The onset of a debate over Social Security's future offers Democrats a chance to articulate what they're for -- not just what they're against. President Bush has provided them an opening. He's laid out a rhetorical message that works -- the Ownership Society -- but has failed to provide the means to make it happen. The reason it works is that it evokes the most promising path to security: being able to save, invest and build up a reserve of assets. Yet the challenge of any meaningful Ownership Society policy agenda is to ensure that as many people as possible are given the chance to get in the game. Proactive policies are required that create opportunities for those without resources to save and build wealth. One promising idea worth fighting for is the formation of a universal children's savings account system.
Under such a program, every newborn child would be given an account and a modest endowment to create a platform from which future savings can occur. These accounts would be supplemented with savings incentives in the form of progressive matches for children in families with fewer resources. The key is to make sure that everybody is included and those who are in need are given a boost. This kind of "progressive universalism" has been used with success in the United Kingdom -- where Tony Blair and Gordon Brown are debuting their own accounts-at-birth program this spring.
Creating a system of personal accounts, offered at birth, makes a strong statement. Not only does it represent the country's commitment to invest in every child, but it also sends the message that each child has a stake in the broader society. For those who feel left out of the economic mainstream, owning assets can change their orientation and behavior; it can help them save for their future, plan to go to college or purchase a home. In our America today, too many feel they don't have a vested interest in society as a whole. We need to find ways to ensure everybody is included as a stakeholder. With children's savings accounts, kids will grow up knowing that they have a pool of resources at their disposal to help them succeed. Perhaps more significantly, these accounts can serve as teaching vehicles to facilitate the delivery of financial education -- a vital skill set for the 21st century. Over time, these accounts could evolve into a universal system through which all Americans would meet their lifelong asset needs, helping them accumulate the resources necessary to secure their future.
This past year, a bipartisan coalition of legislators introduced a bill in both houses of Congress to build just such a program. The America Saving for Personal Investment, Retirement and Education Act ("The ASPIRE Act") would create a universal system of "KIDS Accounts," supported by progressive savings incentives. Account resources would be restricted to asset-building purchases, such as post-secondary education, first-time homeownership or retirement security. While there are many different ways in which to structure a children's savings account proposal, the ASPIRE Act could serve as the vehicle around which future discussions are focused. For low-income Americans, these accounts provide a means to save and build assets for their children -- an opportunity not offered by existing public policy.
As with all accounts or investment instruments, there is market risk. But this risk can be managed and somewhat minimized through a system of index funds, similar to the federal government's Thrift Savings Plan retirement program, where employees are offered choice among a limited set of funds managed by a private-sector firm. Furthermore, these accounts are not designed to ensure retirement security, but to help Americans save so they are better equipped to make productive investments throughout their lives. Policymakers might consider sanctioning a closer connection to retirement by mandating that a portion of each account, perhaps the initial contributions and subsequent earnings, be walled off exclusively for retirement uses. In this sense, these accounts would contribute to the pre-funding of retirement security as an add-on to Social Security, and that program can remain focused on providing a defined benefit guarantee.
In the current budget environment, it makes good policy sense to pay for this proposal. The cost of the ASPIRE Act is estimated at $37.5 billion over 10 years. This could be more than paid for by maintaining the estate tax, so each generation helps seed the prosperity of the next. Yet children's savings accounts should be conceptualized as an investment strategy in and of itself, with large multiplier effects for the entire economy. For starters, the increase in national savings and the enhancement of financial literacy are primary national policy objectives. Perhaps more significantly, the initial investments can grow, and with responsible stewardship provide a means of ensuring that everyone is afforded opportunities to succeed through higher educational attainment, increased home purchases and greater retirement security.
The profusion of individual accounts over the last three decades, including the advent of 401(k) s, IRAs and Section 529 College Savings Accounts, represents a shift toward asset-based policy. But the distribution of benefits from these accounts, as delivered through the tax code, has been considerably more regressive than the proceeding social insurance and means-tested transfer programs developed after the New Deal. To date, the incentives simply don't work for those who would benefit from them the most.
A better idea is to construct an inclusive system, one that is capable of targeting support and helping Americans chart a path that expands opportunity and ownership by encouraging savings and investment. American history is marked by a series of major policy initiatives that have successfully done just that. The Homestead Act of 1862, The GI Bill of 1944, and the creation of the Federal Housing Administration (FHA) in 1934 each expanded access to important elements of wealth creation and produced tangible results. These efforts were grounded in the twin objectives of ownership and opportunity -- the underlying assumption being that ownership creates stakeholders and expanding opportunities for people to accumulate productive assets has broad social and economic benefits. It's such a good idea that we should start it at birth.
Copyright 2005, TomPaine.com