ASPIRE Act/KIDS Accounts: Latest Articles

Baby Bonds Pay Bipartisan Dividends

Cecille Isidro — Tue, 16 Oct 2007 12:33:00 -0400

At a recent campaign stop with the Congressional Black Caucus, Sen. Hillary Rodham Clinton said, “I like the idea of giving every baby born in America a $5,000 account.”

That was enough to generate a few headlines and some right-wing outrage. The Drudge Report was quick to tweak one of its favorite targets and drive some Internet traffic with a bold banner, “A Bond for Every Bassinet.”

The conservative Washington Times and New York Post blasted the idea within 24 hours, and Republican presidential candidate Rudy Giuliani called it “pandering” and promptly incorporated it into his next fundraising appeal.

But with some pundits denouncing the proposal as some hyperliberal expansion of the welfare state, it’s worth noting that this idea has been simmering for some time in both Democratic and Republican policy circles.

Unfortunately, much of the discussion that followed Clinton’s remark occurred without any context at all beyond the $5,000 figure, which is a real attention getter to be sure.

For starters, the New York senator was not poised to unveil a multibillion-dollar initiative designed to remake the social contract. It hasn’t been included in any of her formal campaign proposals, but it wasn’t an idea just cooked up on the campaign trail, either.

In a July 2006 speech to the Democratic Leadership Council, Clinton proposed giving every newborn child a $500 endowment, calling it a “baby bond” to distinguish it from a similar proposal championed by the very conservative then-Sen. Rick Santorum (R-Pa.).

But this time, Clinton didn’t say $500; she said $5,000. And at that level, the proposal not only is novel but also costs about $18 billion more per year. The unscripted musing of the sure-footed candidate has made more news than the substance of the proposal. That would hardly be a first, but it remains a shame since this is still a good idea, with good politics to boot.

In the past year alone, there have been similar proposals to use children’s accounts to support these purposes, which have been promoted by the likes of Republican Sens. Jeff Sessions (R-Ala.) and Jim DeMint (R-S.C.), as well as Democratic senators such as Charles Schumer (D-N.Y.) and Joe Biden (D-Del.).

Just last week, a bipartisan coalition of lawmakers reintroduced a bill called the America Saving for Personal Investment, Retirement and Education, or ASPIRE, Act, which provides every baby with a $500 endowment, untouchable for 18 years and then restricted to paying for college, putting a down payment on a home or saving for retirement.

These policymakers have crossed the aisle because they recognize that with the country’s growing wealth gap, low personal savings rate and poor financial literacy, we need to find ways to seed more savings and property ownership.

Access to even a modest pool of assets can provide an essential element of economic security, helping people weather income shocks and take advantage of strategic opportunities.

Much of this simply can’t be achieved through social insurance that is geared toward specific risks like unemployment or very low pay, or specific services such as health care. Assets provide the flexibility families need to navigate a volatile economy.

And there are a number of benefits to starting this savings process at birth. Not only do you get to maximize the advantage of compound interest, but these accounts can become a teaching tool to deliver the fundamentals of financial education -- a primary skill for navigating our 21st-century economy.

This is actually the approach that they are using in the United Kingdom, which is already implementing a similar accounts-at-birth proposal with support from both the Labor and Tory parties.

If we engage in a dialogue that goes beyond headlines, the merits of baby bonds could garner support from progressives and social conservatives alike. That’s because, at its core, this policy is about ownership and opportunity, offering a little something for everyone.

Supporters of President Bush’s ownership society should feel right at home providing a means to spread property ownership through the population, which might change how people think, behave and plan for the future -- ultimately promoting self-sufficiency in the process.

Liberals are more likely to focus on how savings accounts can serve as investments in children that can create opportunities down the road to overcome economic disparities.

We’ve already seen the potential of this idea to create some common ground.

When debates on Social Security had broken down along partisan lines in 2004 and 2005, Santorum and then-Sen. Jon Corzine (D-N.J.) were able to momentarily sing each other’s praises as the initial co-sponsors of the ASPIRE Act. Perhaps Clinton, or some other Democratic standard-bearer, will find other strange bedfellows to work with who see creating children’s savings accounts as an investment worth making.

Forget Easy Money

Cecille Isidro — Sun, 07 Oct 2007 07:12:00 -0400

Countrywide Financial, the nation’s largest mortgage lender, has a curious new idea -- or, more precisely, an old one. No longer will it use wads of Chinese cash recycled through Wall Street to make subprime loans to unqualified borrowers. Instead, it will take in deposits from small savers and lend them out to people who might actually repay them -- just like that humble thrift institution president George Bailey did in It’s a Wonderful Life.

Imagine: a bank that promotes thrift! This could be the start of something big. Writing recently in the American Banker, Eugene Ludwig, a former comptroller of the currency, advised financial institutions to stop relying "on the easy money that comes from wholesale funding" and to concentrate instead "on harder-to-get core deposits." How quaint. Remember when banks actually tried to instill the savings habit by going into schools and helping kids set up small passbook accounts? Today, the first experience most younger Americans have with a bank comes during freshman orientation at college, when they come across a table laden with giveaways and credit-card applications.

This return to thrift comes none too soon. Not since the Great Depression have so many Americans lost their homes in one year -- and we’re not even in a recession, at least not yet. But we’re still on course to see 2 million foreclosures in 2007, afflicting one in 62 households. That’s a 67 percent increase from 2006, according to RealtyTrac. The Federal Reserve’s recent decision to cut its benchmark rate by half a point, while widely praised on Wall Street, will do little to stop the slide.

Also not since the Great Depression have Americans saved so little. Even with unemployment at historically low levels, Americans spent more than they earned in both 2005 and 2006 -- and charged the difference. Household debt, not including mortgages, now eats up nearly 15 percent of disposable income -- more than food and gasoline combined. One in seven families is dealing with a debt collector. Children today are more likely to live through their parents’ bankruptcy than their parents’ divorce. Americans’ stunning lack of savings not only brings personal tragedy but also is causing the dollar to plummet against all major currencies, jeopardizing our economic growth and threatening the financial system worldwide.

What’s going on? No doubt, some of us like to shop too much, but it’s also true that the "fixed costs" of middle-class life have soared. Elizabeth Warren, a professor at Harvard Law School, shows that while family incomes have gone up in the past generation, the costs of health care, education, housing, child care and transportation have risen even higher.

Meanwhile, not only does the government itself borrow as though there were no tomorrow, primarily through unfunded health and pension plans, but it promotes what David Blankenhorn of the Institute for American Values calls "anti-thrift" institutions. Today, 41 states plus the District of Columbia and Puerto Rico run lotteries, and 11 states encourage casinos. Government has also allowed for the mainstreaming of other anti-thrift institutions -- some charging annual interest of more than 500 percent -- that once existed, if at all, only in the shadows of society. Payday lenders, rent-to-own stores, auto-title lenders, some franchise tax preparers and chain pawn shops are all now as common across the landscape of middle-class America as Applebee’s.

After the terrorist attacks of 2001, President Bush told us that the patriotic thing to do was to shop. But Osama bin Laden is still out there, gas is more expensive than ever, the credit card is maxed out and our homes are depreciating. There’s a better way: the old-fashioned virtue called thrift.

Historically, thrift didn’t carry its current association of being cheap or stingy. Rather, it meant the wise use of resources. It meant an abhorrence of waste, whether of raw materials, time, energy or money. In short, it meant conservation.

To conserve money, working-class men and women banded together to create "thrift" institutions. Before these institutions were deregulated and taken over by the fast-buck crowd in the 1980s, they provided a staid but reliable vehicle for building a nation of "freeholding" middle-class homeowners and small-scale entrepreneurs. Most Americans understood, until the triumph of the anti-thrift institutions, that their own freedom from wage slavery -- and, indeed, the civic health and wealth of the republic -- depended on the savings habit and the widespread ownership of unencumbered small properties that it makes possible.

Today, by contrast, while many Americans understand the need to conserve energy and natural resources, they have trouble seeing what any of that has to do with credit cards and subprime mortgages. But conserving financial resources is not only still essential to individual liberty; it is also essential to moderating wasteful consumption and saving the environment.

Reviving the American thrift ethos won’t be easy, and it will probably take at least a generation. But we can take some small steps now that would make saving easy, automatic and frequent. Our goal should be to generate new savers as well as new savings -- in sharp contrast to current government policy, which allocates considerably more than $100 billion a year in tax breaks to high-income earners who would save anyway.

First, we should take advantage of one of the most powerful forces in human nature: inertia. Studies in behavioral economics show that when new hires have to opt out of a 401(k) retirement plan, as opposed to having to opt in, savings rates skyrocket. Also, building on the "Opportunity NYC" initiative (which is being privately funded by the Rockefeller Foundation, New York Mayor Michael R. Bloomberg and several other donors), governments, civic-minded corporations and philanthropies could make automatic savings deposits to individuals who engage in socially desirable behavior. Finish high school, volunteer in your community or buy an energy-efficient appliance, and your savings account receives a deposit.

Technology, if fully exploited, can also make the cost of maintaining a bank account far lower, thereby giving financial institutions a greater incentive to serve small savers and giving freedom to the "unbanked" poor from the gouging fees that payday lenders charge to cash checks. Imagine that your debit card is also an interest-paying savings card, to which your employer, the Internal Revenue Service and other entities can make automatic deposits. Some innovative firms are already offering such a product, which combines low cost with convenience and security.

Meanwhile, regulators should encourage more community-focused banks, credit unions and thrift institutions. These can resume their historical role of promoting thrift by helping customers become savers as well as (eventually) homeowners and small-business owners.

Congress should do its part as well. The bipartisan New Savers Act, for example, makes it easier to open bank accounts, buy savings bonds, put money away for college and receive financial education. Another bipartisan measure, the Automatic IRA Act, encourages automatic payroll deposits into IRAs. Other proposals authorize tax credits for low-income savers, as well as remove savings penalties for those on public assistance.

Finally, to usher in this "new thrift" across generations, Congress should establish a lifelong savings account for all children when they are born -- a reality in Britain and elsewhere and an idea that’s rapidly gaining bipartisan momentum in the United States.

If you’re an American born in the 20th century, thrift probably strikes you as a musty, downscale word -- reminiscent of used clothes, aged relatives who wrapped their sofas in plastic or perhaps the grandmother who saved Green Stamps. But it’s worth remembering, as did generations of Americans struggling up from poverty and privation, that thrift is still the essential virtue that makes the American dream possible.

Restoring the Value of Saving

Cecille Isidro — Tue, 04 Sep 2007 08:09:00 -0400

The value of saving is finally making a comeback. After years of over consumption and accelerating debt -- and more than two years with a negative personal savings rate -- Americans are finally beginning to fret over their empty coffers and negative balance sheets. As headlines profile subprime borrowers going into default around the country, the average American’s sense of economic security has jumped from unease to panic. As policymakers scramble to develop new policies to bolster working families, echoes calling for the return of the American value of thrift are beginning to grow louder.

Any middle class American will tell you that it is increasingly difficult to afford a middle-class lifestyle on a middle-class income. Tuition at four-year institutions -- in 2005, averaging $11,441 a year -- amounts to 25% of median income; in 1990, a year of higher education cost just 16% of annual household income. Increase in the median home price has also outpaced income growth. Throughout the 1980s and 1990s the cost of a new home was 3.8 to 4.2 times greater than the median household income; today a new home is 5.1 times greater than median household earnings. The accelerating costs of higher education and homeownership -- both hallmarks of the middle-class lifestyle and trophies of the American Dream -- have made these goods largely unattainable to those who rely solely on income to advance.

Americans are quickly beginning to realize they’ll need more than just stable wages to get ahead in the new economy. And with foreclosure rates skyrocketing, and student loan and credit card debt continuing to mount, families are rightfully hesitant to take on more debt. This leaves only one option: for hard working families to afford a middle-class lifestyle -- while avoiding the paralysis of debt -- they must restore the virtue of thrift and begin to develop personal assets through saving.

Saving has already emerged on the campaigned trail as one not-so-novel way to bring low- and middle-income American’s back onto solid economic footing. Just last week, John Edwards proposed the creation of “Get Ahead Accounts” that will provide matching dollars for working families who save. It is with savings, Edwards argues, that families will achieve economic security -- by investing in assets such as higher education or homeownership.

Just off the campaign trail back on Capitol Hill, savings proposals are gaining traction in a divided Congress looking for a bipartisan way to support working families who feel increasingly marginalized. Just before the August recess, Senators Clinton (D-NY) and Smith (R-OR) introduced the New Savers Act, a comprehensive bill designed to promote new savings, especially among low- and middle-income families, and enhance existing savings vehicles. In addition, members from both chambers and both sides of the aisle have proposed reforming asset limits -- rules in public assistance programs that prevent low-income families from saving while receiving benefits. The savings agenda appears to safely occupy the ever-receding common ground in both parties’ approach to social and economic policy, making it fertile ground for innovative policies that can actually become law.

One bold initiative rooted in this shared agenda has the potential to instantly reinvigorate America’s saving culture and provide every citizen with a vehicle to invest in his or her own economic future. To date there are a number of legislative proposals, from both Democrats and Republicans, to create a Children’s Savings Account for every child in America. These accounts, which could be started with government seed money and grown through personal deposits, would provide every individual with the start up capital needed to transition into adulthood. By limiting the use of these funds to investments in higher education, homeownership, or retirement, we can ensure that every young person has the opportunity to pursue the American Dream and the capital needed to secure a middle-class lifestyle through hard work and prudent investment.

Making homeownership, higher education, and retirement security a reality for families earning the median income in the new economy will require a fundamental shift away from debt and consumption back to the inherently American value of thrift on which our middle class emerged and thrived. Policies both big and small can help increase the incentive to save and expand access to savings products, but it will take a cultural reawakening for America to remember that the trophies of a middle-class lifestyle are bought with hard work and prudent investment, not with easy credit.

Kids' Accounts Warrant Debate

Cecille Isidro — Thu, 22 Mar 2007 22:38:00 -0400

Governor Schwarzenegger was cheered when he recently talked about post-partisanship in Washington, D.C. But the post-partisan waters don’t run deep back home in California. Two state senators who just crossed the aisle to forward a creative solution to a pressing problem are getting more grief than glory.

Senator Darrell Steinberg, D-Sacramento, and Robert Dutton, R-Rancho Cucamonga, held a press conference on February 28 to introduce their bill to create a California Kids Account for every newborn. The goal is to encourage parents to start saving early for their children’s future and, in the process, build the whole family’s financial know-how. This bill is essential to equip the next generation with the expertise and tools they’ll need to gain a middle class foothold in a society where employers and government play a smaller caretaking role.

But the vision and purpose of this bill was twisted almost exactly backward by the political bombardment that followed the press conference.
Here’s how the accounts would work: California would deposit an initial $500. The money couldn’t be touched until the child turns 18. Then it could only be used to pay for college, technical training, to buy a home or invested in a retirement account. Parents, relatives and the child could make regular contributions to grow the nest egg

The $500 deposit isn’t a giveaway. It’s an investment.

But the bloggers and talk-radio junkies went ballistic. Before the bill could get a fair hearing, they wrongly slapped three labels on it, calling it: 1) socialist 2) big government and 3) an illegal-immigrant magnet. It’s this last one that Dutton’s office got over 1,000 calls about. Their office was so overwhelmed that they dropped off the bill.

There’s a long list of democrats -- including U.S. Senators Hillary Clinton and Chuck Schumer -- with their own Kids Account proposals. But the Kids Account isn’t a Democrat or Republican idea. It’s an American one.

And big government? Kids Accounts grow out of the reality that the era of big government is over. Kids Accounts recognize the growing responsibility families have to manage their own health, education and retirement needs. That’s especially tough when you start with no assets to your name, the situation for a quarter of white kids and more than half of blacks and Latinos. Kids Accounts give all kids a head start. From the day they’re born, we’ll start to grow more savers, investors and owners, and fewer people who are dependent on the state.

The most ridiculous beef with the proposal is that Kids Accounts would encourage illegal immigration. The notion that prospective parents will enter California so that, 18 years later, the child will have limited access to $500, is absurd. Moreover, every child born in the United States is a U.S. citizen, not a second-class citizen.

Finally, what can California expect if this bill becomes law? We can look to Great Britain. Great Britain launched a version of KIDS Accounts, called the Child Trust Fund, for each of the 700,000 children born in the U.K. every year, beginning in September 2002. As a result, the percentage of those who electronically deposit monthly savings in bank accounts for children has since doubled. And the amount being saved each month is up 60 percent. Preliminary analyses show the greatest savings increases amongst low-income families. Projections show most children will reach 18 with a financial springboard of more than $18,000.

Kids Accounts aren’t cheap. They’d run about $280 million a year. But let’s put that number in perspective. Last year’s infrastructure bonds had a $37 billion price tag. Those bonds are costing us about $1.8 billion a year in interest. If we can pay people $1.8 billion a year in interest, we can invest 15% of that amount in kids, our most precious infrastructure.

Kids Accounts ask us to look at our world in a new way, so the bill naturally demands a legitimate and vigorous debate. Unfortunately, political attacks can stifle a policy debate. But they can’t stop the future from coming.

On Taxpayer-Funded Savings Accounts

Cecille Isidro — Mon, 12 Mar 2007 00:32:00 -0400

Even though California is being modeled as the birthplace of post partisanship, ideological divisions still run deep in the political process. Two state senators who just crossed the aisle to forward a creative solution to a pressing state problem are getting more grief than glory.

Sens. Darrell Steinberg, D-Sacramento, and Robert Dutton, R-Rancho Cucamonga, held a press conference two weeks ago to introduce their bill to create a California KIDS Account for every newborn. The goal is to encourage parents to start saving early for their children’s future and, in the process, build the whole family’s financial literacy. This bill would help to equip the next generation with the expertise and tools they will need to gain a middle-class foothold in a society where employers and government play a smaller caretaking role. But the vision and purpose of this bill was twisted almost exactly backward by the political bombardment that followed the press conference.

Here’s how the accounts would work: The state would deposit the initial $500. The money couldn’t be touched until the child turns 18. Then it could only be used to pay for college, technical training, to buy a home or be invested in a retirement account. Parents, relatives and the child could make regular contributions to grow the nest egg. Churches and community groups could, too. If $50 a month goes into the account -- something experience in the United States and around the world shows is possible -- the kid’s got $17,000 by the time he turns 18 or $30,000 by the time he’s 30.

However, the bloggers and talk-radio junkies went ballistic. Before the bill could get a fair hearing, they wrongly called it 1) socialist 2) big government and 3) an illegal-immigrant magnet. It is this last one that Dutton’s office got more than 1,000 calls about. His office was so overwhelmed, he dropped off the bill.

Let’s address these assertions. Socialist? Would you call Rick Santorum -- the former conservative U.S. senator from Pennsylvania -- a socialist? In Washington, he was the lead author of the federal bipartisan KIDS Account proposal. Listen to what he said: "Does it not make sense to give young Americans the opportunity to have a head start in life, enabling them to have security in the long run? By making every young person an investor, KIDS Accounts will expand opportunities, encourage self reliance, promote savings and give every family a personal stake in America’s economy." Other Republican leaders, including U.S. Sens. Jim Demint (R-SC), and Jeff Sessions (R-AL)., also have accounts proposals (called Portable Lifelong Universal Savings or PLUS Accounts).

Or how about that bastion of socialism, the Heritage Foundation? It says: "Modest programs . . . such as KIDS Accounts can make the American Dream realizable to millions who are currently excluded because they lack the means to save."

Thre’s also a long list of Democrats -- including U.S. Sens. Hillary Clinton and Chuck Schumer of New York -- with their own KIDS Account proposals. But the KIDS Account isn’t a Democratic or Republican idea. It’s an American one.

Our country has a robust history of making investments that allow people to build wealth. For instance, 25 percent of Americans can trace part of their family wealth back to the Homestead Act, which provided 160 acres of land to anyone who was willing to live and work on the land for more than five years. KIDS Accounts would aim to democratize access to financial assets. They would be the Homestead Act of the 21st century.

And Big Government? KIDS Accounts grow out of the reality that the era of big government is over. Most people already realize that the state and your employer aren’t going to automatically take care of your health care and retirement. You will.

KIDS Accounts recognize the growing responsibility families have to manage their own health, education and retirement needs. Because so many kids -- a quarter of white kids and more than half of blacks and Latinos, according to studies conducted by Brandeis University professor Thomas M. Shapiro -- are born with no assets to their names, KIDS Accounts give them a head start. From the day they’re born, we’ll start to grow more savers, investors and owners, and eventually have fewer people who are dependent on the state.

The most egregious beef with the proposal is that KIDS Accounts would encourage illegal immigration. First, every child born in the United States is a U.S. citizen. And second, the money in this account couldn’t be accessed until the child turns 18. For someone deciding if they should enter the United States illegally, it’s hard to believe their decision would be swayed by an investment account that their future child couldn’t access for almost 20 years.

Finally, what can California expect if this bill becomes law? We can look to Britain. Britain launched a version of KIDS Accounts, called the Child Trust Fund (CTF), for each of the 700, 000 children born in the United Kingdom each year, beginning in September 2002. As a result, the percentage of those who electronically deposit monthly savings in bank accounts for children has doubled. The average amount being saved each month by an individual has risen 60 percent since 2002, according to CTF officials. Preliminary analyses show the greatest savings increases among low-income families, and families at all income levels are participating. Projections show most children will reach 18 with a financial springboard of more than $18,000.

This idea is also being piloted right here in San Francisco by the nonprofit EARN. More than 1,400 San Franciscans -- with average yearly incomes of $21,000 -- are saving about 5 percent of their income each month toward long-term goals.

KIDS Accounts aren’t cheap. They would cost the state at least $270 million a year. But let’s put that number in perspective -- it’s less than 0.5 percent of our state’s budget.

This is a bill that asks us to look at our world in a new way, so it naturally demands a legitimate and vigorous debate. Unfortunately, political attacks can stifle a policy debate. But they can’t stop the future from coming.