111 child accounts: the beginning of savings for life pamela perun, policy director initiative on...
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111
Child Accounts:
The Beginning of Savings for Life
Pamela Perun, Policy Director
Initiative on Financial Security, The Aspen Institute
(510) 299-0050
“Perspectives on College Access, Savings and Debt”
College Savings & Financing Summit 2008
Washington, DC
May 21, 2008
2
The College Gap
Who goes to college (age 18-24)?31% from low-income families56% from middle-income families 75% from high-income families
Who graduates (age 18-24)?6% from low-income families19% from middle-income families52% from high-income families
3
The 529 Plan Gap
Who has a 529 plan?By household income
– 3% less than $50k in annual income– 6% income between $50k and $100k– 10% income between $100k and $150k– 22% income greater than $150k
By household financial assets– 3% less than $50k– 4% between $50k and $150k– 8% between $150k and $250k– 13% greater than $250k
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Child Accounts: A Bridge Over the 529 Plan Gap
a long-term investment account for every child in America
a financial asset to fund the transition to adulthood
a new generation of savers and financially-savvy consumers
a firm connection to the U.S. savings system for millions of families
4
5
Child Accounts: Contributions
At birth, every child is given a certificate for $500
Parents redeem certificate at a participating private provider to open a tax-free account
Parents, family, churches, friends can contribute up to $2,000 annually
6
Child Accounts: Account Design
Incentives– 100% match, up to $1,000 for low and
moderate-income families (EITC eligible)Investments
– Only 2 choices: principal preservation product or target date investment fund
– Limit on fees and expensesAccess
– None before age 18– Thereafter, for any purpose with incentives for
use towards education, business start-up, home ownership, retirement
7
Child Accounts: Operation
Financial Assetsat age 18
2
Government $500 certificate
(Every Newborn)
Parent
Child
Family/Friends
TaxSystem
Child Account(Private-Sector
Provider)
Government
1
5
4
3
Certificate
Contributions
Eligible Families Claim Matching Contributions at
Tax Time
MatchingContribution
(not spendable)
Savings
1
2
3
Open account inchild’s name
4
5
Contribute
File Taxes
Receive match through tax system
Child able to accessAccount at age 18
888
Child Accounts: Potential Growth
Amount of Contributions
Year 1 Year 5 Year 18
Low-Income Moderate Contributions ($20/month, matched)
$782 $3,156 $14,018
Middle-Income Moderate Contributions ($50/month)
$846 $3,829 $17,475
Middle-Income Aggressive Contributions ($100/month)
$1,152 $6,966 $33,676
High-Income Aggressive Contributions ($2000/year)
$1,560 $11,148 $55,277
Accounts could grow to between $10,000 and $55,000 depending on contributions and matching funds
Assumes a lifestyle investment with rate of return ranging from 8% to 4% as the child grows.
9
Is More Saving By Low- and Moderate Income Households Feasible?
Research shows that
when opportunities and incentives are available
even extremely low- income households are capable of saving a relatively large portion of income
10
Lessons from Individual Development Accounts
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%Monthly Deposits
Savings Rate
Source: Center for Social Development, Washington University in St. Louis: “Saving Performance in the American Dream Demonstration,” Mark Schreiner, Margaret Clancy, Michael Sherraden, October 2002
Average Monthly
Deposits
Savings
Rate
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Child Accounts: Why a Private Sector Platform?
0
5
10
15
20
25
ThriftSavings
Plan
529 Plans Fidelity ChildAccounts
Number of Accounts (millions)
Number of Accounts, Year 5
Massive Scale
Required To Service
Accounts
4
12
8
20
Source: IFS Analysis
Child Accounts: Potential Market Size, 10 Years Out
Potential Market Size, 10 Years Out
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
1 2 3 4 5 6 7 8 9 10
Year
Ass
ets
un
der
man
agem
ent
(bil
lio
ns)
0
5
10
15
20
25
30
35
40
45
Nu
mb
er o
f ac
cou
nts
(m
illi
on
s)
Assets under management
Number of Accounts
13
Child Accounts: Next Steps
Two state-based pilot projectsChallenge fundMississippi work well underway
– $15,000,000 commitment from the Kellogg Foundation
Second state work in progress
Federal legislationActive interest in bipartisan legislation in
Senate and House
14
The Case for Child Accounts
A long-term investment in children and their futures
A universal saving campaignA hands-on lesson in financial literacyAn exercise in choice and responsibility An opportunity fund for adulthoodA bridge between working families and
the U.S. savings system
15