. It has also been shown to help children’s early social emotional development, math and reading scores and increase the likelihood they will eventually enroll in college.

In Maine, the Alfond Scholarship Foundation has provided all babies born in the state with a $500 grant towards either college or future training.

To date, the foundation has invested about $78 million on behalf of 156,000 children, according to Colleen Quint, president and CEO of the Alfond Scholarship Foundation.

Families have contributed about three times that amount, or about $236 million, she said. They have also received about $29 million in matching grants from the state.

The total invested — about $344 million — grew to $477 million in the market as of the end of April, according to Quint.

Early data shows the $500 investment families receive has an outsized impact on their aspirations, savings behaviors and engagement around education, she said.

A federal program would help give residents of all states the same opportunity.

“We don’t have to imagine what a national platform would look like,” Quint said. “We can see it happening now.”

Concerns about inflation, tax implications

Critics of the children’s savings plans point out the government already deployed massive amounts of stimulus money during the pandemic, which hasn’t meaningfully boosted long-term savings.

“Savings rates are again near historic lows,” Adam Michel, director of tax policy studies at the Cato Institute, said at the hearing.

“In this case, checks from the government fueled more inflation than they did wealth building,” he said.

Other approaches may better help to address wealth inequities for young children.

Reforming the tax code can help prevent double taxation on wages when they are earned, as well as interest that accumulates on saving, Michel said. While that disincentive has been reduced for 401(k)s and 529 plans, they still come with restrictions on how the money may be used that may discourage low- and middle-income individuals from using them.

The 401Kids proposal calls for children to only have access to the funds once they turn 18. The money would have to be used for education, training, a home purchase or to start a business. The funds could also be rolled over to a Roth individual retirement account or ABLE account for children with disabilities.

Universal savings accounts, which may allow for more flexibility in uses for the money, may be a better solution, some experts said.

“Universal savings account have a benefit that they do not discourage savings for those who are concerned that the conditions for withdrawal … would stop them from addressing an emergency in their family,” said Veronique de Rugy, senior research fellow at The Mercatus Center.

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