Savings Accounts From Day One
A social scientist says we'll have a stronger middle class when we give savings accounts to babies.
Professor Michael Sherraden is director of the Center for Social Development at Washington University in St. Louis. He'd like every baby in the U.S. to get a tax-advantaged savings account, seeded by Uncle Sam, an idea that has bipartisan support in Congress.
How would your savings plan work? I think there should be a lifelong system of accounts for everybody to save for important life goals -- post-secondary education, homeownership, additional job training. Eventually, money in the accounts would provide retirement security.
There's a strong rationale for making the accounts progressive, with low-income kids getting a slightly larger initial deposit because most of the tax benefits of college and retirement-savings plans now go to upper- and middle-income families. One bill in Congress calls for $500 for all children and an additional $500 for the poorest.
Where would the money come from? There are four million babies born every year. In an annual federal budget of $3 trillion, even at a cost of $4 billion, I wouldn't call it a large sum.
And who would manage it? The savings plans would be offered by the major asset managers. Good plan features would be simple investment options and low costs.
Will these accounts turn us into a nation of savers? There's at least some encouragement for everyone to save. Family members would get tax benefits for making additional deposits, although there would be caps on tax-deductible contributions.
As with some trial programs already under way, matching funds could come from the government, charities or more-creative sources. For example, a corporation might want to "adopt" kids in a particular school district, matching their savings.
Even with compound interest, would these accounts generate enough to make a dent in college or retirement costs? For now, I'm focused on post-secondary education, which has a huge impact on lifetime earnings. Having $10,000 to $15,000 in an account for college would have an impact on tens of millions of young people.
Will the recent market downturn diminish the accounts' appeal? If I paid attention to bear markets, I'd be distracted. I don't know whether we'll have accounts this year, but ten to 15 years from now, we'll have an account for every child.