Child Development Accounts: Innovative Plans Build Savings For Youth, Starting at Birth

In a global economy, people require ongoing investment to remain competitive and successful. Research suggests that having savings and other assets (owning a house, for example) is as important for people’s long-term development as income. Therefore, programs that promote saving and accumulation of assets may be important to help people become and remain economically viable.

Children are in particular need of investment as they grow and develop into young adults. But statistics suggest that we are not investing sufficiently or effectively in our children. As of 2008, the Children’s Defense Fund (CDF) notes that “epidemic numbers of children” are at risk in the United States, with 5.8 million living in extreme poverty, teen pregnancy rates on the rise and educational achievement scores falling. In fact, among industrialized nations, the United States ranks 21st in science scores, 25th in math scores and last in three categories: child poverty, the gap between rich and poor, and adolescent birth rates. Child development accounts (CDAs), first proposed in 1991 by Michael Sherraden, director of the Center for Social Development at Washington University in St. Louis, offer an innovative approach to making long-term investments in America’s children.

Shown at a CDA Research and Policy Symposium last fall in St. Louis are, from left: Michael Sherraden, director of the Center for Social Development at Washington University; Jim Bullard, president of the Federal Reserve Bank of St. Louis; and Edward Lawlor, dean of the George Warren Brown School of Social Work at Washington University in St. Louis.

What are CDAs?

CDAs are savings or investment accounts that benefit a child’s future. Often opened at birth, CDAs allow parents and children to accumulate savings over approximately 18 years. With regular saving, often supplemented by the government, a child will have a nest egg by the time he or she graduates from high school. This nest egg can be used by the child to successfully launch himself or herself into early adulthood.

Although CDA programs differ in design and features, most share common characteristics.

With few exceptions, savings accumulated in CDAs can only be used for approved purposes. These commonly include post-secondary education, a down payment on a starter home, and seed capital to start a small business, among others.

As an incentive to save, most CDAs are “seeded” with an initial deposit of around $500 to $1,000 and deposits made by children and their parents are matched, often at a 1:1 ratio up to a certain limit.

Recognizing the difficulty of saving for low-income households, the accounts of lower-income children receive additional financial assistance. This assistance may take the form of a larger initial deposit, a higher match or a grant.

Ideally, CDAs are universal—available to all—in the same way that public education is universal. The government usually provides the initial deposit and match funds. Although these funds are usually offered as a grant or subsidy, a recent proposal in the United States would make the initial deposit and match funds a long-term, low-interest loan.

Why CDAs?

CDAs are particularly attractive for long-term investment in a nation’s children (and long-term investment in a nation’s future competitiveness and viability) for several reasons.

Most CDA accounts are opened at birth, allowing savings to be accumulated over approximately 18 years. This long span of time means that regular deposits of small amounts can make a difference, thus making saving a realistic goal for families of low or modest income.

Having savings may improve outlook and expectations, and children are in the best position to capitalize on this improved outlook for the long term. Research shows that having savings that are specifically for college may increase a child’s expectations of attending college and improve academic achievement.

Among lower-income families, CDAs may effectively interrupt the cycle of transgenerational poverty. Studies have shown that economic status is often passed from one generation to the next within a family. No matter the economic background of a family, a CDA provides a child the opportunity to obtain an education, buy a house or establish a small business—all opportunities that improve the child’s chances of increasing their economic status over the long term.

CDAs around the World

Canada, Singapore and the United Kingdom have instituted national CDA policies. Although sharing the common theme of investment in children, the programs differ in design.[1]

Canada provides all children with a tax-deferred savings vehicle to encourage savings for post-secondary education. The first C$2,000 deposited every year by parents or children is eligible for a 20 percent match, with an additional match for low-income families. A grant program supplements the savings of middle- and low-income households, providing an initial grant of C$500 and an additional C$100 annually, in addition to the match. The funds accumulated in the account must be used for post-secondary education or the government funds must be returned.

Singapore provides a CDA account to all children from birth to age 6. Savings accumulated by age 6 are matched at a 1:1 ratio up to a cap of S$6,000 to S$18,000, depending on the child’s birth order. (Because Singapore’s program is meant to promote population growth as well as child development, larger financial incentives are available to the third and fourth children of a household.) The savings in the CDA account can be used for child care, education-related expenses and medical expenses. Unused funds can be transferred to a college savings account when the child turns 7 years old.

The United Kingdom provides all children with a tax-advantaged Child Trust Fund at birth seeded with an initial deposit of £250 (or £500 for lower-income children). An additional deposit of £250 (or £500 for lower-income children) is provided at age 7. Unlike Canada’s and Singapore’s programs, the U.K.’s program does not provide a savings match. Another difference is that the funds in the U.K. may be used for any purpose after the child reaches 18 years of age.

Toward a Federal CDA Policy in the United States

The Center for Social Development is leading an innovative experiment in Oklahoma. SEED for Oklahoma Kids (SEED OK) tests the impact of giving every child a CDA at birth for post-secondary education. The experiment is intended to be a model for a national CDA policy in the United States.

In 2007, approximately 2,700 newborns from across Oklahoma were randomly selected to participate in this research study. Of these newborns, 1,360 (the treatment group) received $1,000 in a special SEED OK account in the Oklahoma College Savings Plan, and another 1,360 (the control group) did not receive an account.

Through SEED OK, families in the treatment group can save for their children’s future and may receive matching funds for their savings, depending on their household income. Both groups will be followed throughout the duration of the seven-year experiment to investigate the impact of CDAs on saving for college, family attitudes and behaviors, and outcomes for children.

SEED OK uses the Oklahoma College Savings Plan, a 529 College Savings Account, as the CDA’s financial vehicle. Nicknamed for the applicable section of the federal tax code, “529s” are state-sponsored plans that allow all individuals to save, regardless of income, for post-secondary education.

Although specifically created for college savings, aspects of 529’s design—including centralized accounting, low deposit minimums and matching provisions—make them a promising, tax-advantaged savings tool that could be used to build a national CDA policy. In fact, the design of SEED OK is meant to be scalable—that is, a design that can be expanded in size from a state-level program to a federal program.

The groundwork for SEED OK was laid by a four-year national research initiative on CDAs, known as Saving for Education, Entrepreneurship and Downpayment (SEED).

The national SEED initiative includes 10 CDA programs at community-based organizations across the United States, totaling more than 1,000 accounts. The programs target children of various ages, including infants and children in preschool through high school. Research in the SEED initiative has included in-depth interviews with parents and youth, focus groups with parents, a survey of parents and monitoring of the SEED accounts.

Challenges and Opportunities

Preliminary findings from SEED and early experiences implementing SEED OK suggest some challenges.[2]

Most parents in the SEED initiative understand the importance of saving, and many of them save despite their limited incomes. Economic barriers, however, make it difficult for low-income parents to save; and, although they do save, they save at fairly low amounts.

Voluntary enrollment does not work. Despite attractive incentives, enrollment rates in SEED and SEED OK are low. Focus groups with parents who did not enroll their children in SEED suggest that distrust of financial institutions, embarrassment about lack of financial knowledge and discomfort sharing personal financial information discouraged enrollment. In SEED OK, it appears that paperwork necessary to open an account is also a barrier to enrollment. A system of universal CDAs with automatic enrollment would go far to addressing both of these barriers.

Policy Initiatives

There are currently five federal proposals for special savings accounts for children:[3]

America Saving for Personal Investment, Retirement, and Education (ASPIRE) Act: Every newborn would receive an account endowed with a one-time $500 contribution. Children in households earning below the national median income would be eligible for a supplemental contribution of up to $500.

Young Savers Accounts: These accounts would serve as Roth IRAs for children. Parents would be allowed to make deposits using their current IRA contribution limits.

401Kids Accounts: Savings accounts would be opened in a child’s name as early as birth, with up to $2,000 of after-tax contributions permitted per year. The funds could be used for education expenses, for a first-home purchase or could be rolled over into a Roth IRA for retirement.

Baby Bonds: Each child would receive a $500 bond at birth and at age 10. Funds could be used for college or vocational training, buying a first home and retirement savings. Families earning below $75,000 a year could direct their existing child tax credits into the accounts tax-free.

Portable Lifelong Universal Savings (PLUS) accounts: Granted to every newborn for retirement savings, each PLUS account would be endowed with a one-time $1,000 initial deposit. Contributions would continue as adults, with a mandatory 1 percent of each paycheck withheld pre-tax and automatically deposited into their account. (Workers could voluntarily contribute up to 10 percent). Employers would also be required to contribute at least 1 percent (and up to 10 percent) of earnings.

Endnotes

1. Vernon Loke and Michael Sherraden, “Building assets from birth: A global comparison of Child Development Account policies,” International Journal of Social Work, forthcoming. [back to text]
2. Drawn from unpublished work by Deborah Page-Adams and Edward Scanlon of the University of Kansas School of Social Welfare. [back to text]
3. Adapted from unpublished work by Reid Cramer and Ray Boshara of the New America Foundation. [back to text]