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Building Assets: Creating a Culture of Savers and Investors

January 1, 2005 |
While the need to broaden asset ownership is great, the promise is even greater.
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California's leaders need to cut a new deal with struggling families: If you're willing to work and save, we'll help you own a private investment account, accumulate wealth and control your own economic future. And to California's kids, leaders should say: We'll get you started on a path of saving and investment from the day you are born, make sure your school teaches you how this economy works, but it's up to you to make smart investments in your future when you turn 18.

Is that a deal worth making? If so, what holds the deal together is a new citizen-state contract to broaden the ownership of assets, to foster an "ownership society" in California. If California and its 35 million citizens agree to this new social contract, we'll see economic opportunity unleashed, the middle class expanded and happier, more productive citizens.

The need for spurring widespread asset ownership in California is immense. Some 7.8 million California households, or 29 percent, would only last three months at the poverty level if they were forced to deplete all of their assets. That's the fourth worst "asset poverty" rate in the nation, more than twice California's "official" poverty rate of 12 percent -- and possibly more consequential. When families don't have enough assets, they may be one medical emergency or one layoff away from government dependence. Nor can they buy a home, send their kids to college, start a business, reduce or manage their debts, or make long-term investments. And pass on opportunities to future generations? Forget it. Just imagine any family trying to survive -- let alone thrive -- in today's economy without assets.

While the need to broaden asset ownership is great, the promise is even greater. Those with assets not only have brighter economic prospects, they're better, happier and more productive citizens. This Jeffersonian insight is buttressed by recent research, which finds that when families -- including very poor families -- own assets (as distinct from income), they are more likely to stay married, work harder, enjoy better physical and mental health, make educational plans for their children, feel more confident about and in control of their futures, take better care of their property, and be involved in community and political affairs. As Aristotle once observed, "Where the middle class is large, there are least likely to be factions and dissension."

Finally, who doubts that California and the rest of the nation will be better off with more savers, investors and owners, and fewer people relying on the government for their livelihood and well-being? Who doubts that we'd be better off with an active investment state instead of a passive welfare state? We certainly can learn from history: Nearly one-quarter of U.S. adults today have a legacy of asset ownership directly traceable to the Homestead Act and the GI Bill -- once dubbed "the magic carpet to the middle class" -- that have returned to the nation seven dollars for every one invested.

Indeed, today the U.S. continues this wise policy of building assets. Washington "bundles" well over $300 billion a year in investment opportunities through the tax code for mortgage deductions, college and retirement savings, and to spur stock ownership and business investment. Great policies, without a doubt -- except that more than 90 percent of these tax benefits accrue to households earning more than $50,000 a year, or roughly the upper-half of America. The bottom half, by contrast, gets several hundred billion dollars a year of income support to "get by," instead of assets to "get ahead." As the nation created and gradually expanded its "modern" welfare state during the 20th century, we somehow stopped thinking that these asset-building policies were good for all Americans.

So, how can asset ownership policies work for everyone -- including everyone in California, where nearly one in five adults lacks a high school diploma (the surest route to a lifetime of low wages) and the median price of a single family home is $465,000? As President George Bush moves forward on his ownership society agenda, which embodies exactly the right idea, we need to make sure it includes everyone. President Bush envisions a nation in which citizens -- by saving their own money in tax-benefited accounts -- make their own decisions regarding college, retirement, homeownership, and health care. Clearly, there's a risk that too many Californians and Americans will not be able to save adequately for these purposes, that they will remain ownerless in an ownership society.

What, then, can California do? There's a lot of "low-hanging fruit" that California could pick right now. But with too few Californians owning assets, economic opportunity eluding millions, and the middle class getting squeezed, our vision and agenda must be bolder. We propose that California embrace a two-part ownership agenda that builds on the best thinking and the best economic opportunity policies in the world.

First, any Californian working hard but still earning below $30,000 per year should be offered dollar-for-dollar matching funds for savings that lead to a first home, post-secondary education or training, or retirement. We could call these "California Ownership Accounts." To make this simple, the state could deliver the matching funds through state tax returns for amounts saved in IRAs, Roth IRAs, or California's "529" college savings plan. California could also make it easier for the one in six individuals who receive the Earned Income Tax Credit, a federal tax refund aimed at the working poor, to channel their refunds into these accounts.

Now, one may ask if low-income people can and will save. The answer -- based on recent demonstration projects in the U.S., Canada and the U.K. -- is a resounding "yes." Savings in these projects were modest, ranging from $18 to $38 per month in deposits, but with matching funds these savings led to the ownership of assets. In California, more than 5,000 people of modest incomes are saving in matched savings accounts. In Silicon Valley, 1,300 savers -- with average median incomes of $24,000 -- have saved over $1.5 million. More than 500 people have used their savings to buy homes, go back to school and start college funds for their children. With rising tuition and housing costs, and only 39 percent of California workers having an employer-sponsored retirement plan, California Ownership Accounts will reward hard work, thrift and saving, and give struggling but industrious California families a real shot at the American Dream. The estimated price tag of these accounts is $430 million a year, about what California receives each year from its tobacco settlement. Think about it: funds earned from helping people die could instead help them live.

The second and more visionary part of California's agenda should be to create an investment account at birth -- a California Kids Account -- for each of the 540,000 babies born each year in California. Why set up accounts for children? As any investor will tell you, the earlier you begin saving, the better. As any parent will tell you, the earlier you set expectations for your child to attend college, the more likely he or she will do so. College savings accounts embody expectations; they are hope in concrete form. And, as any financial educator will tell you, financial education is taken more seriously when people -- including kids -- have an account of their own to manage, real money with which to make investment decisions. If we are witnessing the gradual rise of the "investor class" or ownership society, which most Americans view as a good thing, the sooner kids and adults become comfortable with private savings accounts, the better.

How, exactly, would this work in California? The state could launch every California Kids Account with a onetime, $300 deposit, while encouraging after-tax contributions (not to exceed $1,000 per year) into the accounts of children in households below the state's median income. The accounts would build up tax-free. Assuming low-income families managed to save or leverage just $50 per month, this small investment would grow to nearly $19,000 when the child turns 18 -- enough to comfortably cover the first three years of tuition and fees at a public university in California. If the child does not use the account for college, it grows to $34,000 by age 30 and $185,000 by age 65. Besides post-secondary education and training, California Kids Accounts could only be used for a down payment on a first home or rolled over into a retirement savings account; if the account is used any other way, the at-birth deposit must be returned to the state, along with penalties and taxes. The accounts also provide a perfect catalyst and centerpiece to build the financial literacy of all young Californians. At $160 million a year, this relatively small investment -- it's less than three-tenths of one percent of the state's $100 billion budget -- would be transformative.

California could learn from other pioneers on this front. Beginning next year, each of the 700,000 kids born in the U.K. annually will receive about $400 each in a "Child Trust Fund," with the poorest one-third of kids getting about $800. The idea is to create a "stakeholder" society and help ensure that children have opportunities that their parents may not have had. In Canada, "Learning Bonds" will soon be established at birth to help low-income students save for college. In Kentucky, the Republican secretary of state and the Democratic state treasurer plan to launch a "Cradle to College" initiative, which would establish a 529-type college savings account for every newborn in Kentucky so that no residents would need to forgo college because they cannot afford it. Finally, bipartisan legislation called the ASPIRE Act -- led by unlikely U.S. Senate bedfellows Rick Santorum (R-Pennsylvania) and Jon Corzine (D-New Jersey) -- was introduced in Congress last July to create a savings account at birth for each of the million kids born in the U.S. Clearly, the idea is catching on, and California has a great opportunity to lead the nation on this path-breaking idea.

Throughout the 20th century, it was assumed that the prosperity generated by industrial economies should be broadly shared -- and it largely was, through policies that redistributed income from those who had it to those who did not. And it was often thought that the best anti-poverty policy is a strong economy, the proverbial "rising tide that lifts all boats."

At the dawn of the 21st century, our goal should not be broadly shared prosperity, but broadly created prosperity. Those boats shouldn't wait around to be lifted, but government should enable struggling families to own and lift their own boats. Our goal, after all, should not be to penalize or reduce wealth at the top -- we want to reward hard work, creativity and initiative -- but to enable more Californians to create and build their own wealth. That's a "new deal" all Californians should eagerly embrace.