Children's Savings Accounts

On January 24th, 2006, the New America Foundation convened a forum of the leading asset development policy architects from around the world to discuss Children's Savings Accounts. Children's Savings Accounts, or CSAs, are savings and investment accounts, often established at birth, and usually restricted to enabling kids to go to college, buy a first home, and build up a nest egg for retirement. Many CSA policies and proposals are progressively funded, meaning that more public resources are available to children from lower-income households.

The U.S. Congress is currently considering creating an American Children’s Savings Account through the America Saving for Personal Investment, Retirement, and Education (ASPIRE) Act. The ASPIRE Act is bipartisan legislation that would broaden economic opportunity in America by providing a “Kids Account” at birth for every child in America. When the child turns 18, monies saved in the account could be used to pay for college, provide the down payment on a first home, or begin a nest-egg for retirement. New America’s Asset Building Program is widely credited with advising the drafting of the Act and forging the ideologically diverse coalition of House and Senate leaders that are co-sponsoring the Act. “Children’s Savings Accounts: International Momentum, and Lessons for the U.S.” was convened by the New America Foundation to learn about the successes and setbacks experienced by leaders implementing CSAs in their host countries.

Michael Sherraden, Director of the Center for Social Development at Washington University and widely considered one of the intellectual godfathers of the asset development movement, introduced the discussion. Contextualizing asset building within the larger macroeconomic forces of the times, Sherraden described universal savings tools as the 21st century answer to “a world shifting away from defined benefit plans and toward defined contribution plans.” Calling the trend toward defined benefit plans an “historic, seismic moment,” Sherraden characterized asset building as a response to these shifting forces that will “make these systems and these [economic] changes work for the whole population.” Kids Accounts, such as those proposed in the ASPIRE Act, are a promising step toward that future, he stated.

In Sherraden’s view, CSAs have two advantages over IDAs (matched savings accounts for the working poor now serving some 20,000 low-income persons in the U.S.); since they begin early in life, they acculturate individuals to the world of savings and sophisticated financial transaction from an early age, not to mention allow participants to benefit from the advantage of compound interest on savings from birth. And since CSAs benefit children, they are in some ways more politically appealing than other types of IDAs. Sherraden encouraged the audience to envision a world where every child on the planet is automatically established with an account at birth. “Why not, for every kid, an account?”

David White, Chief Executive of the Children’s Mutual, administers the United Kingdom’s savings plan for children, called the Child Trust Fund, or CTF. The idea behind CTF is to create a “financial springboard into adulthood” that will ensure that “not some but all children have the best possible start in life,” he explained. Each family chooses a provider, or bank, through which to service the account, and all children receive at least 250 pounds from the government to start the account. The amount is doubled for the poorest one-third of children. Anyone, including family members, friends, participating children, and even organizations, can contribute to a child’s account.

Applicable to all U.K. kids born since September 2002, roughly 1.25 million CTF accounts have been opened as of the end of 2005. In an encouraging show of success, the percentage of those in the U.K. who electronically deposit monthly savings in bank accounts for children has doubled, from 20% pre-CTF to 40% post-CTF, according to White. This means that in less than a year, the Child Trust Fund has doubled the number of U.K. families saving for their children’s future—a tremendous success for a program still in its early stages.

White made several recommendations for the ASPIRE Act in the U.S based on the U.K.’s experiences with CTF. He emphasized the importance of financial literacy in creating a successful universal savings program. In the U.K., CTF is currently implementing a larger grassroots initiative to educate participants and their families about the benefits and nuts and bolts of participation. “Accounts alone” are not enough, he told the audience; they must be supplemented with financial education to build familiarity and confidence with financial planning.

Marc LeBrun, Director of Canada’s federal CSA program—called the Canada Educational Savings Program, or CESP—echoed Mr. White’s recommendations when relating his country’s experiences with CSAs. Mr. LeBrun first described the evolution of Canada’s two CESP programs, both of which use Registered Education Savings Plans, or RESPs. The first, Canada Education Savings Grants, or CESGs, were introduced in 1998 and establish a tax-deferred savings account for a child’s post-secondary education to which the Canadian government will contribute up to $7,200 (in Canadian dollars). The second, called Canada Learning Bonds, was established in 2004 and is directed at low-income children under age 16. CLBs provide a $500 initial payment and up to 15 annual payments of up to $100 per child.

Canadian researchers have found that the program has been successful in promoting family savings for education, and that ownershipo of an account is positively correlated with grade performance, even when controlling for factors such as parental educational attainment. To date, the CESP has paid out $2.5 billion in grants and reaches 2.1 million children, or 31% of all Canadian children. LeBrun expects this number to rise as the Canadian government increases outreach to lower and moderate-income communities.

LeBrun identified the two greatest obstacles to universal participation in CESP as lack of financial literacy and lack of trust (of large financial institutions and/or of the government). Like White, LeBrun noted that it is essential to build support for savings programs through outreach and education. “It is not enough to have ad campaigns,” he warned. “You need to have grassroots efforts” at the local level to make programs accessible and understandable.

LeBrun noted that Canada is currently taking steps to overcome the lack of trust that may be preventing further participation among certain sectors of the population by partnering with faith-based and other existing local organizations. He further recommended that in addition to building outreach and awareness campaigns into any CSA program, program design should be as simple as possible, and the government should partner with a variety of financial institutions to offer accessibility for participants.

The final presenter, Fred Ssewamala of Columbia University, described the CSA program he is spearheading for orphans of AIDS victims in Uganda. In contrast to the U.K. and Canadian programs, his project is not currently implemented or funded on a national scale. Yet Ssewamala’s perspective on the benefits of children’s accounts provided the audience with a poignant perspective on why CSAs are a life-altering tool whose benefits can be useful to children no matter where they are from. In a country where hope is difficult to come by, Ssewamala spoke of Children’s Savings Accounts as both an anti-poverty tool and a means to a paradigmatic shift in worldview for the children. He bets that young account owners will look at life differently, and that new hope nurtured by the account will engender future-oriented behavior among orphans left parentless and otherwise largely adrift by the devastation of the AIDS epidemic.

Ssewamala’s program provides a 2:1 match rate for every Uganda shilling that a child and his or her caregivers save. Each month, a savings account statement is generated for each child in the group to see his or her accumulated savings. The project, still on-going, has gathered some encouraging preliminary data. In the first 6 months of the program, child participants saved a total of 4,168,000 Uganda shillings, or roughly 83,400 shillings per family. Translated into U.S. dollars, this is an equivalent of $50.52 saved per participant, or an $8.42 average monthly deposit—a huge triumph in a country where annual per capita income is less than $300 (World Bank, 2000). Perhaps most importantly, participants are demonstrating important psychological benefits from participation, articulating specific future goals such as professional aspirations, and how they plan to achieve them.

The panelists provided the audience with more than the sum of their practical insights and rationales for Children’s Savings Accounts. Their descriptions of the benefits already observed among young account holders in other countries underscored the importance of establishing similar accounts in the U.S. “New America is grateful to our panelists for sharing their knowledge with us today,” said Ray Boshara, Director of New America’s Asset Building Program. “This was both an inspiring and practical discussion, and we’re eager to share these encouraging results and stories with policymakers here in the U.S."

Participants

• Michael Sherraden
  Director, Center for Social Development, Washington University


• Marc LeBrun
  Director General of the Canada Education Savings Program (CESP), Department of Human Resources and Skills Development Canada


• Fred Ssewamala
  Assistant Professor of Social Work, Columbia University; Principal Investigator, SEED Uganda


• David White
  Chief Executive of Children's Mutual, United Kingdom


• Ray Boshara
  Director, Asset Building Program, New America Foundation