Childrens Saving Accounts

At the World Bank this week: Children's Savings Accounts, and a state poverty alleviation strategy in Nigeria

Leila Seradj — Mon, 27 Jul 2009 19:15:00 -0400

From the UK to Singapore, children's savings accounts programs are gaining traction around the world. And that's because studies have shown-- from Uganda to the United States-- that beginning savings and asset-building habits at a young age has a multitude of economic and psycho-social effects on a child. The Global Assets Project has a hand in some of these (most recently, with our work in developing a multi-country youth savings account pilot). And now, it looks like Nigeria is catching on.

Nigeria's Bayelsa State has the highest per-capita income in the country, due to its rich oil and gas resources. But, unlike a country like Norway, which deposits its surplus petroleum income to the Government Pension Fund, the Nigerian population has hardly reaped the benefits of living in a natural resource-rich state. Lack of transparency and accountability in public financial management is one of the reasons why poverty, unemployment, and an undiversified economy persist.

It's for this reason that Bayelsa State Governor Timipre Sylva has focused on utilizing the state's natural resource wealth for the betterment of its citizens' welfare. The World Bank is assisting the Governor in carrying out his strategic vision, which includes a planned pilot for the introduction of Child Development Accounts. The pilot, which has been developed in collaboration with the Global Assets Project and Columbia University, is still in its planning phase, but holds exciting potential.

This Friday, July 31, from 12:00 to 1:30 p.m., Governor Sylva will speak at the World Bank offices in Washington, D.C., where he will discuss his government's strategic priorities and the challenges associated with implementing reforms. His remarks will include a discussion of the planned Child Development Accounts pilot project. (Because of space contsraints, please arrive early, and bring an ID to enter the building.)

Reform towards Transparency and Accountability in a Niger Delta State
Friday, July 31, 2009
12:00 - 1:30 pm

Speaker: Timipre Sylva, Governor, Bayelsa State, Nigeria
Discussants: William Byrd, Fragile & Conflict Affected States Unit, OPCS
Hinh Dinh, Office of the Chief Economist & Senior Vice-President, Development Economics
William Kingsmill, Senior Advisor, Office of the Vice-President, Africa Region
Chair: Shanta Deverajan, Chief Economist, Africa Region

RSVP to komondi@worldbank.org

The World Bank
701 18th Street, N.W.
J-Building
Room J-5099
12 PM to 1:30 PM

Reading, Writing and Financial Education?

Pamela Chan — Thu, 02 Jul 2009 19:30:00 -0400

In response to the financial downturn, high schools around the country are adding financial literacy to their curriculum. Some schools are offering the financial literacy class as an elective. Others are making it a graduation requirement. New Jersey is the newest state to join Utah, Missouri and Tennessee in requiring high school-ers to take a financial literacy course. Some individual school districts, like the Chicago Public Schools, are making the decision without a mandate from the state.

The recent trend to make financial education part of the core curriculum in public schools reminds me of a New America event held last year, "The Effectiveness of Youth Financial Education." Experts stressed the importance of linking financial education to real-world financial activity, such as a savings account or visits to a bank. Being able to see how savings grow in a real account engages kids' interest in personal finance and motivates them to learn and retain financial principles.

For kids from higher income families who have the resources to open a bank account on their own, financial education in school would be immediately relevant and helpful. For kids from lower income families without the resources or access to a bank account, financial education in school may seem unimportant. The ASPIRE Act, which would create a Lifetime Savings Account at birth for every child in America, could help even the playing field and ensure that schools' efforts to teach financial literacy are maximized for children from all families.

Mark Your Calendar

Mark Huelsman — Tue, 07 Apr 2009 16:30:00 -0400

Via Blair Benjamin over at the Asset Almanac, there is a very promising upcoming conference in Brooklyn, NY on the impact and potential of child and youth savings accounts, featuring a number of great speakers.

In particular, there should be enriching discussions on the behavioral effects of youth savings, better approaches to college affordability (like, say, progressive 529s!), among other topics.

The conference will be held June 14th-16th. More to come in the months ahead, I'm sure.

America Saves Week: What if every baby began saving at birth?

Leila Seradj — Wed, 25 Feb 2009 22:57:00 -0500

In light of America Saves Week, I can't help but highlight President Barack Obama's nod to "universal accounts" during his remarks last night's to a joint session of Congress:

"To preserve our long-term fiscal health, we must also address the growing costs in Medicare and Social Security. Comprehensive health care reform is the best way to strengthen Medicare for years to come. And we must also begin a conversation on how to do the same for Social Security, while creating tax-free universal savings accounts for all Americans."

So if we're going to talk about universal savings accounts, why not start at birth?

This month's Boston Globe article, for example-which cited the New America Foundation's work around Lifetime Savings Accounts (LSAs)-is evidence that more are taking notice (take a look at Reid Cramer's piece about the article on The Ladder, as well.) In order to address wealth inequalities that afflict even a prosperous nation like the U.S., the ideology behind LSAs is that all citizens should be given the opportunity to build up assets-and the best time to start is at birth.

Given the present financial crisis, the concept of LSAs underscores the importance of saving early. As Asset Building Program director Ray Boshara noted, "One of the lessons of the current crisis is that there are limits on what we can borrow. We need to start saving again as a nation. The only way to do that is to start with kids."

Based on the work of the Asset Building Program, in October 2007, a bipartisan coalition in Congress introduced the ASPIRE Act, which would set up an account at birth for every child in America which they can later use to pursue post-secondary education, buy their first home, or build up a nest-egg for retirement. Primarily benefiting low-income children, the accounts would be endowed with a one-time $500 contribution, with children from families below the national median income receiving an additional $500 and the opportunity for matched savings. And in the case of the latter, families that qualify for the matching component could save more than $20,000 by the time the child turns 18.

As the article notes, the appeal of children's savings accounts runs across ideological lines: supporters include Vice President Joe Biden, White House Chief of Staff Rahm Emmanuel, former Republican senator Rick Santorum, and columnist David Brooks.

As the 111^th Congress continues forward and attempts to improve the long-term economic health of the nation, they should consider ways to help people save and invest money-and there's no better time than at birth.

Savings: What’s Culture Got to Do With It?

Jeff Meyer — Fri, 30 May 2008 15:04:00 -0400

Is there such a thing as a culture of savings? This is a question I have been thinking about for almost a year now since undertaking research into savings accounts for children around the world. Bankers in countries from Sri Lanka to Papua New Guinea to Kenya told me in interviews that their banks are offering child savings accounts (CSAs) with an intention of "inculcating" a habit of savings among young people, or "nurturing" a savings culture. (Of course, these banks are primarily offering the accounts to attract and retain young customers, who will hopefully build their balances as they grow older).

In one conversation, a banker in Sri Lanka told me that Asians are more thrifty than people elsewhere. "We tend to save a lot," a tendency that he said was inculcated into the country's children. Conversely, an executive at an international children's charity told me that Ethiopia, where the charity recently started a child savings program, doesn't have a very strong savings culture. In Ethiopia, the executive said, the people that save, save primarily for death (i.e. through burial societies). Moreover, a banking executive at a multinational bank that operates in the South Pacific told me, in part because of a hot and humid environment, there is no such thing as a habit of savings in the region. If you get something today, you better consume it today, the executive said of the mentality there.

It was with these conversations in mind that I listened to a talk earlier this month given by Sheldon Garon, Professor of History and East Asian Studies at Princeton University, about savings in a global and historical context. Professor Garon, who is writing a book about thrift, asked if the post-war thrift in East Asia was due to cultural influences, such as Confucianism. He then took the audience through a series of historical trends that reinforced what I took to be his point that institutions are a key determinants of savings behavior. The stops on his historical tour included the origin of savings banks in Europe about two centuries ago; the regional disparities in the use of savings accounts in the United States early in the 20^th century (which he attributed to widely varying number of financial institutions in the regions); and the large footprint of postal banks in countries such as Japan. (Postal banks also have extensive networks in places such as China, Germany, and Kenya). Coming out of Professor Garon's talk, I found myself thinking that, instead of grouping countries as either having a culture of savings or not, perhaps it is more constructive to think about how governments can help promote a habit of savings among their citizens.

A question I have going forward is: Where does all of this leave developing countries that lack the infrastructure of bank branches to collect savings at? One intriguing possibility is transforming pharmacies, retail outlets of cellphone operators, and even mom-and-pop snack shops into mini-banks. The idea of conducting banking transactions with a third-party is often called using "banking agents." The CGAP Technology Program has done extensive research on the subject, including an overview of early experiences with branchless banking (which includes banking agents and cellphone banking), and a list of frequently-asked-questions on banking agents.

One sociological issue that arises when discussing banking agents (in addition to several regulatory ones) is if there is something lost by not dealing with a professional banker. Ideally - though this may seem naïve nowadays - bankers are supposed to help clients choose the most suitable financial products for them. For example, banks offer many types of savings accounts, and a person unfamiliar with banks in the first place would likely have difficulty understanding the features of each. One way to address this is for governments to encourage or mandate banks to offer a simple, low-fee starter account, which consumers can opt-out of if they wish. Another question is whether a person would trust "mom" or "pop" with their deposit. Getting at this question, in a lecture last week, Kabir Kumar of CGAP showed a photo of a pharmacy in a slum in Pakistan that has been equipped with a point-of-sale (POS) banking terminal. Mr. Kumar then noted that pharmacies make for particularly good banking agents because of the trust pharmacists typically command in a community.

So, in the future, can banking agents pull the same (or more) weight as postal banks historically have in terms of broadening access to financial products? My answer is "yes," though that it will take clever thinking by banking regulators to ensure that transactions with banking agents are safe for consumers. Such a development would seemingly enable all countries - even those thought by some not to have a culture of savings - to allow many more of their citizens to reap the benefits of being hooked into the formal financial system.

A Cool New Way For the Poor in South Africa To Save For College

Jeff Meyer — Thu, 08 May 2008 19:36:00 -0400

A key goal of New America's Asset Building Program is to encourage governments and other entities to offer each child born in the United States - and around the world - a savings account at birth. We believe doing this is the first step toward ensuring that all children have a stock of financial assets at the start of their adult lives.

With this in mind, we see the "529" college savings account in the United States as potentially an excellent platform for enabling parents to save for their children's education. This type of investment account - established by Congress in 2001 and named after a section of the tax code - allows parents to save money and withdraw the funds tax-free when their children head off to college. Every state, as well as the District of Columbia, offers 529s. Yet, right now, it is primarily mid-to-high-income parents who are taking advantage of them. We believe that making 529s "progressive" (i.e. having the government offer incentives such "seed" funding and/or matches to the accounts of less well-off families) is an excellent way to put these savings vehicles to work for children who come from families of more modest means.

As such, I was intrigued by a new college savings plan in South Africa I came across earlier this week. The Association of Collective Investments, an industry association for investment funds in South Africa, recently launched the Fundisa Fund as a three-year pilot project. The gist of the plan is that family and friends of a learner (or others) make contributions to an investment account opened by the parents at a bank.

Then, when the learner is ready to attend college or university in South Africa, the money accumulated in the account - plus bonus money offered as an incentive by the Fundisa Fund - is transferred to the college or university as payment for tuition.

What is intriguing to me about the plan is the large bonus - as much 25% of the money put into the account each year (with a cap of 600 South African rand, or about US$79). According to an email I received from the Association of Collective Investment's chief executive, the plan is aimed at South Africa's poor.

Another interesting feature of the Fundisa Fund is: the apparent requirement that family/friends/others need to contribute at least 40 rand (about US$5) per month into the learner's account.

The money saved in the Fundisa Fund is invested in a relatively conservative way (in government bonds and bank deposits), as opposed to more aggressively (such as in stocks, which is an option among 529 plans in the United States).

After an initial glance at basic details of the Fundisa on its website, a few questions my colleague Rourke O'Brien and I have about the program include:

are there any penalties for withdrawing money from the account in addition to losing the 25% bonus that learners would have received?;
is all money going into these accounts post-tax, and are the accounts tax-advantaged?;
and is there a progressive element to the plan?

South Africa is unique in that it has one foot in the developed world and the other in the developing world. As such, the design of the Fundisa Fund could be useful study fodder for the providers of 529 plans in the United States, as well as governments and banks in developing countries. We hope to learn more details about the Fundisa Fund, so stay tuned for perhaps another blog post on this development.

Saving Across America

Ellen Seidman — Thu, 24 Apr 2008 14:44:00 -0400

Last week I had the privilege of discussing asset building for lower income Americans in three very different settings: the annual Opportunity Economics Colloquium of the Hope Street Group, held at the Lansdowne Resort outside of Washington; an Assets Forum sponsored by the New America Foundation in the State Capitol in Sacramento, California; and with a group of financial services, social service and foundation representatives brought together by the City of Seattle. While the settings and audiences varied, the theme was the same: how to empower and encourage all Americans, particularly those who do not have funds either to cushion an economic setback or to invest to achieve economic security, to take sustainable first steps toward saving. Given the current financial crisis, one wishes these discussions had started ten years ago, but that same crisis makes it all the more important that they're happening now.

Our group at Hope Street, which included policy types and investment bankers and other private sector players, young and less young, from both coasts, was assigned the task of recommending policies that would be effective to increase to 50% the percentage of Americans who had savings to cover six months of operating expenses. In other words, unlike the usual Washington policy debate, this was not about pension and retirement savings, important as those are. We settled on a goal of about $10,000-recognizing that it was low, but to give us a target to shoot for-and focused on liquid assets, while recognizing that bankable non-liquid assets, such as a home, can sometimes serve the same purposes. While we didn't stick entirely to the task, in that at least one of our policy recommendations is a bet on the longer term, the policies we chose would all constitute effective steps toward the goal.

After four hours of robust discussion and debate, we settled on five top policy recommendations. These are: build a new generation of savers by seeding a savings account for every child-to become available at age 18-with $500 and, as in the United Kingdom, use the new account to enhance the financial literacy of the entire family; encourage greater competition in the consumer financial services sector-while recognizing the need for effective consumer protection-to increase innovation in products and services that serve the bottom half of the wealth distribution; encourage greater efforts in the workplace to provide easy, automatic paths to saving beyond retirement saving, and financial education about how to manage and grow those savings; revitalize the US Savings Bond program, which provides a totally safe, small denomination, non-account-based, modestly liquid vehicle for saving in small amounts; and stop punishing savings by substantially modifying the asset limits that discourage everyone from TANF recipients to applicants for Pell grants for higher education from saving. The Hope Street colloquium ended with presentation of these ideas to representatives of the three Presidential candidates.

In Sacramento, the focus was on financial literacy, both to build on and to build up momentum for the California Financial Literacy Initiative (AB 2123), introduced by Rules Committee Chair Ted Lieu and sponsored by California Controller John Chiang. We discussed the increased need for financial literacy in a world of enhanced individual responsibility for financial health, a younger and older population, and ever more complex financial products from a widening array of providers. The Financial Literacy Initiative is a platform on which the state and its partners can build both financial literacy resources and outreach. Already the California Library Literacy Services has indicated interest in adding financial literacy to its broader literacy initiative, potentially bringing this type of education into a trusted resource for adults in over 600 communities. A particularly innovative element of AB 2123 would start the process of establishing a Financial Literacy Corps to mobilize financial professionals and others to provide unbiased financial advice to low- and middle-income families who are now without this resource. New America Foundation is working on this concept on a national scale and it is exciting to see it begin to take shape in California.

Seattle and King County have been working on a series of asset-building initiatives, including a Bank on Seattle program. The participants in the asset-building coalition-city and county officials; social service agencies; banks, thrifts and credit unions; and the philanthropic sector-are focused on building pathways to enable people to better meet their financial needs. We spent our time discussing what was needed, the roles of all parties, examples of success and best practices, and what the literature tells us. Specific areas of concern were bringing people into bank accounts and linking those accounts to saving; effectively coordinating financial education with the opportunity to use what was being taught; small dollar loans; and the challenges of banking immigrants in both urban and rural settings. Participants were very interested in the Federal Deposit Insurance Corporation's small dollar loan pilot program, both for what the 30 bank participants in that program (none of them, unfortunately, in Washington State) will be trying and demonstrating and because the FDIC will be disseminating the learnings widely.

It is enormously exciting that the importance of building savings and assets-of establishing the underpinnings of financial stability-has gained such interest in such a variety of venues. It is even more exciting that people across the country, from all sectors, are working together to develop and implement long-term, sustainable strategies to make financial stability attainable for everyone.