[Senate Hearing 118-805]
[From the U.S. Government Publishing Office]
S. Hrg. 118-805
CHILD SAVINGS ACCOUNTS AND OTHER
TAX-ADVANTAGED ACCOUNTS
BENEFITING AMERICAN CHILDREN
=======================================================================
HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
MAY 21, 2024
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
______
U.S. GOVERNMENT PUBLISHING OFFICE
63-974--PDF WASHINGTON : 2026
COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
MARIA CANTWELL, Washington CHUCK GRASSLEY, Iowa
ROBERT MENENDEZ, New Jersey JOHN CORNYN, Texas
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
BENJAMIN L. CARDIN, Maryland TIM SCOTT, South Carolina
SHERROD BROWN, Ohio BILL CASSIDY, Louisiana
MICHAEL F. BENNET, Colorado JAMES LANKFORD, Oklahoma
ROBERT P. CASEY, Jr., Pennsylvania STEVE DAINES, Montana
MARK R. WARNER, Virginia TODD YOUNG, Indiana
SHELDON WHITEHOUSE, Rhode Island JOHN BARRASSO, Wyoming
MAGGIE HASSAN, New Hampshire RON JOHNSON, Wisconsin
CATHERINE CORTEZ MASTO, Nevada THOM TILLIS, North Carolina
ELIZABETH WARREN, Massachusetts MARSHA BLACKBURN, Tennessee
Joshua Sheinkman, Staff Director
Gregg Richard, Republican Staff Director
(II)
C O N T E N T S
----------
OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Crapo, Hon. Mike, a U.S. Senator from Idaho...................... 3
WITNESSES
Elliott, William, Ph.D., professor of social work and director,
Joint Doctoral Program in Social Work and Social Science,
University of Michigan, Ann Arbor, MI.......................... 4
Quint, Colleen J., president and CEO, Alfond Scholarship
Foundation, Portland, ME....................................... 6
de Rugy, Veronique, Ph.D., George Gibbs chair in political
economy and senior research fellow, Mercatus Center, George
Mason University, Fairfax, VA.................................. 8
Michel, Adam N., Ph.D., director of tax policy studies, Cato
Institute, Washington, DC...................................... 9
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Crapo, Hon. Mike:
Opening statement............................................ 3
Prepared statement........................................... 29
de Rugy, Veronique, Ph.D.:
Testimony.................................................... 8
Prepared statement........................................... 30
Elliott, William, Ph.D.:
Testimony.................................................... 4
Prepared statement........................................... 33
Responses to questions from committee members................ 45
Michel, Adam N., Ph.D.:
Testimony.................................................... 9
Prepared statement........................................... 54
Quint, Colleen J.:
Testimony.................................................... 6
Prepared statement........................................... 59
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 68
Communication
Center for Fiscal Equity......................................... 71
(III)
CHILD SAVINGS ACCOUNTS AND OTHER
TAX-ADVANTAGED ACCOUNTS
BENEFITING AMERICAN CHILDREN
----------
TUESDAY, MAY 21, 2024
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10 a.m.,
in Room SD-215, Dirksen Senate Office Building, Hon. Ron Wyden
(chairman of the committee) presiding.
Present: Senators Bennet, Casey, Whitehouse, Crapo,
Grassley, Thune, Daines, and Barrasso.
Also present: Democratic staff: Drew Crouch, Senior Tax and
ERISA Counsel; Grace Enda, Tax Policy Analyst; Jonathan
Goldman, Senior Tax Counsel, International; and Joshua
Sheinkman, Staff Director. Republican staff: Courtney Connell,
Chief Tax Counsel; Jamie Cummins, Senior Tax Counsel; and Gregg
Richard, Staff Director.
OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM
OREGON, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The committee will come to order.
The Senate Finance Committee has a long and very bipartisan
tradition of working together on issues that relate to helping
Americans save. This morning's hearing has a focus on child
savings accounts and other savings programs for kids, and it is
another opportunity for the committee, on both sides of the
dais, to bring forward fresh ideas. There are a few key issues
underpinning the discussion.
First, my view is wealth inequality is still a major
challenge for America. The gap between working people and those
at the top narrowed a bit when Congress passed major economic
rescue programs during the pandemic. Most of those programs
have expired.
Data from the Federal Reserve shows that the wealth gap is
getting worse for young people, who are paying more than ever
for rent and education. Also, among young people in America, we
are seeing a real drop-off in what has been the traditional
American optimism about our wonderful country. A recent USA
Today-Harris survey found that two-thirds of Gen Z and three
quarters of millennials believe that they are not doing as well
as their parents were doing at a young age. They are certainly
bringing up important reasons why they feel that way.
A study by an expert group called the Equality of
Opportunity Project looked at how generations of Americans have
fared economically, relative to those who came before them. The
research found that in the middle of the last century, 90
percent of Americans out-earned their parents. These days, it
is more like 50 percent.
Now, it is often said that getting an education is the
surest way to guarantee your future. The fact, however, is many
young people are better-educated than ever before, and they are
still finding it hard to get ahead. And certainly if you are
not born into wealth, being a young person in America leaves a
lot of those young Americans feeling like they are stuck
underwater.
Here today we have an opportunity to change that. There is
big interest in using the tax code to help restore opportunity
for kids and young people. So, this morning's hearing kicks off
our debate on the best ways to help Americans build their
savings and get ahead.
Child savings accounts, in my view, are a proposal with
enormous promise. We are lucky to have a number of champions
for young people on this committee, none bigger than Senator
Casey, whose 401Kids bill is really the gold standard when it
comes to child savings account proposals.
Now, the idea behind them is on Day One, a newborn child
automatically gets an account with some seed money that grows
over time. Later on, with enough contributions, they are able
to use it in a way that will help them live out the American
Dream, whether it is getting an education, buying a home, or
starting a business.
These accounts--and I am going to close with this--they are
really not some kind of radical, extreme concept. There are
more than a hundred of these programs running in cities and
States around the country. We are going to hear about one such
program in the State of Maine, and these accounts are not all
that different from some programs that exist in Federal
statute, including the 529 and Coverdells.
In my view, this is the kind of idea--and we will probably
hear this again over the course of the morning--that ought to
bring Democrats and Republicans together. Saving is a
bipartisan priority. There has been progress, but the numbers
show that there is a lot more work to be done making sure that
low-income families benefit.
Child savings accounts can accomplish that in a few key
ways: first, by opening accounts automatically, which breaks
down a barrier that keeps too many Americans from getting
started; second, starting them with seed money. All the
evidence from existing programs shows that money not only
unlocks opportunities for kids, it is a smart investment. It
goes right back into the economy down the road.
So, there is a lot for the committee to discuss today. We
very much look forward to working with Senator Casey and the
entire committee, on both sides of the aisle, on these issues.
If you are looking out for kids in America, and you have
Senator Casey and some of my colleagues who have a long history
in this, as my mother would say, ``you are running with the
right crowd.''
[The prepared statement of Chairman Wyden appears in the
appendix.]
The Chairman. Senator Crapo?
OPENING STATEMENT OF HON. MIKE CRAPO,
A U.S. SENATOR FROM IDAHO
Senator Crapo. Thank you, Mr. Chairman. Today's hearing
provides an important opportunity to examine the ways working
families can save their hard-earned income for their children's
future.
Only 2 years ago, this committee and others worked together
in a bipartisan, bicameral fashion to expand retirement savings
through the SECURE 2.0 Act. As we continue to monitor its
implementation and the effects the law had on retirement
savings, it is appropriate for us to explore other savings
needs beyond just retirement.
Fortunately, Americans already have access to numerous
savings options, whether it is saving for a specific purpose
through a tax-advantaged account or saving through traditional
savings vehicles.
Tax-advantaged accounts allow benefits such as tax-free
growth and withdrawals, making it easier and more efficient to
save for a specific purpose. For example, 529 accounts can help
families save for their children's education experiences.
Health Savings Accounts and flexible spending arrangements can
be used to help eligible individuals save for medical expenses.
Dependent-care FSAs can help workers save for expenses for
dependents, such as after-school or in-home care for kids or
other family members. And ABLE accounts help those with
disabilities save for critical tools like assistive technology
and transportation, to name just a few.
Beyond these tax-advantaged accounts, Americans can also
save through widely available traditional means, such as
savings and brokerage accounts. And for children specifically,
custodial accounts, and even some child-specific accounts
offered by some institutions, can help teach children the ins
and outs of saving. When paired with proper financial
education, more children and young adults can learn how to
budget and save from an early age, carrying best practices on
into adulthood.
Any discussion concerning the options to save goes hand-in-
hand with a conversation on the importance of planning and
managing savings throughout one's life. Part of that planning
includes the need for many to consider seeking professional
financial advice in order to create comprehensive savings
strategies.
Although families have access to many savings vehicles,
navigating this often-complex web of options can be daunting,
and every family's needs are different. Whether a family is
saving for a down payment on a home or planning ahead for
unforeseen emergencies or health expenses, understanding what
options are available is key.
Effective planning becomes even more important at a time
when Americans are experiencing inflation at levels not seen in
decades. Higher costs of food, fuel, and housing eat up
families' disposable income and squeeze their ability to save.
In fact, as compared to January 2021, average U.S. households
are spending over $1,000 extra each month just to maintain
their standard of living.
Today's witnesses will discuss all of these topics, and I
look forward to hearing how Congress can expand opportunities
to save in a fiscally responsible manner. I also expect to hear
testimony on child savings initiatives that some States have
implemented. While I respect the steps some States are taking,
implementing a similar program at the Federal level would come
at a significant cost to taxpayers. Expanding options to save
is a worthy goal, but we must do so in a way that does not
exacerbate already out-of-control government spending or create
another unsustainable government program.
To all of our witnesses, thank you for being here. I look
forward to hearing your testimony.
Thank you, Mr. Chairman.
[The prepared statement of Senator Crapo appears in the
appendix.]
The Chairman. Thank you, Senator Crapo.
Professor William Elliott will be our first witness. He is
from the University of Michigan School of Social Work, and is a
leading researcher in the field of child and college savings.
He also has done a lot of outstanding work in wealth
inequality.
Then Ms. Colleen Quint, the president and CEO of the Alfond
Scholarship Foundation, will go next. They award a $500 grant
at birth to every Maine resident baby for their future
education after high school. And I also note that she was at
the George J. Mitchell Scholarship Research Institute. And
Senator Mitchell, in addition to being part of the Senate
leadership, is an alum of this committee, so we are glad to
have you here.
Veronique de Rugy is the George Gibbs chair in political
economy and senior research fellow at the Mercatus Center,
George Mason. Primary research interests include the U.S.
economy, the Federal budget, taxation, tax competition, and
cronyism. We welcome you.
And then we have Adam Michel, director of tax policy
studies at Cato, which focuses on analyzing the economic and
budgetary effects of taxation in the United States. Prior to
joining Cato, Dr. Michel served as Deputy Staff Director at the
U.S. Congress at the Joint Economic Committee. We work closely
with them as well.
So, we welcome all of you. This is going to be a good
debate.
We will go with you to begin, Dr. Elliott.
STATEMENT OF WILLIAM ELLIOTT, Ph.D., PROFESSOR OF SOCIAL WORK
AND DIRECTOR, JOINT DOCTORAL PROGRAM IN SOCIAL WORK AND SOCIAL
SCIENCE, UNIVERSITY OF MICHIGAN, ANN ARBOR, MI
Dr. Elliott. Chairman Wyden, Ranking Member Crapo, and
distinguished members of the committee, it is an honor to
testify before you today regarding the promise of children's
savings accounts for building wealth for children. I am
grateful for the opportunity to address this committee and
appreciate your continued attention to the urgency of wealth
inequality--and to the potential of improving children's
chances through investments in children's asset interventions.
CSAs are asset-building accounts that provide a type of
financial structure that can facilitate wealth accumulation
from multiple sources, for the purpose of giving all children
an equal opportunity to reach their full potential. A group of
CSA experts identified eight key principles for designing CSAs
at scale: eligibility for all, automatic enrollment, automatic
initial deposit, starting young, targeted additional deposits,
centralized savings plan, investment growth, and simplified
investment options.
Importantly, the 401Kids bill includes seven of the eight
principles. As a practical example, you will hear more about
how Maine is utilizing these principles in Colleen Quint's
testimony. By the end of 2023, there were 121 CSA programs in
39 States serving 5.8 million children in the U.S.
Currently, there are seven States with a statewide program:
California, Illinois, Maine, Nebraska, Nevada, Pennsylvania,
and Rhode Island. All seven States built their programs upon
their State 529 savings plan. In the absence of passage of
national CSA policy, some States and localities have developed
their own children's savings initiatives.
Without Federal funding, existing CSA programs provide
relatively small initial deposits ranging from $5 to $1,000.
But research shows CSAs still build wealth. For example, at age
14 the average treatment child in the SEED for Oklahoma Kids
experiment, a group that includes low-income and Black
children, has about $4,373 in their account.
So, even when family's savings are minimal, significant
assets accumulate in these types of accounts. CSAs provide an
infrastructure for potentially leveling the playing field. Once
every child has an account, it gives the government a tool like
a water valve that can be used to control the flow of assets
into households. By allowing multiple streams of assets to flow
into accounts, in addition to giving the government a valve,
third parties such as extended family members, employers,
communities, as well as other entities, are also given access
to smaller valves that can be used to increase the flow of
assets going to low-income children.
The potential for different types of assets flowing into a
CSA makes them tools that can provide a way for not only
government, but people and groups outside of the government to
help finance college and reduce the racial wealth gap. Existing
CSAs have been designed to not only give low-income children
access to the asset arm--as opposed to the credit arm--of
financial institutions to build wealth, but to pay for college,
and for launching them into adulthood.
They also have been shown to have an impact on children's
preparedness for college. Research findings indicate that CSAs
are associated with children's early social and emotional
development, math and reading scores, improved children's
educational expectations, and increasing the likelihood they
enroll in and complete college.
Research also shows effects on parents. CSAs increase
parental educational expectations, reduce punitive parental
practices, and reduce maternal depression, for example.
Importantly, some findings are consistently strong among low-
income children, revealing that CSAs are the rare and valuable
intervention that works best with those who need it most.
In conclusion, children's asset investments are more than
just financial benefits for higher education. They have
demonstrated the potential to transform the opportunity
landscape, and in the process to reset young people's
confidence in U.S. institutions and their ability to deliver
equitable returns.
In our context of rising student debt, encroaching
artificial intelligence disruptions, and considerable post-
pandemic disruption, CSAs help create an environment for
forming tangible hopes. What makes them tangible is that they
give children a stake in the future, their own and ours. They
give them the power to purchase a piece of their future today.
Thank you again for the opportunity to testify, and I look
forward to answering your questions.
[The prepared statement of Dr. Elliott appears in the
appendix.]
The Chairman. Thank you, Dr. Elliott, and we will have some
questions for you in a moment.
Ms. Quint, welcome.
STATEMENT OF COLLEEN J. QUINT, PRESIDENT AND CEO, ALFOND
SCHOLARSHIP FOUNDATION, PORTLAND, ME
Ms. Quint. Thank you very much. Chairman Wyden, Ranking
Member Crapo, and distinguished members of the Senate Finance
Committee, my name is Colleen Quint. I am the president and CEO
of the Alfond Scholarship Foundation located in the great State
of Maine. It is a pleasure to be here today, and I thank you
for the opportunity.
For more than 15 years now, the Alfond Scholarship
Foundation has been investing $500 at birth for Maine children.
We started on an opt-in basis for the first 4 years or so, but
since 2013 we have been doing that automatically for every baby
born a Maine resident, and to date we have invested that $500
for about 156,000 Maine children.
So, it is a great program to be part of, and the oldest of
our grant recipients are like sophomores in high school now, so
we are just a couple of years away from beginning to disburse
those funds as they begin their education.
So, our CSA program reflects the vision of Maine
businessman and philanthropist Harold Alfond. He really created
the program to provide opportunity at what I call the micro and
macro levels. So, at the micro level, it was really intended to
have an impact on individual children as they think about their
path to the future. But on the macro level, it was very much
intended to build a more educated workforce for a prosperous
future for the State of Maine.
Those benefits are really amplified, because it is invested
at birth, so it has that 18 years to grow over time through
market performance. And to be sure, there is real money
invested in these accounts. To date, it is about $78 million
from the foundation for those 156,000 children.
Mr. Alfond's vision was always very much that families
would also contribute, and they have absolutely done that. In
fact, families have contributed about three times what the
foundation has put in, about $236 million. But the median
contribution, for the most recent quarter, from a Maine family
was $255.
So these are hardworking Maine families, many of them with
modest means, who are doing what they can to lean in and
contribute to build that future pathway for their children. The
funds are all invested in NextGen529, which is Maine's 529
plan, and those contributions from families have earned about
$29 million in matching grants from the State.
So, the total value of $344 million that has been invested
actually, in the market, at least at the end of April, was
worth $477 million. So that is a lot of money for Maine kids,
and to support the development of the State's future workforce.
The choice of 529s as a platform for our program was a very
easy one for us. It was an existing platform. There was no need
to reinvent the wheel, and it is designed to save for higher
education, which was the purpose Mr. Alfond had in mind. So we
knew we could achieve both quality and scale with a very small
staff--also, the ability of the 529s to support a wide variety
of post-secondary education. A lot of people think of it in
terms of bachelor's or associate's degrees, but it can be used
for many training and certificate programs, and even
apprenticeships now.
So that gives flexibility to students as they start their
career path, and again fills a wider range of jobs and needs of
employers across the State. We continue to be encouraged by
additional efforts by members of both the House and Senate,
supported by members of Maine's delegation, to expand the uses
of 529s even further to include even more training and
certificate programs.
And Congress's passage last year of SECURE 2.0, as Senator
Crapo mentioned, was a big boon. We had a lot of Maine families
who wanted to make that early investment for their child, but
would say to us, ``I do not know if my toddler is going to
continue education after high school, and I want to make sure
the money I am investing now will benefit them later on.'' And
now that unused funds in a 529 can roll over into a Roth IRA
for retirement purposes, that has been something that has given
families a lot of peace of mind and made them feel confident
about investing that money for their child's future.
And of course, by investing that money at birth, that means
we have 18 years not only for the money to grow, but it is also
a platform through which we can share information and resources
and supports with students and families. Every quarter, they
receive a communication from us that shows the current value of
their Alfond grant, as well as, again, tips and resources for
them as the child grows. It is a simple and streamlined
document that is really designed to call out the market growth
and to help build financial literacy for families who might not
have experience investing.
Like many CSA programs, My Alfond Grant has a small staff.
There are 2\1/2\ of us, and so we develop close partnerships
with a lot of organizations across the State: hospitals,
family-serving organizations, State agencies, employers. We
have a lot of Maine employers; over 100 of them in fact offer
payroll deduction for college savings to their employees.
And so, what happens with the families is, when they find
out about the program--not just from us, but it has been
reinforced from other trusted sources--it builds trust for and
engagement in the program.
So, our belief and the early data seem to demonstrate that
this early investment of $500 has an out-sized impact on family
expectations and aspirations, family savings behaviors, and
family engagement around education. It is exciting to see
Senator Casey's proposed 401Kids savings account that would
really take that substantial early investment nationwide, so
that whether you live in Maine or California or Nebraska or any
State, you would have that same kind of an opportunity.
We do not have to imagine what a national platform would
look like. We can see it happening now. There is a saying in
politics: ``As Maine goes, so goes the Nation,'' and now there
is an opportunity to see that in policy as well.
Thank you very much.
[The prepared statement of Ms. Quint appears in the
appendix.]
The Chairman. Well said.
Okay. Dr. de Rugy, welcome. Glad you are here. Please
proceed.
STATEMENT OF VERONIQUE de RUGY, Ph.D., GEORGE GIBBS CHAIR IN
POLITICAL ECONOMY AND SENIOR RESEARCH FELLOW, MERCATUS CENTER,
GEORGE MASON UNIVERSITY, FAIRFAX, VA
Dr. de Rugy. Thank you. Chairman Wyden, Ranking Member
Crapo, members of the committee, thank you for having me.
Finding ways to help children from low-income families
become economically self-sufficient is a really worthy goal.
Creating inroads to make sure everyone saves is one way to
ensure that low-income children are well-positioned for the
future. However, creating one more government program paid for
with borrowing will very likely backfire.
I would like to make three points today. First, our fiscal
situation means that we should not create more government
programs paid for with borrowing without significant offsets
elsewhere. Second, trying to raise saving through government
spending and debt is akin to fighting against windmills. Third,
if Congress wants to encourage savings for low-income families,
universal savings accounts are a much better solution.
So first, our Federal debt is more than $34 trillion, up
from $28.5 trillion in 2021. Our debt-to-GDP ratio is close to
100 percent of GDP and heading to 166 percent in 30 years.
While the debt-to-GDP ratio is lower than it was during the
pandemic, most of the reduction is a result of inflation. And
contrary to what some believe, it is too early to declare
victory in the fight against inflation, which unfortunately
hits lower-income households the most, as it eats away their
savings and reduces the purchasing power of their income.
Not only has the credit agency Fitch Ratings downgraded the
Treasury debt, but soon we might be in even more trouble and
uncharted territory as Federal borrowing is projected to
require an additional $120 trillion over the next 30 years.
Rapidly increasing interest rates have also dramatically raised
direct cost of service of the national debt.
According to the CBO, this year alone interest payments
will be at least $870 billion, which will have to be borrowed
since we do not have the money. Since so much of our debt has a
maturity of less than a year, it means that in 2024 Treasury
will have to roll over or borrow over $10 trillion at a higher
rate than we have been used to.
I am bringing all this up as evidence that it is
irresponsible to create a new program that requires adding to
the Federal debt. It is equally irresponsible to believe that,
contrary to the economic literature on the topic, this deficit
spending will pay for itself. It will not. If anything, it
could make it harder for the Federal Reserve to finish the
fight against inflation.
Second, beyond the problem of creating a government program
paid yet again with debt, persistently large public dissavings
pose a fundamental economic challenge to policy aimed at
boosting wealth and private savings. Economic research shows
that increasing public dissaving through deficit spending
offsets and crowds out private saving.
More debt also means an increased likelihood that future
taxes will need to be raised to pay off the debt and its
interest. The anticipation of higher future taxes can
discourage people from saving, as they expect to have less
disposable income in the future. In other words, when this body
adds to the debt, it essentially borrows from future
generations to fund current spending. It is a transfer of
wealth from future generations to the current generation. It is
not an increase in spending.
Instead of creating new spending, the government should
prioritize placing the Federal budget in a sustainable long-
term path to increase national savings. This could be achieved
by implementing fiscal adjustment focused mostly on cutting
spending rather than increasing taxes, as economic research has
shown that spending cuts are more effective at reducing the
debt-to-GDP ratio and promoting long-term economic growth.
Historically, nothing has been as effective as economic growth
in enabling societies to improve the life chances of their
members, including those at the very bottom.
Third, to encourage saving, policymakers may want to
consider enacting a more comprehensive savings program, such as
a universal savings account. Universal savings accounts would
allow workers to save in one simple account from which they
could withdraw without penalty for any expected or unexpected
events in their lifetime, and at any time.
Other restrictions from withdrawals imposed on all other
savings accounts operate as a disincentive to save for those
with limited resources. Universal savings accounts have
successfully increased savings among lower-income earners in
the United Kingdom, South Africa, and Canada. They would also,
like all other accounts, have the benefit of sheltering some
income from the punishing double taxation that our tax code
imposes, which I assume Dr. Michel will be talking about.
Thank you very much.
[The prepared statement of Dr. de Rugy appears in the
appendix.]
The Chairman. Dr. de Rugy, my apologies.
Dr. Michel?
STATEMENT OF ADAM N. MICHEL, Ph.D., DIRECTOR OF TAX POLICY
STUDIES, CATO INSTITUTE, WASHINGTON, DC
Dr. Michel. Chairman Wyden, Ranking Member Crapo, and
members of the committee, thank you for inviting me to testify
today.
Saving is an important foundation for economic growth,
personal well-being, and our kids' futures. When policymakers
decide that an activity like saving is important, the impulse
is always to subsidize more of it. Today, I encourage you to
resist that impulse. Before designing new subsidy schemes with
potentially negative effects and large fiscal costs, we should
fix the places where government policy is currently making
saving harder, places where poorly designed taxes, expensive
spending programs, and burdensome regulations create perverse
incentives against putting money away for the future.
For example, the tax code is a major impediment to savers.
The income tax system double and triple taxes investment
income, which discourages Americans from saving for their kids,
for their retirement, for their dream of opening a business, or
any of life's other priorities.
Our income is first taxed when we earn it by the income tax
and the payroll tax. If we save some of our wages to spend in
the future, the government taxes us again. They tax us on any
of the gains we make while waiting to spend our savings.
Thankfully, the tax code has many features that reduce some of
this built-in disincentive to save.
Qualified investment accounts like 401(k)s for retirement
and 529 plans for education protect some of our savings, but
they come with complicated strings attached, complicated
strings that discourage lower- and middle-income Americans from
fully participating.
Lower capital gains taxes, lower corporate income tax, and
estate tax exemptions all protect savers from the tax code's
antisavings bias. That said, there is a lot more work that
needs to be done to simplify and equalize the tax code's
treatment of savings.
I will focus my remarks on the tax code, but it is also
worth noting that the trillions of dollars that the Federal
Government spends each year on social welfare through Social
Security, Medicare, and a long list of other programs also
undermines incentives to save. This spending keeps people from
putting their own money away, particularly for lower-income
Americans who are most targeted by government programs.
Their personal savings has been displaced by unfunded
promises of future government benefits. Instead of adding new
subsidies for personal savings, Congress should simply step
aside. You could start by ensuring that the 2017 tax cuts are
made permanent, so that American families and businesses can
have the certainty they need to plan and invest for the future.
You could also continue to cut income tax rates, cut capital
gains taxes, and cut business taxes to reduce existing
disincentives to save in the tax code.
Universal savings accounts, or USAs, would allow families
to save for their kids or any of life's other priorities. The
flexibility of these accounts makes them best suited for lower-
and middle-
income Americans, as we have seen with the wild success of
similar accounts in the UK and Canada. For example, almost 60
percent of Canadians own tax-free savings accounts, and more
than half of those account holders earn the equivalent of about
$37,000 a year. These accounts have helped increase savings and
supported the rest of the Canadian savings ecosystem.
Tax cuts that are paired with cuts to spending programs
that are currently crowding out personal wealth-building and
threatening higher taxes in the future would be even more
effective at allowing Americans to save for their own
priorities.
I will end with a quick reminder of the policy experiment
we just finished running. During the pandemic, Americans
accumulated more than $2 trillion in excess savings, following
massive government spending. Just a few short years later, that
excess savings has been spent, and saving rates are again near
historic lows. In this case, checks from the government fueled
more inflation than they did wealth-building. Instead of
subsidies, getting government policy out of the way is a more
effective means at supporting American savers.
Thank you, and I look forward to your questions.
[The prepared statement of Dr. Michel appears in the
appendix.]
The Chairman. Thank you, Dr. Michel.
Let me start with you, Professor Elliott. I was struck, as
we kind of prepared for this, seeing some of what is coming
from Oklahoma, certainly a State that is pretty conservative in
its politics, and they have undertaken, I gather, a kind of
experimental, innovative approach with respect to kids and
parents.
I gather that you have been doing some analysis of it and
that it seems to be a very significant benefit to families,
based on what they have seen. I would be interested in your
elaborating a little bit. I gather that the program in Oklahoma
is called the SEED program. I would be interested in what you
are picking up and if there are some benefits that the research
indicates are particularly worth studying as we go forward with
Senator Casey's legislation and this debate.
Dr. Elliott. Thank you, Senator. Yes, I have to first of
all give credit to Michael Sherraden, who is kind of the
godfather and guru of asset-building at Washington University
in St. Louis. His center, called the Center for Social
Development, actually is doing the analysis on SEED OK. I
certainly am familiar with that research, and I am a part of
that center as well.
And so, what they found, interestingly enough, is that
children's savings account not only impact wealth-building, but
they also impact early educational outcomes.
As we talk about early investment and why it might be
important and why savings is important, what we are finding is
that even with relatively small amounts--they have an initial
deposit of $1,000 in these accounts--these kids experience
greater social and emotional development, something we know is
very predictive later in life of both educational and economic
outcomes of children.
It produces things like improving parents' maternal
depression. It reduces depression among parents, mothers in
particular. It effects things like parental practices: they are
less likely to spank their kids, and use different kinds of
parental practices when they have access to these accounts.
It changes the expectations of kids and their parents. So,
parents who have these savings accounts have higher
expectations that their kids will go to college. Research
outside of SEED OK also shows that when they have these
accounts, parents are much more likely to talk to their kids
about going to college, and that this is a really important
mechanism for improving their children's expectations for
college.
So, it is also kind of like a two-generational approach,
where these savings accounts, relatively small investments, are
impacting the outcomes of children early on, their parents, and
the parents' communications with their kids.
The Chairman. Okay. We are going to want to ask you some
more questions down the road as this discussion in Oklahoma
with the SEED program continues.
Now for you, Ms. Quint, my own view is that our country
needs as many cost-effective, smart approaches as possible to
give kids a hand up. And I believe that a child tax credit and
a child savings account are a good fit together. I would be
interested in hearing your thoughts on it, and I gather you
have either written or discussed this along the way at some
point, stressing that these two work well together and meet
different needs, and would be a very good combination for the
Finance Committee to look at in a bipartisan way.
Ms. Quint. Yes, thank you, Senator Wyden, for the question.
So, I guess I would say a couple of things about that. One is
that I do think that if you are looking at kind of meeting
needs now, the Child Tax Credit and other interventions like
that help families meet current needs: getting food on the
table and doing what they need to to get through today. But
something like a CSA account gives them that hope for the
future. Dr. Elliott uses a phrase often called ``tangible
hope,'' which I think is a really wonderful way of capturing
what that is all about.
And so, to be able to do both of those things at the same
time--we know from the CSA piece that really it changes
behaviors and is motivating to families in different ways, and
I think that is the piece that really gives you the prospect of
changing a pathway or a trajectory for a child over time.
I think that that is really kind of the magic that gives,
again, a pretty outsized impact for the relatively modest
investment that is made up front. But it changes the
orientation of the family to think not just about today, but
about tomorrow as well.
The Chairman. Very good.
Senator Crapo?
Senator Crapo. Thank you, Mr. Chairman.
And I will start out with you, Dr. de Rugy. You mentioned
the value of universal savings accounts as an option in terms
of evaluating how we should approach this issue. Could you
explain a little bit more why you believe the universal savings
account approach is the better approach to follow?
Dr. de Rugy. Sure. I mean, I would like to say first that I
think the first, best solution would be to actually reform the
tax code to remove the disincentives to save that Dr. Michel
has talked about, because ultimately these accounts, the reason
they exist is to actually try to alleviate that double taxation
of income.
So that is the first thing. And then the second--or maybe
actually the first is, putting our country on a fiscally
sustainable path is really a priority otherwise.
Yes, universal savings accounts have a benefit that they do
not discourage savings for those who are concerned that the
conditions for withdrawal, all the regulation and the penalty
for early withdrawals, would stop them from addressing an
emergency in their family if they have saved away money in
these accounts.
So the beauty of universal savings accounts is that a
family can save up to a certain level tax-free. I think it
functions like a Roth in countries where it has been operated.
So, you put in income that has been taxed, but you can actually
withdraw the money without penalty for whatever reason when you
need it.
The reason why it encourages savings beyond the tax
advantage is that again, it does not lock your money. If you
have any anxiety about what the future will bring, then you can
withdraw the money.
Senator Crapo. Thank you very much.
And, Dr. Michel, I would like to follow up with you on the
same line. I actually agree with your answer, Dr. de Rugy,
about the fact that we need to fix our fiscal policy and stop
eating away the value of savings and disincentivizing savings.
But, Dr. Michel, could you follow up on that, and as you
do, I would like to ask you specifically to comment: when you
talk about the double taxation or even triple taxation of
savings--I think you mentioned the corporate tax. I believe
that the corporate tax does have a significant impact on
retirement savings, and it is one of the parts of our economy
that pays the corporate tax. Could you comment on that?
Dr. Michel. Yes; thank you for the question. On universal
savings accounts, I second everything that Dr. de Rugy said and
add that USAs, I see them as an on-ramp to the rest of the
savings ecosystem that we currently have, for people who are
frankly scared of locking their money up until retirement, or
having to earmark it for education.
It gives them the flexibility to choose what they want to
save for, and allows more people access to the systems that
frankly are primarily used by people who can make those long-
term planning decisions, who do not need to withdraw money next
year or 2 years down the road or however long it may be. And we
have seen--this has been borne out in the UK and Canada. The
accounts are widely used across the income distribution, and
are widely popular and very successful.
On the corporate income tax, for investments that are made
in equities where the returns come from C corporations, the
corporate income tax is a big cost to those businesses and
lowers the after-tax return on those investments. And so, to
the extent that you lower the corporate income tax, you are
going to encourage additional investment in savings by those
entities.
And so, one of the things we saw after the 2017 Tax Cuts
and Jobs Act--we reduced the corporate income tax from the
highest rate in the developed world to something about average.
Business investment increased, and that increases productivity,
increases wages, and has sort of broader economic benefits as
well.
Senator Crapo. And many retirees don't actually manage a
large part of their own investment portfolio. Those are pension
plans and other types of investments; is that correct?
Dr. Michel. Correct. Most people are invested in indexed
funds or target date funds, which are primarily invested in
large corporations that pay the corporate income tax.
Senator Crapo. All right. Thank you very much.
The Chairman. Thank you.
Senator Thune?
Senator Thune. Thank you, Mr. Chairman, to you and Ranking
Member Crapo for having this hearing today.
Dr. Michel, let me start off with you. In your testimony,
you highlight how different features of the tax code both
incentivize and disincentivize families to save and plan for
the future. You also mentioned that Congress should be focused
on making permanent the Tax Cuts and Jobs Act. To that end,
beyond simply reducing rates across all tax brackets, what do
you believe TCJA got right in helping Americans improve their
capacity to put money away? And then as a followup, what are
some things within the tax code that Congress should be
thinking about to better assist Americans who want to plan and
save for the future?
Dr. Michel. Thank you for the question. I will start where
you ended. I think, as we have been discussing, universal
savings accounts would be a great addition to the next round of
tax reform, as we are making large portions of the TCJA
permanent and then expanding on those gains.
In addition to the corporate income tax reduction that we
have been discussing, full business expensing--the ability to
write off investments in the year that you make them--was a
significant boon for growth and investment, and just as
important, if not more important than the rate reductions.
So, when we are thinking about tax reform, we want to be
improving the tax base as well as lowering the rates. So,
expensing was an important feature and, unfortunately, one of
the things that's expiring currently.
Senator Thune. Thank you.
Dr. de Rugy, in your testimony you say that research
concludes our national debt and high deficit are adversely
affecting families and their ability to save. I am interested
in if you could explain this correlation for the committee, and
how a lower debt-to-GDP ratio would encourage more families to
plan and to save for the future.
Dr. de Rugy. Sure. So when the government, if the
government puts money in an account and has to borrow for it,
it needs to take that money. It can crowd out private savings
in the process.
But one of the big distortions that it creates is that
today's debt means future taxes. So effectively, what you are
doing is, since the U.S., I assume, intends to repay its debt--
and we have primary deficits as far as the eye can see--it is
going to have to raise taxes or cut spending significantly, or
do a mix of both.
And as a result, basically what you are doing is, you are
giving with one hand and in the future, you are raising the
taxes of future generations. The anticipation of these
increasing taxes could actually create disincentive to save for
people, because they are expecting they are going to have less
disposable income going forward.
There is another way actually that the debt can create a
disincentive to save. There is enormous literature that shows
that debt, government debt actually slows growth, and slowing
growth means less money for people, which then turns into less
saving.
I mean it has--other than the economic issues, it actually
creates a lot of dysfunction. It creates troubles, less
tolerance. I mean, we want growth. So everything that Congress
can do to actually promote growth is important for savings, but
it is important beyond savings.
And finally, I will say that if Congress were tempted to
actually grow the economy by spending more money, again the
review of the literature would say that it is not a good idea,
because the multiplier--which is basically the impact on
economic growth for the money that we spend--is very often
below one.
So it means that you will spend $1, which you take in the
private sector, and you will get much less than $1 in return.
That creates no economic growth, and it certainly creates then,
further down the road, disincentive to save, and it really does
not promote wealth.
Senator Thune. So, I am a big believer in progrowth
policies to get greater growth in the economy, and the rule of
thumb that I have always seen or heard is that for every 1
percentage point increase in GDP, it generates about $3
trillion in additional tax revenue over a 10-year period. So,
it helps with the deficit issue.
If you have progrowth policy, you are getting growth in the
economy. But I am just curious. The data supports the idea that
borrowing, that debt, reduces the rate of growth.
Dr. de Rugy. Yes. I mean, there are two different ways of
looking at it. It is like the mechanism by which debt,
basically spending and paying for the spending with debt,
creates less growth. It is through the crowding out and the
expectation of future taxes and all of this.
But there is also the more macro literature that shows--
actually there are over 40 studies that have been done since
the Great Recession that actually show that high government
debt slows down the economy. I mean, it is a pretty common now
and noncontroversial finding in the literature.
Senator Thune. All right; great. Thank you.
Thank you, Mr. Chairman.
The Chairman. I thank my colleague. We are waiting for
other members to come, and I am going to just ask a couple of
additional questions and give Senator Crapo a chance to do the
same as we wait for our colleagues.
So, one of the issues that I always think is central, as we
talk about new ideas and new approaches, is you have to
reinvent the wheel. In other words, you have to go out there
and set up all kinds of new stuff that is cumbersome and the
like.
I think, Ms. Quint, you all and others have looked at this
and have said, ``Hey, wait a minute here.'' We are using--in
the 100 programs, and I think yours as well--we are using
existing architecture. We are using essentially the 529 model.
And I heard our colleagues, Dr. de Rugy and Dr. Michel,
certainly making important points about not going out and
creating new stuff or spending money where you do not have to,
and I certainly share that view.
I was struck, and I thought it would be worth--I see
Senator Daines is here, a valuable member of the committee, and
I just want to get an answer to this one, and then we will go
right to our colleague. But we do not have to reinvent the
wheel. We have existing architecture, is that right?
Ms. Quint. Yes, that is exactly right, Senator Wyden. And I
think Mr. Alfond was a savvy and flinty New England
businessman, and he did not want to spend more on
administration or to create something anew that already
existed. So, the 529s really are designed to do exactly what we
wanted to do.
So, having that already established platform was really
important to our program, and the vast majority of CSA programs
across the country do use that 529 platform. It also allows for
contributions from multiple sources, which has been really
important.
Obviously, the invested funds have an opportunity for
growth over time. Investment options are often streamlined into
like an age-based portfolio or a year of enrollment, which kind
of simplifies things and provides that platform for
communications also, as a way of really kind of working with
families over the years as their child grows.
And you know, the broad permissible uses--I spoke about
this a moment ago. But in our program, we always say
``education after high school.'' We try not to use the word
``college.'' We certainly do not say ``post-secondary
education,'' because nobody in Maine says ``post-secondary
education.'' They just say ``college.'' But by that, they have
a too-narrow definition, and it can be used again for many
training and certificate programs, and apprenticeship programs.
Congress is now considering even expanded uses. SECURE 2.0, as
we talked about before, allows them to roll over to Roth IRAs.
And then of course 401Kids, the legislation sponsored by
Senator Casey, would expand to home ownership and
entrepreneurship.
So, when we are talking about growth, these are kinds of
assets that can help families grow their own wealth and
opportunity over time in a way that we believe will eventually
have generational impacts.
The Chairman. Okay.
Senator Daines?
Senator Daines. Mr. Chairman, thank you.
Well, thanks to Bidenomics, Montanans are spending on
average $1,100 more per month than they were before President
Biden took office. Inflation is high, the interest rates are
high, home prices are high, making home buying nearly
impossible for the average American.
It is getting harder and harder to live in our beautiful
State, not to mention to build savings for themselves and their
children's future. In fact, just last month I attended an
inflation roundtable with local Montanans in Billings who
shared this same concern.
In fact, Montana has the third highest home-price-to-income
ratio in the entire United States, reflecting the lasting
impact inflation has had. Wages are not keeping up with housing
prices, in part due to the reckless spending we have seen from
this administration.
Interesting to note that Kamala Harris has broken more ties
as Vice President than any Vice President in our Nation's
history. She is now the gold medalist. She has surpassed both
John Calhoun and John Adams. We have had 47 Vice Presidents;
she is number one in tie-breaking votes after just a little
over 3 years, and both Calhoun and Adams served 8-year terms.
Some of these tie votes have been massively consequential in
terms of spending. Nearly $4 trillion where every Republican
voted ``no'' on that massive COVID spending package. Every
Republican voted ``no'' on the so-called Inflation Reduction
Act, totaling nearly $4 trillion when looking over a 10-year
horizon. And Kamala Harris broke the tie to allow both of those
massive spending bills to pass.
Owning a home is one of the top ways that people build
long-term wealth for themselves and their families. I grew up
in the home construction business. My dad was, in fact still
is, alive and director at the National Association of Home
Builders. Dad turns 85 next month and he is a proud
homebuilder. It is how we kept food on the table.
In his State of the Union address, President Biden proposed
trillions of dollars in misguided housing subsidies. This tax-
and-spend agenda will do nothing to fix this problem, but only
make it more expensive for Montana families. These tax credits
just throw money at one problem to distract from costs rising
elsewhere, creating an endless Democrat-driven spending cycle.
Dr. Michel, can you explain why the housing policies
outlined in President Biden's State of the Union address are
harmful?
Dr. Michel. Thank you for the question, Senator. The
fundamental problem of the new tax credits, as proposed by
President Biden, is, they are going after the wrong problem.
The housing market is--housing costs are elevated because there
is a supply constraint on builders because of costs of inputs,
because of local and State regulations on where you can build
and what type of building you can do.
And so, instead of throwing money at the problem on the
demand side, we will only inflate prices if you cannot expand
supply. And so reform should be focused on the supply side. How
do we build more houses? How do we make it easier for people to
build? That is where these efforts should be focused. Throwing
money at the problem simply makes the concerns of inflation and
the rest of what you have highlighted just that much worse.
Senator Daines. I saw, with Jamie Dimon here a few weeks
ago, The Wall Street Journal talked about how he says interest
rates may actually stay closer to 8 percent over the longer
haul, for various reasons. But one of the reasons that he
suggested was where monetary policy driven by the Fed starts to
take more of a secondary position to fiscal out-of-control
policy here, driven by massive deficits and debt here in
Washington.
And of course, those who buy our debt every day at the debt
auctions, the rates will have to be maybe inching upwards to
keep our debt attractive to buyers. This is again a real
concern. It ties right back to the housing problem, around why
rates may indeed stay higher for longer periods of time, which
pushes a lot of middle-
income families out of the market.
Let me just say this in closing. I do not think Americans
can afford these dangerous policies. We should incentivize
putting their savings toward their home purchases, rather than
continuing down an irresponsible path of out-of-control
spending that this administration has started.
I appreciate the chairman's interest in supporting
children. I hope we can work together in passing my Child Tax
Credit for Pregnant Moms Act to do just that. Thanks for the
conversation.
I yield back.
The Chairman. I thank my colleague.
We are going to go to Senator Bennet in a second. But just
let us reflect for a quick second on the fact that, if the
Senate wants to take a progrowth step quickly with research and
development and bonus depreciation policies that there is
enormous support for here and in the business community--it got
357 votes--all we have to do is pull the bill down from the
House of Representatives. It got 357 votes, and we need to
figure out how to work together and pass something that is
progrowth and paid for, every single nickel paid for. So, I am
interested in working with my colleague, and of course the
ranking member.
Senator Bennet?
Senator Bennet. Thank you, Mr. Chairman. Thank you to you
and Senator Crapo, the ranking member, for holding this
hearing. Thank you to the witnesses for being here. We really
appreciate it.
Professor Elliott, your testimony highlights how inequality
continues for low-income children, low-wealth children who are
actually able to obtain a college degree in this country. Could
you discuss the current research showing disparities and
economic benefits of a college degree for children from low-
income backgrounds versus higher-income families?
Dr. Elliott. Yes, Senator. So bachelor's degrees--right now
there is a growing body of research. It is not something we
started looking at a whole lot until more recently.
But low-income bachelor's degree holders earn about one-
third less than high-income earners. And so their degree, even
though they obtain the college degree, kind of the American
dream, they end up not earning as much.
Also, Black families with a head of household who's a
college graduate have about 33 percent less wealth than White
households with no high school degree, who dropped out of high
school, right? And so, there is this gross wealth inequality
when it comes to----
Senator Bennet. Say that again? Say that again, Dr.
Elliott.
Dr. Elliott. Yes. Black families with a head of household
who graduated from college have about 33 percent less wealth
than White families with a head of household who dropped out of
high school, right? So, it just really emphasizes----
Senator Bennet. You are saying that African American
college graduates versus White high school dropouts, in terms
of wealth----
Dr. Elliott. Yes; and we see the same kind of stats with
regard to even college enrollment between high-achieving Black
families and low-achieving White families. They are much more
likely to go to college than Black families. And so there is
this gross inequality happening within our system.
Senator Bennet. But that gross inequality, though,
continues even beyond the college degree is what you are
saying, and there are some people who have said, well, the
solution to all this massive income inequality in our country
is that everybody needs to get a college degree.
The reality in the United States is that--to put it
slightly differently than you put it, it is my understanding
that on average, if you are an African-American graduate of
college in the United States, you are earning less than a White
high school graduate in the United States.
Dr. Elliott. And I want to expand that, sir, beyond race. I
mean, it is also the case that for White low-income families
who graduate from college and are low-income, earn less than
White higher-income college graduates. And so, this is both a
race and a nonrace issue.
Senator Bennet. Dr. Elliott, could you talk a little bit
about what you think some of the solutions are here to change
those trajectories? How do Pell Grants, for example, maybe
relate to the conversation that we are having?
Are there other ways to keep people from situations where
in order to try to get ahead, they are digging themselves
deeper and deeper and deeper into debt that is making it more
difficult for them to be able to get footing underneath them--
you know, a generational footing underneath themselves and
their families?
Dr. Elliott. I think that is one of the beautiful things
about the 401Kids bill by Senator Casey, right? It really would
provide kids with enough money to pay for college, and so that
means they do not have to go into debt, right?
So we know that students who go to college and end up in
debt, compared to students who go to college and do not have
debt, have much worse economic outcomes afterwards. Less
wealth, less likely to buy a home, all these kinds of things
are happening, and so it is really important.
I would like to also quickly mention that the College
Board, which is a large institute that does a lot of studies in
college financing, recommended that we take a portion of the
Pell Grant and put it into an account early on.
So, as we think about how to finance it, it does not have
to be new moneys, right? We could think about how we are using
some existing moneys to finance some of these things. That is
one way to tie in the Pell Grant to children's savings accounts
in the 401Kids bill.
Senator Bennet. I think that is a really good point. I
mean, we have seen--I used to be a school Superintendent, a
school Superintendent in the Denver Public Schools. We have
seen, unfortunately, this Department of Education, I think, do
a horrible job with the FAFSA at a moment when kids are
actually in the middle of applying to school.
The idea that we could change the incentives to bring them
in earlier in their lives and in their schooling, makes a lot
of sense to me. And I will just close, Mr. Chairman--I know I
am out of time--by saying ``thank you'' again to the panelists.
I do think Senator Casey is on to something here. This bill
is so important. We are living in a country now where students
are burdened by levels of debt that no other generation has
been burdened by, and it is not their fault. All they are
trying to do is get themselves an education that this economy
seems to demand, and they are then constrained by 20 years' or
40 years' worth of debt repayment.
We have to fix this, and Bob Casey has given us a
suggestion for how to make things better. I think that is
extremely helpful.
The Chairman. Your years of advocacy for kids--that is a
real plus to have you vocally and visibly in support of this,
and we are going to spend a lot of time on these issues here.
They are enormously important.
Senator Whitehouse?
Senator Whitehouse. Thanks very much. I appreciate the
witnesses being here.
Let me start by asking Ms. Quint--I am sorry, but I was in
the Judiciary Committee, so if you have already gone over this,
then I may be asking you to duplicate. But could you just give
us the sort of summary overview of how it is that Federal 529
plans, as currently structured, do less for families who need
help the most? Why is it that they deliver greater benefits to
the better-off, and how does a Dynasty, so-called, 529 plan
work?
Ms. Quint. Sure. Thank you very much for the question,
Senator Whitehouse. Let me say that I am familiar with the
CollegeBound Rhode Island program.
Senator Whitehouse. That is going to be my next question.
Ms. Quint. Oh, excellent, as well as the Providence
Promise. So much good work happening in your State.
Senator Whitehouse. Yes.
Ms. Quint. So, to answer the question about Federal 529
plans, you know, what I can do is speak to Maine's experience,
and our experience has been that some families, especially
those without prior experience with 529s or investments, can
find it challenging to open an account, right?
So it is uncharted territory for them. They are not sure
they have the money to save. They do not know that 529s exist
or kind of why they are there, and it does not sound like
something that families like them do. So those are all barriers
to entry, right?
Credit to the industry, there have been a lot of strides
for 529s in recent years that have simplified account opening,
provided multiple ways to contribute, streamlined investment
choices, and also significantly lowered the contribution rate.
When I first started in this program 10 or 12 years ago, it
was--I think the minimum contribution was something like $350.
Now it is $5 into our account, right? So that is really
helpful. But the tax advantages of 529s are not particularly
motivating for families of lower and moderate income who might
have little or no tax burden.
And the other thing is, that because they have smaller
dollars to invest, families of smaller means will tend to be
more conservative with their choices. They want to make sure
the little bit of money that they have to invest, that they do
not risk losing that. So they put it in something, even within
a 529, as close to a savings investment choice as they can,
whereas wealthier families who have more income to use, are
investing more and they are choosing, not necessarily riskier
portfolios, but maybe even just an age-based portfolio that
would be better balanced.
And so that is the kind of thing that contributes to or can
contribute to that inequality over time. Certainly, something
like a Dynasty 529 plan that will--and again, not my area of
expertise, but as I understand it, it allows for a change in
the beneficiaries. That means that more moneys can be invested
over an even longer period of time, which could be a great
thing for some families, but can absolutely contribute to the
inequality.
Which is why a universal platform--like we have in Maine,
like they have in the State of Pennsylvania with Keystone
Scholars, like is being proposed in 401Kids--that would put
meaningful dollars in for everybody automatically and
universally at birth, in ways that get everybody onto that same
platform----
Senator Whitehouse. Well, thank you very much, and you were
good enough to mention Rhode Island's CollegeBound program.
So let me ask Dr. Elliott a question or two about programs
like that. By the way, my recollection is that the CollegeBound
program was the creation of a dear friend and former State
Treasurer, Paul Tavares. And it has grown considerably since
then, but they really had the early wisdom about the importance
of getting behind this. And it has, as I said, grown better
since then.
So, Dr. Elliott, how do child savings accounts like those
created by Rhode Island and those proposed by Senator Casey,
address the shortcomings of Federal 529s? How do they ensure
that the benefits go to those who need it the most, and why is
automatic enrollment so important in that context?
Dr. Elliott. Thank you, Senator. Yes, so there are a number
of advantages to CSAs that I think have kind of been lost in
some of this discussion here. One is the fact that low-income
people, while they can save--we have shown that with
experimental evidence--they can save smaller amounts of money.
And so what CSAs do, by adding some money into the account
for the kids, with an initial deposit or whatever else, as we
have seen in Maine's case--we have done some research on that,
and that initial deposit really matters for them building
wealth over time, particularly for low-income families, because
they cannot contribute as much as wealthier families.
I think about it even from the sense of, if you have a
high-
interest account, if you have $10,000 to put in that, you will
earn a lot more than if you have a little amount of money in
it. So these CSAs--the money being put in there really actually
matters.
They also streamline access too. So automatic enrollment,
it allows every kid--and this is behavioral economics; it is a
well-
established fact. It is much easier to put people into a
program and they will not opt out, and you have seen less than
1 percent of people opt out of these programs in most cases.
And so, once they are put into their programs, they stay
in, and they get to have those experiences with the account:
the higher expectation, the social/emotional thing, all these
early outcomes that we are seeing. By putting them into the
account, we assure that all families get access to these kinds
of benefits and opportunities.
And then, by adding some money to those accounts, we allow
them to build wealth to lower the wealth gap.
Senator Whitehouse. Thank you very much.
Thank you, Mr. Chairman.
The Chairman. I thank my colleague.
Senator Grassley, you are next.
Senator Grassley. Thank you. I was over in Judiciary, so I
missed your testimony. Thank you for appearing before us.
I am going to start out with Dr. Michel and Dr. de Rugy. In
1981, former Federal Reserve Chairman Volcker testified before
the Senate Banking Committee at a time of growing deficits and
elevated inflation. As part of his testimony, he called on
Congress to cut spending, while also pursuing progrowth
policies with respect to taxes. He urged Congress to focus on
reforms that would incentivize Americans, in his words, ``to
invest, to save, and to work.''
Are the prescriptions laid out by Chairman Volcker in 1981
good guiding principles for Congress today?
Dr. de Rugy. Thank you, Senator Grassley. Well, it looks
like Chairman Volcker understood that there is actually a
connection between the monetary side and the fiscal side while
fighting inflation, and that the Federal Reserve cannot do it
alone.
It seems that his prescriptions are really important,
because one of the things that happens when the Federal Reserve
raises interest rates is that it actually makes interest
payments more expensive and increases the need for borrowing,
hence fueling inflation.
But also, increasing growth by freeing the supply side is
also a way to actually help fight inflation. So it seems that,
yes, they are really good prescriptions. And unfortunately, I
am worried that actually the fact that there is no talk about
austerity right now, however you want to define it, means it is
fueling inflation. It is making the job of the Fed even harder.
I am worried that the increase of tariffs is actually
constraining the supply side. There are just a lot of things
happening that make it much harder for the Federal Reserve to
really lower inflation to target.
Senator Grassley. Dr. Michel?
Dr. Michel. I will add that, with debt at 100 percent of
GDP or higher, trending toward $2 trillion in deficits, a $400-
billion-a-year tax increase hanging over Americans' heads at
the end of 2025 when the 2017 tax cuts expire, all of this
depresses economic activity.
Businesses and individuals have to plan for their future,
and if they know that they are going to have to be sending more
money to Washington, they are going to do less of all of the
productive activities that grow the economy, expand the supply
side, and make it easier to fight inflation.
And so, those fiscal threats that are hanging out in the
future are certainly making things harder, and are something
that was certainly understood at the time by Chairman Volcker.
Senator Grassley. Also, Dr. Michel, your testimony
discusses how our current tax code disincentivizes savings and
recommends policies that counteract that bias.
Last Congress, I introduced the Middle-Class Savings and
Investment Act that would effectively exempt the middle class
from tax on most of their savings and investment income. It
would do this by aligning the current zero tax rate bracket for
capital gains and dividends with a 22-percent income tax
bracket, excluding a modest amount of interest income from tax.
Do you agree that a proposal along these lines could
significantly reduce the current tax code bias against savings?
I am not asking you to endorse the bill, just the philosophy.
Dr. Michel. Well, thank you for your leadership on this
issue, and certainly the additional layers of taxes through
capital gains, on dividends, on interest, all decrease savings.
To the extent that we can expand the number of Americans who do
not get hit by these taxes and simplifying them by aligning
brackets, as your bill does, all that pushes in the direction
of getting more Americans greater opportunity to save and
invest their own income.
So certainly, it is a great way of encouraging investment,
and we should continue to push at expanding these types of
policies.
Senator Grassley. Dr. de Rugy, many of my colleagues on the
other side of aisle claim our mounting debt and deficit can be
solved solely by taxing the wealthy. Is it not true that absent
spending reductions, tax hikes for middle-class Americans will
become inevitable?
Dr. de Rugy. Yes. The answer is ``yes,'' and the reason--
there are two. First, there is not enough tax revenue that can
actually address our debt problem, right? That is the first
thing. Plus, raising taxes to the level that that would require
would be very detrimental to growth, which hence would then
backfire.
But there is also a really big economic literature about
the best way to reduce the debt-to-GDP ratio, which has been
conducted in like 180 different countries, looking at what they
have done to succeed, and what they have done when they did not
succeed.
And what that literature finds is that the best way to
reduce a debt-to-GDP ratio is to enact fiscal adjustments that
are mostly based on spending cuts, preferably social spending,
so that is entitlements in the American context.
The bad news from this literature is that actually in spite
of the fact that we know what we should do, a lot of the time
legislators choose to implement packages that are mostly made
of taxes, and hence they fail. There is, by the way, other good
news from----
The Chairman. Doctor, we're just going to have to move on.
Dr. de Rugy. Sure, sure, sure.
The Chairman. Okay.
Dr. de Rugy. I could go on for a long time talking about
fiscal adjustments.
The Chairman. Great.
Senator Barrasso is next.
Senator Barrasso. Thanks, Mr. Chairman.
Dr. Michel, I want to talk about universal savings
accounts. You know during COVID, Americans saved a lot of
money, over trillions of dollars. Unfortunately with high
inflation, with higher interest rates, the savings dried up,
and now people are carrying huge amounts of debt. I think we
are talking about household debt of $18 trillion right now. And
you know, in Wyoming the average family is spending over $1,000
a month more just to kind of stay up to where they were when
this administration came into office.
So I think we need to look to find ways to turn the tide,
help families build their own financial security. Congress has
come together to pass bipartisan retirement legislation to help
families save for retirement. I believe Congress can actually
come together to help working families save for the unexpected
twists and turns that happen as a part of life.
My predecessor, Senator Craig Thomas of Wyoming, was a huge
proponent of universal savings accounts. So you know, you have
described universal savings accounts as a way to help Americans
put away money for future use and for emergencies. So, how do
you think universal savings accounts could complement what we
have done in recent years on creating, expanding, and improving
retirement savings accounts?
Dr. Michel. Thank you for the question. I think we have
heard today that 529s in particular can be complicated to set
up, for some families to feel comfortable putting money into
that is earmarked for a very specific purpose in the future.
Universal savings accounts give more families access to that
same savings incentive, that same type of account to put money
away, but they do not tell them they have to spend it on
education or save it for retirement. But instead, they could
save for starting a business, they could save for putting their
child through college, but they could choose to use that money
for something else.
So the flexibility allows people who do not want to earmark
their money for A, B, or C, to save for the unexpected, save
for a decision that has yet to be made in the future, sort of
expanding the existing incentives we have to more types of
Americans who are saving for diverse needs.
Senator Barrasso. When you talk about planning for the
future and poor decisions made, I want to talk about some poor
decisions I think have been made by this administration, which
have hurt our economy. People are living with high inflation
rates, high interest rates, and people are feeling financially
squeezed--that is what I heard this past weekend again in
Wyoming--and having to dig deeper to pay for things. They get
less for their money.
And so, prior to the pandemic and after the 2017 Republican
tax reform, we saw the opposite of the current reality, of
people really doing well. It was the best economy in my
lifetime. In 2019, real household median wages increased by
$4,000, the largest increase in U.S. history--lots of people
lifted out of poverty.
So what impact would reversing some of the progrowth tax
policies that we right now have--and President Biden has said
if he is reelected, he is going to get rid of all of those.
What impact would that have on working families and those
trying to save their hard-earned dollars?
Dr. Michel. Reversing the 2017 tax cuts, I think, would
have two--you can think about it in two different buckets. One
is, tax rates would go up on individual families across the
board, and that gives them less money to spend on whatever
their priorities are, including savings.
Fully reversing the tax cuts would mean that businesses are
again uncompetitive globally. Before 2017, businesses were
often leaving the United States, moving jobs and investment
overseas, and after the reform, we saw businesses increase
investment. We saw wages go up. We saw businesses expanding
here in America.
And so, undoing all of that, I think we would go back to
that world where the U.S. and U.S. workers are globally
uncompetitive, and that would make our fiscal situation harder
to solve, and it would make Americans, sort of at large, poor.
Senator Barrasso. Can you talk a little about savings and
economic growth? In terms of the country, can you speak about
how boosting savings can help foster long-term sustainable
economic growth, and what benefits there are, not just to the
individual and the household level when they save money, but
also at the national level?
Dr. Michel. Savings is the foundation of future investment.
When you save money and it gets invested in a business, then
that buys new machinery or invests in a new process. The people
who work for those businesses can be more productive, which
then leads to wage growth.
It is the foundation of economic growth--investment--which
is fueled by savings. And so, we should be doing everything in
our power to get the Federal Government and the tax code out of
the way of savers and investors, as a way to ensure robust,
long-run economic growth that benefits everyone.
Senator Barrasso. Okay. Thank you, Mr. Chairman.
The Chairman. I thank my colleague.
Senator Casey, much praise has been directed at you and
your bill, so please go ahead.
Senator Casey. Mr. Chairman, thanks very much. I appreciate
you calling this hearing, and you and the ranking member having
this important hearing.
So, I am coming at the end, when I know we all have the
benefit of each of your testimonies, as well as the hearing
record. But I want to thank each of you for being here. Mr.
Chairman, I want to thank you in particular for the work you
have done on child savings accounts, something you have been
leading on for years.
I think the way I look at this issue is one of those
fundamental questions we have to wrestle with when it comes to
what steps are we going to take to make sure that every child
in the country has the full measure of freedom and security?
I have outlined a proposal in legislation to make it a goal
for the country that we have five freedoms for every child,
that every single child--not most, not some percentage, but
every single child--has the guarantee of health care. Every
child should have the freedom to learn, have opportunities for
early learning. Every child should be free from harm. Every
child should have the freedom to not be hungry. And every child
should have the freedom to be economically secure.
You cannot have that kind of economic security for every
single child unless we have savings accounts. So, it is
critically important to their freedom--and I want to thank
everyone who is here on the panel for providing your expertise
to tell us about this issue--and in particular the 5.8 million
American children, including more than a half a million,
546,000 Pennsylvania children, who have a savings account in
their name.
I have sponsored bills since 2017 to make the promise of
children's savings accounts a reality for all American
children, so that every child can have a place where their
family, their community, and their government can invest in
their future. The 401Kids Savings Act will enable children,
when they reach adulthood, to have the money saved to pay for
college or to start a small business, to buy their first home
or to save for retirement.
So I will start with Dr. Elliott. Dr. Elliott, what effect
does having a personal savings account have on a child from a
low- or a moderate-income family?
Dr. Elliott. Interestingly enough, the effects are
strongest, in most cases, among the low-income kids. This is a
rare event for interventions that we have.
So, it is really exciting, and we have seen that these
accounts, even with small dollar amounts in them, can affect
children's expectations, parents' expectations, social/
emotional development, maternal depression, and many other
things.
It was interesting as you were talking about the five
freedoms. What is kind of unique about the children's savings
account, while it is not a silver bullet, it does affect
health, it does affect education, it does affect economic
futures. So this is a program that can work across things.
And I will mention one other quick thing, which is that
what we have not had a chance to talk much about is that once
these structures are in place, not only do we have the Federal
investment--this is not something that is just about the
Federal investment--but you have a chance for multiple streams
of assets to flow into these accounts to build wealth, right;
so, foundations and employers and all different kinds of
groups. We see this happening in New York; we see this
happening in Indiana, where these different groups--pastors are
getting together and putting $1,000 scholarships into kids'
accounts in their communities.
And so, we are just really touching the tip of the iceberg
of these accounts and their possibilities.
Senator Casey. So really, it's foundational, not just for
the obvious economic benefit, but on other aspects of the life
of the family.
Dr. Elliott. For sure, and it starts early, right? I mean,
these effects start when we see social/emotional development
and the kids are like 4 years old, right? And so we know from
economics and the research around it that these early effects
are so important to later academic success and later economic
success.
And so, it really flips the whole paradigm of financing
education and wealth and equality. When you start thinking
about 18, we are having impacts as early as when the kids are
just born and very soon after that. So, it is really important.
Senator Casey. Ms. Quint, I was going to ask you why States
like Maine and Pennsylvania begin our children's savings
accounts at birth, and how does that help both children and
families?
Ms. Quint. Sure. Thank you very much, Senator Casey. And
your Keystone Scholars program--and obviously the 401Kids Act
is really exciting. And Maine is glad to be part of the mix of
helping to think about all of that. So the benefit, obviously
the biggest benefit, is that because it's invested early, it
has more time to grow.
I did not mention it earlier, but for the oldest of our
Alfond grant recipients, that $500 is now worth $2,036, and
they are still a few years away from continuing their education
after high school. It also provides, as Willy was just saying,
more time for contributions from family as well as from other
sources.
I mentioned earlier that in the most recent quarter, $255
was the average contribution amount, but the median amount of
an account with savings from a family in Maine with an Alfond
grant is about $5,500, and the mean is about $11,500. So again,
real assets are accumulating here over time.
And with respect to Dr. de Rugy, who spoke earlier about
these kinds of programs as potentially being a disincentive to
save or crowding out savings, at least our experience in Maine
has been families are saving at a rate of three to one what the
foundation has put in. So that has certainly not been our
experience.
Senator Casey. Well, thanks very much. I really want to
thank our witnesses. I know I am a little bit over, but I am
really grateful for your time here today, and especially I am
grateful for the committee's work on this issue.
The Chairman. Senator Casey, because this is so important
to you and you put in all this time, is there anything else you
wanted to ask about, and then we will go to Senator Crapo and
we will get ready to wrap up.
Senator Casey. I will submit some questions for the record.
The Chairman. Very good. And we really want to put a lot of
time into this issue, Senator Casey. You have, and what was
striking when you were out of the room, one of the issues that
came up is the way your approach has developed. You do not have
to go out and reinvent the wheel. You can basically build on a
lot of the architecture that is out there.
This is a point that Ms. Quint made, and we have got some
very good opportunities to do this in a cost-effective, smart
way, and I appreciate all the sweat equity you have put in.
Senator Crapo, anything else?
Senator Crapo. I have some questions, but I will submit
them for the record, Mr. Chairman.
The Chairman. Okay.
Here is what we have learned. All over the country, States
and cities are stepping up with cutting-edge child savings
programs. We have 120 and counting, and we have learned that a
lot of these programs feature approaches that social science
teaches are sensible ideas that, in effect, when you have
approaches like automatic accounts and seed money and
contributions from families--this is one of the things I
remember when we started talking about this, and I was a young
member of this committee. So we have been talking about it a
long time.
I remember a parent came up and said, ``You know, I give my
kid a gift every holiday and birthday, but the toys and stuff
break. I think I want to have this savings account, because it
is something they can keep building on,'' and you all have made
that point. I think Senator Casey's 401Kids legislation has
these kinds of cost-effective features.
So I am going to close my remarks. We have many colleagues
talking, for example, about their concern about the economy and
debate about the President's activities. I heard a rumor there
is an election coming up. We will be talking about those kinds
of things.
But what is on offer today is something that will help now,
and that is the bipartisan effort that passed in the House of
Representatives that brought together Democrats and
Republicans. Every Republican on the House Ways and Means
Committee, for example, supported that effort.
That is because it is good for growth--the research and
development effort, the bonus depreciation. These are smart
kinds of efforts paid for by fighting fraud. So we are going to
continue to discuss these kinds of ideas that have been talked
about this morning, particularly savings.
But I just wanted to end this morning by saying it is
something we can do right now, something that will make a big
difference in communities, and we are going to continue to
pursue those kinds of issues.
With that, the Finance Committee will stand adjourned.
[Whereupon, at 11:30 a.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Hon. Mike Crapo,
a U.S. Senator From Idaho
Today's hearing provides an important opportunity to examine the
ways working families can save their hard-earned income for their
children's future.
Only 2 years ago, this committee and others worked together in a
bipartisan, bicameral fashion to expand retirement savings through the
SECURE 2.0 Act. As we continue to monitor its implementation and the
effects the law had on retirement savings, it is appropriate for us to
explore other savings needs beyond just retirement. Fortunately,
Americans already have access to numerous savings options, whether it
is saving for a specific purpose through a tax-advantaged account or
saving through traditional savings vehicles.
Tax-advantaged accounts allow benefits such as tax-free growth and
withdrawals, making it easier and more efficient to save for a specific
purpose. For example, 529 accounts can help families save for their
children's education expenses. Health Savings Accounts and flexible
spending arrangements can be used to help eligible individuals save for
medical expenses. Dependent-care FSAs can help workers save for
expenses for dependents, such as after-school or in-home care for kids
or other family members. And ABLE accounts help those with disabilities
save for critical tools like assistive technology and transportation,
just to name a few.
Beyond these tax-advantaged accounts, Americans can also save
through widely available, traditional means, such as savings and
brokerage accounts. And for children specifically, custodial accounts
and even some child-specific accounts offered by some institutions can
help teach children the ins and outs of saving. When paired with proper
financial education, more children and young adults can learn how to
budget and save from an early age, carrying best practices on into
adulthood.
Any discussion concerning the options to save goes hand-in-hand
with a conversation on the importance of planning and managing savings
throughout one's life. Part of that planning includes the need for many
to consider seeking professional financial advice in order to create a
comprehensive savings strategy.
Although families have access to many savings vehicles, navigating
this often-complex web of options can be daunting, and every family's
needs are different. Whether a family is saving for a down payment on a
home or planning ahead for unforeseen emergencies or health expenses,
understanding what options are available is key.
Effective planning becomes even more important at a time when
Americans are experiencing inflation at levels not seen in decades.
Higher costs of food, fuel, and housing eat up families' disposable
income and squeeze their ability to save. In fact, as compared to
January 2021, average U.S. households are spending over $1,000 extra
each month just to maintain their standard of living.
Today's witnesses will discuss all of these topics, and I look
forward to hearing how Congress can expand opportunities to save in a
fiscally responsible manner. I also expect to hear testimony on child
savings initiatives that some States have implemented. While I respect
the steps some States are taking, implementing a similar program at the
Federal level would come at a significant cost to taxpayers. Expanding
options to save is a worthy goal, but we must do so in a way that does
not exacerbate already out-of-control government spending or create
another unsustainable government program.
______
Prepared Statement of Veronique de Rugy, Ph.D., George Gibbs Chair in
Political Economy and Senior Research Fellow, Mercatus Center, George
Mason University
Chairman Wyden, Ranking Member Crapo, and members of the U.S.
Senate Committee on Finance, I thank you for the opportunity to testify
today. My name is Veronique de Rugy, and I hold the George Gibbs Chair
at the Mercatus Center at George Mason University, where I study tax
and fiscal policy, the Federal budget process, and the implications of
government spending for economic growth.
Finding ways to help children from low-income families become
economically self-sufficient is a worthy goal. And creating inroads to
make sure everyone saves is one way to ensure that low-income children
are well positioned for the future. But asset limits, deposit
restrictions, and investment options on newly proposed savings programs
would affect participation and outcomes, especially for low-income
participants, in the same ways existing savings options do. Indeed,
there are already plenty of savings options in the U.S., but many of
them discourage savings due to their complex rules, tax penalties for
early withdrawals, or limitations on qualified uses.
Policymakers should fix these savings disincentives, the biggest
being our debt and our tax code. Policymakers should also consider
enacting a more comprehensive savings program, such as the Universal
Savings Accounts (USAs) program. USAs would allow workers to save in
one simple account from which they could withdraw without penalty for
any expected (college, child care, or retirement, for example) or
unexpected (major car repair or emergency medical expense) event
throughout their lifetime. USAs have successfully increased savings
among low-income earners in the United Kingdom, South Africa, and
Canada.\1\
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\1\ Adam N. Michel, ``Universal Savings Accounts Can Help All
Americans Build Savings'' (Heritage Foundation Backgrounder No. 3370,
Washington, DC, December 4, 2018).
What comes next in my testimony is (1) a brief discussion of the
limitations of the proposed child savings account (CSA) model, and (2)
suggestions for better pathways to higher rates of savings for
Americans.
1. the limitations of child savings accounts
There are two primary limitations to the proposed child savings
account model worth noting: (1) this model is simply shifting wealth
around at a high cost, and (2) the proposed plan limits what the CSA
may be used for, namely, post-secondary education and training, a small
business, a first home, or retirement security. While all these
investments are worth saving for, the CSA's lack of flexibility may
prevent low-income families from using their savings for what they
might need in the future.
A. Societal Wealth Would Not Increase
First, the proposal to establish CSAs--government-contributed
investment accounts for some children--faces several economic and
philosophical objections to moving existing assets from one group to
another. The government would purchase financial assets (through the
529 platform), likely from selling government bonds to older and
higher-income households. The program will also likely require future
tax hikes to pay for the ensuing debt accumulation. In other words,
such a program would not create new savings per se since it would
generate ``savings'' in one place with money from reduced savings in
another. In that sense it would be different from a 401(k). In the
best-case scenario, it would merely constitute a redistribution of
existing wealth from current asset holders to children, and a
redistribution across time. However, a review of the literature on the
effects of government spending on the economy reveals that the
multiplier is often well below one, meaning that the best-case scenario
is unlikely.
On the plus side, the government-contributed assets would be held
in private-market investments, thereby avoiding direct government
ownership and emulating the ownership society. That is a better idea
than investing the assets in treasuries or having the government itself
invest and hold the assets.
Second, this plan is presented as a wealth-building proposal by
which most of the money can be withdrawn when the child turns 18. A
child can use the money for expenses other than college; if they do use
it for college, however, it would be an expensive way to fund college,
since the government already spends elsewhere in the higher-education
system, allegedly to help low-income students.
B. Complex Regulations and Penalties on Early Withdrawal Could Create
Disincentives to Save
One of the greatest concerns of low-income earners has
traditionally been access to liquidity, and convoluted savings rules
and penalties for early withdrawals only restrict liquidity. Research
from the Internal Revenue Service demonstrates that low-income earners
are 31 percent more likely to take a net-taxable withdrawal when they
experience an income shock.\2\ The Urban Institute found similar
results: people with limited education, low income, and few assets tend
to withdraw from their retirement accounts more frequently over a 2-
year period than those with higher education and income.\3\
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\2\ Robert Argento, Victoria L. Bryant, and John Sabelhaus, ``Early
Withdrawals from Retirement Accounts during the Great Recession,'' IRS,
November 2013.
\3\ Barbara A. Butrica, Sheila R. Zedlewski, and Philip Issa,
``Understanding Early Withdrawals from Retirement Accounts''
(Discussion Paper 10-02, The Urban Institute, Washington, DC, May
2010).
The same Urban Institute study indicates that 40 percent of those
withdrawals are linked to either adverse events such as job loss or
poor health, or investment events such as buying a home. Ten percent of
the withdrawals were for necessary expenses during a job change. The
study concludes that withdrawals from retirement savings accounts are
more common when families experience a change in employment, the birth
of a child, or starting college.\4\ Of these, only starting college
could be a qualified withdrawal from a Child Savings Account, and that
is only if families withdrew for tuition payments, not for other costs
related to attending college.
---------------------------------------------------------------------------
\4\ Butrica, Zedlewski, and Issa, ``Understanding Early
Withdrawals.''
Withdrawing from savings to cover rent after a job loss or to cover
an unexpected hospital visit should not be penalized. Putting many
restrictions on the use of the funds may dissuade parents from adding
money to the account.
2. better ways to encourage savings
Encouraging savings, especially for low-income Americans, is a
worthy exercise. But there are better ways to do it.
A. Government Debt Crowds Out Savings
While proponents may tout the CSA as boosting asset accumulation
for future generations, the program faces an inherent contradiction
given the U.S. Government's current fiscal position of running
sustained budget deficits and accumulating debt. As Harvard University
economist Robert Barro highlighted in his seminal work on debt
neutrality, increasing public dissaving through deficit spending can
offset and crowd out private saving.\5\ The size of the debt
accumulation's impact on savings is debated by economists, but it is
not zero and it may also be quite large.\6\
---------------------------------------------------------------------------
\5\ R.J. Barro, ``Are Government Bonds Net Wealth?'', Journal of
Political Economy 82, no. 6 (1974): 1095-117.
\6\ D.W. Elmendorf and N.G. Mankiw, ``Government Debt,'' in
Handbook of Macroeconomics, ed. J.B. Taylor and M. Woodford (Elsevier),
5: 1615-69). A. De Serres and F. Pelgrin, ``The Decline in Private
Saving Rates in the 1990s in OECD Countries: How Much Can Be Explained
by Non-wealth Determinants?'' (OECD Economics Department Working Papers
No. 344, OECD Publishing, Paris, 2003), 117-53; L. De Mello, P.M.
Kongsrud, and R. Price, ``Saving Behavior and the Effectiveness of
Fiscal Policy'' (OECD Economics Department Working Papers No. 397, OECD
Publishing, Paris, 2003).
The Federal Government has run deficits for decades, causing public
debt levels to rise from around 30 percent of GDP in the 1970s to
nearly 100 percent today. Debt has a share of GDP that is heading to
166 percent within 30 years assuming relatively low interest rates,
prosperity, and a return of inflation to the Fed target. The government
cannot readily boost national savings and wealth accumulation while
---------------------------------------------------------------------------
continuing to dissave at high rates.
Rather than creating a new spending program, many economists argue
that placing the Federal budget on a sustainable long-run path should
be the foremost priority for increasing national savings. Reducing the
projected debt-to-GDP ratio could help restore incentives for higher
household savings rates. Economic research has established that the
best way to do that is to implement fiscal adjustments that mostly
focus on cutting spending rather than raising taxes.\7\ Fiscal-
adjustment packages that feature smaller spending reductions and larger
tax increases are unsuccessful at reducing the debt-to-GDP ratio. This
finding is not controversial among economists who have studied the
issue.
---------------------------------------------------------------------------
\7\ A. Alesina and R. Perotti, ``Fiscal Expansions and Fiscal
Adjustments in OECD Countries'' (NBER Working Paper No. 5214, National
Bureau of Economic Research, Cambridge, MA, August 1995); J. Guajardo,
D. Leigh, and A. Pescatori, ``Expansionary Austerity? International
Evidence,'' Journal of the European Economic Association 12, no. 4
(2014): 949-68; A. Alesina, C. Favero, and F. Giavazzi, Austerity: When
It Works and When It Doesn't, (Princeton, NJ: Princeton University
Press, 2019); O. Jorda and A.M. Taylor, ``The Time for Austerity:
Estimating the Average Treatment Effect of Fiscal Policy,'' The
Economic Journal 126, no. 590 (February 2016); 219-55.
Another important finding is that fiscal adjustments based only on
tax hikes are deleterious to both short- and long-term growth. However,
fiscal adjustments based on appropriate spending cuts promote long-term
economic growth. This matters since the preponderance of studies
suggest higher economic growth generally leads to higher savings rates,
---------------------------------------------------------------------------
especially over longer time horizons.
In summary, persistently large public dissaving poses a fundamental
economic challenge to policies aimed at boosting private savings and
wealth.
B. Create Universal Savings Accounts
Short of putting the U.S. on a fiscally sustainable path, there are
other solutions Congress could pursue. While there are some dissenting
views, the weight of evidence indicates the current system of double
taxation of income--first taxing earned income, then taxing the returns
from saving--creates considerable disincentives to save relative to a
benchmark of taxing consumption only. Tax reform to integrate corporate
and personal taxation is often proposed to mitigate these effects.
Instead of fixing the tax code, we have created tax-deferred saving
accounts, such as 401(k)s and IRAs, meant to alleviate some of that
double taxation. Federal law currently provides several such tax-
preferred savings vehicles, each with varying rules and limitations:
some are for retirement, some are for education and disability, some
for health and dependent care, and some for emergencies.\8\
---------------------------------------------------------------------------
\8\ Alex Durante, William McBride, and Garrett Watson, ``Dwindling
Savings and Increasing Financial Stress Highlights Need for Tax
Reforms,'' Tax Foundation (blog), November 9, 2023.
Unfortunately, as mentioned earlier, the rules and restrictions on
withdrawals for each of these accounts likely create disincentives to
save for low-income workers or parents who are worried about not being
---------------------------------------------------------------------------
able to use their savings in case of an emergency.
A better alternative would be for Congress to streamline these
accounts into one universal tax-preferred savings vehicle. The
introduction of Universal Savings Accounts would take what is good
about specialized savings accounts such as 529 plans and apply it to
all Americans, incentivizing them to save. In simple terms, USAs make
lower tax rates on savings more accessible to a greater number of
people for a greater number of reasons. One study by Harvard economist
Daniel Benjamin found that nearly 50 percent of 401(k) balances were
new private savings.\9\ This is a generous estimate, but even the most
modest estimates, like the one by the Brookings Institution,\10\ still
demonstrate that absent income tax penalties, retirement savings have
compounding returns.
---------------------------------------------------------------------------
\9\ D. Benjamin, ``Does 401(k) Eligibility Increase Saving?
Evidence from Propensity Score Subclassification,'' Journal of Public
Economics 87 (2003).
\10\ Eric M. Engen et al., ``Do Saving Incentives Work?'',
Brookings Papers on Economic Activity 1994, no. 1 (1994).
USAs have the potential to increase savings for all groups, not
just those saving for retirement. With fewer rules and more
opportunities, USAs can encourage new populations to save. But people
with the lowest income brackets may see the most benefit. After USAs
were implemented in the UK and Canada, moderate-income earners were the
most responsive. In both countries, low- and moderate-income savers
represent over 50 percent of USA holders.\11\ As the Cato Institute's
Chris Edwards and Ryan Bourne found, in 2016 in the UK, 52 percent of
USA holders earned less than =20,000--around $26,000.\12\ Furthermore,
in the UK, low-income savers earning between =9,500 and =20,000 (about
$12,000 and $26,000, respectively) utilizing USAs reported a 23-percent
increase in savings that would not have been saved or invested absent
the USA.\13\
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\11\ OECD, Encouraging Savings through Tax-Preferred Accounts (OECD
Tax Policy Studies, No. 15, OECD Publishing, Paris, 2007).
\12\ Ryan Bourne and Chris Edwards, ``Tax Reform and Savings:
Lessons from Canada and the United Kingdom'' (CATO Institute, Tax and
Budget Bulletin No. 77, May 1, 2017).
\13\ OECD, Encouraging Savings through Tax-Preferred Accounts.
There is great potential for USAs to help our lowest-income earners
begin saving for whatever life may bring.
Conclusion
With the expiration of the Tax Cuts and Jobs Act at the end of next
year, there is an opportunity for policymakers to simplify the tax
system and create pathways to savings and building financial security
for all Americans. Universal Savings Accounts are a preferable method
for boosting savings and ensuring that American families are
financially equipped for whatever life may bring.
______
Prepared Statement of William Elliott, Ph.D., Professor of Social Work
and Director, Joint Doctoral Program in Social Work and Social Science,
University of Michigan
Chairman Wyden, Ranking Member Crapo, and distinguished members of
the committee, it is an honor to testify before you today regarding the
promise of children's savings accounts for building wealth for
children. I am grateful for the opportunity to address this committee
and appreciate your continued attention to the urgency of wealth
inequality--and to the potential of improving children's chances
through investments in children's asset interventions. Thank you for
the opportunity to participate in today's hearing.
Here is an overview of what this testimony will cover:
Education has long played a crucial equalizing role in the
U.S. economy and in the promise of the American Dream.
Return on degree is unequal, by family wealth.
Strengthening return on degree requires asset-based
financial aid.
CSAs can be such an asset-based financial-aid system.
the american dream and education
European nations have relied on the ``direct redistributive role of
the welfare state to reconcile citizenship and markets,'' but the
United States has chosen to use education as a lever for ensuring
equitable outcomes (Carnevale and Strohl, 2010, p. 83). This distinctly
American belief--that economic disparity can be narrowed through
individual effort in school and calculated public investments in
educational opportunities--has been around almost from our conception
as a country. It is inextricably tied to the American Dream.
However, what if education isn't the great equalizer we once
believed it to be? What if education, today, is instead helping to
increase inequality in some unintended ways? In America in 2024,
children who grow up poor face substantial barriers to moving up the
economic ladder through effort and ability in school, barriers wealthy
children do not face. The inability to buy necessities due to a lack of
income--income poverty--is only half of the story. The other half--
asset poverty--is rarely talked about. Policies are seldom created to
address it among low-income families.
Asset poverty has been defined as not having sufficient net worth
(from savings and durable assets, such as homes or businesses) to cover
3 months of living expenses without income (Wolff, 2017). This
definition of asset poverty is limited to the amount of emergency
savings families have. Recent survey research shows that one in four
U.S. adults said they had no emergency savings, and two in three
Americans would be worried about having enough savings to cover a
month's living expenses (Gillespie, 2024). Other analysis suggests that
about 37 percent of Americans would have to borrow or sell something to
cover an unexpected $400 expense (Federal Reserve Board, 2022).
In this testimony, I will extend the concept of asset poverty
beyond the emergency savings discussion, which is more comparable to
income approaches to poverty. I include in the definition of asset
poverty the concept of families having enough assets to invest in their
children's human-capital development (i.e., a college degree or some
form of postsecondary education or training plus financial knowledge
and skills). I also include the concept of having assets for the
purpose of building additional or new assets. This is a developmental
approach to asset poverty. A developmental approach better aligns with
an American Dream of giving people something to live for, the
understanding of assets as stored money for the future, and the role
that Children's Savings Accounts--a policy intervention I will discuss
later--can play in leveling the educational and economic playing field
on which Americans are asked to compete.
unequal returns
Expecting income- and asset-poor children to compete in the same
marketplace with wealthy children, whose effort and ability are
enhanced by assets in the form of family wealth transfers, has caused
the attainment of a college degree to be disconnected from the use of
effort and ability in schools. This reality plays out in individual
households and in our collective conversation. It brings the American
Dream into question and erodes confidence in the American ideal told to
children as exhortation to study hard.
For example, research examining a link between intelligence and
genetics finds that fewer than 24 percent of high-potential
children born to a low-income father graduate from college,
compared with 63 percent born to high-income fathers
(Papageorge and Thom, 2018). The other end of the spectrum
might paint an even clearer picture of how higher-income
children avoid the same consequences as their poor
counterparts. Papageorge and Thom (2018) find that 27 percent
of low-potential children who have high-income fathers graduate
from college, a greater proportion than that of high-potential
children born to low-income fathers (24 percent).
However, the built-in inequality of opportunity for fair reward--
that is, inequality in the opportunity for low-income and low-wealth
children to be fairly rewarded for using effort and ability to obtain a
degree--is not limited to degree attainment. It continues for those
low-income, low-wealth children who attain a college degree despite the
odds. It is what I call America's ``return-on-degree problem.''
Research increasingly reveals that the returns on degree achieved by
these children lag the returns enjoyed by their more advantaged peers.
And make no mistake about it: this is an American problem faced by low-
income, low-wealth children of all color. Therefore, it is an us
problem. And it can only be solved by joining together to fix it.
Given the role of education as an equalizer within the American
welfare system, the financial aid system is correctly understood as an
investment in economic well-being. Because of the financial aid
system's role in creating economic well-being for all, it is not enough
for the system to provide low-income children with access to education,
financial literacy classes, or even financial institutions; they must
be able to achieve economic outcomes similar to those of their
wealthier counterparts. This is contrary to what we currently see. The
following data illustrates the return-on-degree problem:
Bachelor's degree holders from low-income families start
their careers earning about one-third less than those from
high-income families (Hershbein, 2016).
Black students receive less benefit from having obtained a
college degree ($52,147 income and $32,780 net worth), compared
with their White counterparts ($94,351 income and $359,780 net
worth; Emmons and Noeth, 2015).
Black families with a head of household who graduated from
college have about 33 percent less wealth than White families
with a head of household who dropped out of high school
(Hamilton et al., 2015).
A small wealth premium remains for White college graduates
born in the 1980s when compared to White high school
graduates.\1\ However, researchers find that the wealth premium
has disappeared altogether for Black college graduates born in
the 1980s relative to Black high-school graduates during the
same time (Emmons, Kent, and Ricketts, 2019).
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\1\ Wealth premium is the additional wealth acquired by a family
headed by a member with a college degree over a family headed by a
member who does not have a college degree.
The unequal return on a degree is out of sync with the American
sense of meritocracy and the belief that education can be the great
equalizer. Researchers point to the rising cost of college and student
debt as reasons for the decrease in the wealth premium that a college
degree provides. For example, researchers find that acquiring the
relatively small amount of $10,000 in student loans is associated with
an 18-percent decrease in the rate of achieving median net worth
(Elliott and Rauscher, 2018).\2\
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\2\ The study defined mobility as the likelihood and rate of
achieving median household net worth among individuals who have at
least a 4-year college degree and were at least age 22 (Elliott and
Rauscher, 2018).
After looking at the data on the return on degree, Tough (2023,
para. 20) said, ``Higher education no longer resembles a safe, reliable
blue-chip investment, like buying a Treasury bill. It's now more like
going to a casino. It's a gamble that can still sometimes produce a big
windfall, but it can also bring financial disaster.'' Americans who are
questioning the value of college and rethinking their own plans likely
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agree.
According to an article in The New York Times, public-
opinion polls in the early 2010s all told the same story. In
one survey, 86 percent of college graduates said that college
had been a good investment; in another, 74 percent of young
adults said a college education was ``very important''; in a
third, 60 percent of Americans said that colleges and
universities were having a positive impact on the country
(Tough, 2023, September 5th).
However, a decade later, the percentage of young adults who
said that a college degree is very important fell to 41 percent
from 74 percent. Only about a third of Americans now say they
have a lot of confidence in higher education. Among young
Americans in Generation Z, 45 percent say that a high school
diploma is all you need today to ``ensure financial security.''
And in contrast to the college-focused parents of a decade ago,
now almost half of American parents say they'd prefer that
their children not enroll in a 4-year college (Tough, 2023,
September 5th).
A danger of a growing number of people no longer seeing college as
an important path for achieving the American dream while other
countries are experiencing more young adults enrolling in college is
that America will have fewer people to fill a growing number of jobs
that require a college degree (Marcus, 2022, January 22nd, Tough, 2023,
September 5th). And while there are some well-paying jobs that don't
require a degree, the fastest-growing jobs available to non-degree
holders are mostly low-wage service jobs; at the same time, the demand
for college graduates keeps rising (Tough, 2023, September 5th). This
suggests, while understandably Americans have grown frustrated with
education's ability to act as an equalizer, it will continue to be an
important institution for determining who has real access to the
American dream.
As such, a part of education's role would be preparing college
students to be in the best position to leverage their degree and get
the maximum return from it.
Strengthening the return on degree requires a shift in how college
is financed from debt and even a grant model, toward a wealth-building
model. The question becomes, why? Assets have been said to hold the
following characteristics (Sherraden, 1991):
Financial stability.
Orientation toward the future.
Capitalist (i.e., a builder of wealth).
Focus and specialization.
Risk taking.
Confidence.
Social influence.
Political influence.
Enhance the welfare of offspring.
When people own assets, they gain the corresponding characteristics
of the assets which in turn increases their opportunity to improve
their capability. However, the degree to which owning assets alone
increases what children can achieve is also tied to their ability to
utilize the asset (i.e., children's functioning).\3\ Maximizing the
economic returns on a degree requires a certain level of financial
capability, and the level of financial capability a child has is
determined by the level of financial knowledge, skills, access to
institutions, and assets they have (Elliott and Zheng, 2023, November).
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\3\ Functioning represents what the person succeeds in being and
doing with the commodities and characteristics at their command or
being/doing (Sen, 1999a, b).
Among the characteristics listed above, in this section I focus on
a characteristic often overlooked in understanding wealth inequality:
that is, whether a child starts off with a sufficient level of wealth
to build wealth of their own (i.e., wealth begets more wealth). What is
being suggested is that a child who has wealth takes on the
characteristic of being a wealth builder or capitalist. The simple way
to say this is, families need wealth to build wealth. And they need
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wealth to reap just returns on their effort in college.
A $1 increase in income translates to a $5 increase in
wealth for White families but only a 70-cent increase for Black
Families.
But, importantly for this discussion, when
Black families start off with similar levels of assets, they
have a return of $4.03--not equal to White families, but far
closer (Shapiro, Meschede, and Osoro, 2013).
The power of income for generating wealth is determined at
least in part by the amount of wealth older adults (ages 44-67)
start off with as younger adults (ages 25-44); that is, to
build wealth you must have a certain amount of wealth as
younger adults (Elliott, Rauscher, and Nam, 2018).
Older age adults living at the 50th or 75th
percentile as younger adults can expect to generate more wealth
from each dollar they earn than those living at the 25th
percentile as younger adults (Elliott, Rauscher, and Nam,
2018).
While holding a degree makes a substantial difference in the
amount of net worth younger adults have when they are older, a
college degree matters more for net worth when younger adults
start off with assets than when they do not (Elliott, Rauscher,
and Nam, 2018).
While the institutions and economic forces
that fuel wealth building have changed dramatically within the
past 2 decades, this truth--that children face huge odds in
trying to overcome their starting positions--is not new. In
1999, Conley found that parental net worth is a more important
predictor of young adults' net worth than education, income, or
age.
It must be understood, even if education provides a strong return
on degree to financially literate (i.e., financially knowledgeable, and
skilled) students who are financially included (i.e., ``full access to
social welfare policies and appropriate, affordable financial services
to receive financial resources,'' see Huang, M.S. Sherraden, and M.
Sherraden, 2021, p. 8), the size of the chasm earning a degree is being
asked to close is too vast without a wealth-building strategy that
helps children leave college with wealth, rather than debt.
To strengthen the return on degree and enable education to be an
equalizer, the type of institutional access financial aid should focus
on providing is wealth building, not indebtedness. Children's savings
accounts (CSAs) are a form of financial aid used to provide students
with access to the wealth building arm of financial institutions.
csas are a wealth-building strategy for children
CSAs are asset-building accounts that provide a financial structure
that can facilitate wealth accumulation from multiple sources for the
purpose of giving all children an equal opportunity to reach their full
potential. In the absence of passage of national CSA policy, some
States and localities have developed their own children's savings
initiatives. While the details vary, these investments in children's
futures include initial contributions and matching contributions for
low-income savers, opening accounts for children at birth or in some
cases kindergarten. Some programs are also experimenting with including
financial literacy programs as part of their CSA program (Goldberg,
Friedman, and Boshara, 2010).
By the end of 2023 there were 121 CSA programs in 39 States serving
over 5.8 million children in the U.S. (Prosperity Now, 2024). There are
seven States that have a statewide program (California, Illinois,
Maine, Nebraska, Nevada, Pennsylvania, and Rhode Island) (Sherraden and
Clancy, 2021). All seven States built their programs upon their State
529 Savings Plan structure.
Even With Relatively Small Initial Deposits, CSAs Build Wealth and
Improve Children's and Their Families' Economic, Educational,
Social, and Psychological Outcomes
Existing CSA programs have provided relatively small initial one-
time deposits of anywhere from $5 to $1,000, what might be referred to
as small-dollar accounts. But even these relatively small initial
deposits have resulted in the accumulation of real assets for low-
income and students of color. That's the advantages our financial
markets deliver--over time--extended through CSAs to children who would
otherwise be left out. For example, at age 14 the average treatment
child (i.e., randomly selected to receive a CSA) in the SEED for
Oklahoma Kids experiment, SEED OK for short, a group that includes low-
income and Black children, has about $4,373 in their account (Clancy,
Beverly, Schreiner, Huang, and Sherraden, 2022, June). While this is
not enough to pay for college, the SEED OK experiment definitively
demonstrates that CSAs can be a fully inclusive financial institution
that facilitates asset building.
What makes CSAs proposals like 401Kids one of the most promising
proposals for increasing children's chances to succeed beyond their
starting point is the fact that they have the potential not only to
increase wealth, but also to deliver positive impacts on children's
educational attainment and their families' social and psychological
outcomes as well--even while the account balances are still relatively
modest. Research on CSAs shows positive impacts on children's early
social and emotional development, academic performance, likelihood of
enrolling in college, and likelihood of persisting to graduation from
college. These are valuable gains that are often difficult to produce--
at scale--through other interventions. These gains largely eluded the
significant investments in debt-centered financial aid, but CSAs:
Quasi-experimental Findings \4\
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\4\ Both quasi-experimental and experimental studies are designed
to show a cause-and-effect relationship between an independent (i.e.,
CSAs) and dependent variable (i.e., some outcome). However, a quasi-
experiment does not rely on random assignment.
Increase children's math and reading scores
(Elliott, 2009; Elliott, Sorensen, Zheng and O'Brien, 2023).
Increase children's educational expectations
(Elliott, 2009; Elliott, Zheng, Saborl, and O'Brien, 2021).
Reduce wilt among children who have the
academic ability and expect to attend college but fail to do so
shortly after high school graduation (Elliott and Beverly,
2011).\5\
---------------------------------------------------------------------------
\5\ Wilt is the gap between expectations and attainment.
---------------------------------------------------------------------------
Increase college enrollment and college
graduation of low- to moderate-income children (when they have
school-designated savings of $1 to $499 or $500 or more)
(Elliott, Song, and Nam, 2013).
Increase college enrollment and college
graduation of Black children (when they have school-designated
savings of $500 or more) (Friedline, Elliott, and Nam, 2013).
Experimental Findings
Increase parental educational expectations
for their children (Kim, Sherraden, Huang, and Clancy, 2015).
Increase social emotional development among
young children, particularly among low-income children (Huang,
Sherraden, Kim, and Clancy, 2014).
Reduce punitive parenting practices (Huang,
Nam, Sherraden, and Clancy, 2019).
Reduce maternal depression (Huang, Sherraden,
and Purnell, 2014).
Importantly, some findings are consistently strongest among low-
income children, revealing that CSAs are the rare and valuable
intervention that works best for those who need them most.
But maybe equally important, in a time when the ability to hope
seems to be diminishing, CSAs help create an environment where hope can
serve as motivation to act. Not mere aspirational hope, but what I have
called tangible hope. Assets give children a stake in the future--that
is, the power to purchase a piece of the future today. Another way to
say this is assets allow children to more clearly see how they will be
able, for example, to pay for college, buy a home, retire comfortably.
Assets are real money stored away today for future purchases, making
the future tangible as though one can touch it, experience it--even own
a piece of the future today. This creates an environment where children
can then act consistent with their hopes, thereby bringing hope and
action even closer. In this sense, CSAs as a type of asset building
program allow children to purchase stock in their future selves.
Orientation toward the future is a characteristic of assets that people
can internalize as part of their own identity when they own assets
(e.g., Sherraden, 1991). Asset ownership makes children, and their
families feel secure enough to begin to plan for their futures today.
In this way, CSAs can help children reach their full potential--not
only by helping them build wealth, but by helping them build tangible
hope. Tangible hope is grounded in the ability CSAs give children to
build wealth, to then finance the education that can bring their other
hopes within reach. However, what is needed is a policy that extends
this opportunity to all children.
A Well-Structured Policy Framework Is Critical for Scalable and
Sustainable Early-Life Wealth-Building Policies Such as
401Kids, American Opportunity Accounts Act, and Others
SEED OK, a long-running experiment ran by Professor Michael
Sherraden, director of the Center for Social Development (CSD) at
Washington University in St. Louis, has shown that policy models like
the 401Kids bill can be scaled to serve the full population of
children, delivering financial and nonfinancial benefits, some of which
are greater for disadvantaged children.
To guide program and policy development, a group of CSA experts
collaborated to identified eight key principles for designing CSAs at
scale (Cisneros et al., 2021):
Eligibility for all--everyone is included and gets a stake.
Automatic enrollment--remove barriers to enrollment.
Automatic initial deposit--jump-start wealth accumulation.
Start young--maximize wealth-building potential.
Targeted additional deposits--those with greater need get
more.
Centralized savings plan--enable implementation and reduce
costs.
Investment growth--augment the wealth-building capacity of
families.
Simplified investment options--make decisions easy.
Importantly, the 401Kids bill includes seven of the eight
principles. To be effective, Federal early-life wealth building policy
requires an efficient, effective, scalable, and sustainable account
structure. This is fundamental for ensuring that the policy will reach
all eligible beneficiaries, manage funds successfully, accumulate
assets, and distribute those assets effectively. The policy structure
and delivery mechanisms matter. These elements are strengths of CSAs.
Agreement on Principles for Early-Life Wealth-Building
Policy Extends Beyond the CSA Field and the 401Kids
Bill
These wealth-building principles are not only incorporated into
CSAs but also found within the broader children's wealth building
space. At the present time, two early wealth-building proposals are
before the Congress: the 401 Kids Savings Account Act and the American
Opportunity Accounts Act, briefly summarized below:
The 401Kids Savings Account Act of 2024
U.S. Senator Bob Casey has newly revised and renamed Federal
legislation aimed at establishing a nationwide children's
account policy. This initiative is crafted to empower children
across the country, especially those from disadvantaged
backgrounds, with a pathway to build assets and wealth for
future investments such as funding higher education. The
legislation would create asset-building accounts for all
children in the United States.
The American Opportunity Accounts Act of 2024
U.S. Senator Cory Booker and U.S. Representative Ayanna
Pressley have reintroduced this Act, which aims to establish a
federally funded account for every child to promote economic
opportunity and address the racial-wealth gap. This legislation
provides a $1,000 seed savings account at birth, with
additional deposits annually (up to $2,000) based on family
income and allows access to funds for purposes such as
homeownership or education at age 18.
In a recent report, I discussed the similar origins and content of
these policy proposals (Elliott, 2022, October). In short, the use of
the term Baby Bonds as used in Senator Booker's proposal was first
coined by Hamilton and Darity Jr. (2010). The stimulus for Baby Bonds
was the United Kingdom's Child Trust Fund and the American Savings for
Personal Investment Retirement and Education (ASPIRE) proposal.\6\ Both
the Child Trust Fund and ASPIRE were developed from the principles and
concepts articulated by Sherraden in Assets and the Poor and came about
with his counseling. Because Baby Bonds were inspired by the Child
Trust Fund and ASPIRE, it seems fair to say that the origin story of
Baby Bonds can be traced back to Assets and the Poor much in the same
way that CSAs can be. However, despite sharing a similar origin, the
policy discussions remain somewhat separated (Elliott, 2022, October).
Motivated by our shared commitment to secure asset-
building commitments that improve children's chances, we are making
progress on bringing them together.
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\6\ For information on ASPIRE, go to https://www.govtrack.us/
congress/bills/110/s3557/text.
In November 2023, policymakers and researchers gathered to discuss
wealth building policy at the Urban Institute. Policy views on both
CSAs and Baby Bonds (e.g., American Opportunity Accounts Act) were
represented, and discussants reached consensus on policy principles and
design features for early-life wealth building Federal policies (Brown,
---------------------------------------------------------------------------
Biu, and McKernan, 2024):
t Start at the beginning.
t Ensure inclusion and reduce wealth inequities.
t Make real investments.
t Structure, scale, and transparency.
t Ease of access and use.
t Support vertical integration.
These six policy principles and their related policy design
features have substantial empirical footing in CSA research and
implementation to date and overlap considerably with the eight key
principles for designing CSAs at scale (Cisneros et al., 2021).
Further, the SEED OK experiment has demonstrated that these six
principles and the associated features can serve a full population of
children (Huang, Shanks, Clancy, Elliott, and Sherraden, 2024).
CSAs Were Envisioned as Large-Dollar Accounts
There is one substantial difference between current CSA models and
one of the six wealth-building policy principles, ``make real
investments.'' Current CSA models mostly provide small one-time initial
deposits. This is very different from the 401Kids proposal and American
Opportunity Accounts proposal both of which emphasize the importance of
a real investment by the Federal Government in wealth building for
children.
Despite the current small initial deposits common in CSAs today,
when describing the possibilities of what a CSA could be in Assets and
the Poor, Sherraden's (1991) seminal book where he proposed CSAs, he
provided a wide range of options for what they could become. For
example, while current models of CSAs are restricted to education,
Sherraden also laid the groundwork for multipurpose CSAs--that is, CSAs
that were for other wealth building goals such as homeownership,
starting a business, or retirement. While the most popular and
widespread form of CSAs today are accounts with small one-time initial
deposits, the CSA concept is not restricted to this model and can also
accommodate large-dollar principles outlined in 401Kids, for example.
While there is evidence that CSAs alone can have valuable impacts,
they also provide an infrastructure for delivering scholarship programs
that can bolster student academic outcomes in important ways (Elliott,
Grant, and Case, 2023, March; Elliott, May 2024). They may also provide
means for delivering free college proposals (Promise Programs in
practice) using the CSA infrastructure.\7\ This proposition that CSAs
provide an infrastructure that can be used to deliver free college
proposals is like what Elliott (2022, October) has proposed regarding
Baby Bonds. Free college and Baby Bonds proposals are extensions of
traditional scholarships in as much as they both focus on giving
children a sum of stored away money (or assets) when they turn age 18.
As such, I suggest traditional scholarships and financial aid more
generally, is a type of asset building institution for children.
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\7\ For more information on Promise Programs and free college
proposals, go to https://www.freecollegenow.org/promise_programs.
It might seem foreign to think of free college or scholarships
(i.e., financial aid) as a type of asset-building policy because
education and wealth building have often been thought of as separate
ideas on different policy tracks. However, what is a free college
proposal but a policy to provide children with a significant asset when
they reach age 18? In addition to how they are talked about, the major
difference is the structure used to deliver each of these asset
building strategies. What CSAs provide is a ``well-structured policy
framework'' capable of delivering all different kinds of assets to
children (Huang, Shanks, Clancy, Elliott, and Sherraden, 2024, p. 2).
However, unlike the financial aid delivery system or even the trust
accounts proposed in Baby Bonds, CSAs as a delivery system extends back
into childhood, as early as birth. They also can extend into older
adulthood (e.g., 401Kids proposes rolling over assets into a Roth IRA).
As such, it gives these policies the ability to impact children's early
outcomes as well as post college outcomes and by doing so may provide
the best existing, tested, and scalable vehicle for strengthening the
return on degree, a proposition that requires an institutional
structure that can impact children's pre-college outcomes, college
---------------------------------------------------------------------------
outcomes, and post-college outcomes.
Federal investments of the size discussed in 401Kids, Baby Bonds,
and free college proposals can have an identifiable impact on wealth
inequality. For example, policy simulations show that if a universal
CSA program had been established in 1979 with a progressive initial
deposit of $7,500 for low-wealth households (less than $5,000 net
worth) with incremental declines to $1,250 for the highest-wealth
households ($25,000 net worth or more), the Black/White wealth gap
would be decreased by 23 percent (Sullivan, Meschede, Shapiro, Asante-
Muhammed, and Nieves, 2016). This moment in U.S. history post-pandemic
facing the pending labor market disruptions of AI, grappling with
political polarization and its relationships to wealth inequality
demands urgent action to close wealth gaps. That was part of the
motivation of participants in the Urban Institute convening--to
emphasize the need for a significant Federal investment. Real change
requires a strong investment by the Federal Government.
To deliver on the idea that free college can also be accomplished
using the CSA infrastructure I recommend connecting the size of the
government investment in CSAs for an individual child to what it would
cost to provide a free college education. Currently, the average cost
of attendance at a public 4-year college in-state institution in the
2022-2023 school year is $11,260 which would be $45,040 for 4 years
(College Board, 2022). Estimates by the Joint Economic Committee of the
U.S. Congress indicate that if a child of an EITC-eligible single
parent received the 401Kids deposits from birth, the child's account
could accumulate over $53,000 by age 18 (Casey, 2024). That sum would
fully cover the average cost of tuition and fees at a 4-year, in-state,
public college, or university in 2023-2024 and leave some money over to
be placed in a retirement account (though ideally these accounts would
stay with children throughout their lives; birth to retirement). This
is also in line with Senator Corey Booker's (2023) Baby Bonds proposal.
His proposal, which also would phase out based on income level (i.e.,
the poor get more), would provide every child with an initial deposit
of $1,000 at birth and then an additional $2,000 every year after until
they turn 18. As a result, a child whose family's annual income is 100
percent of the Federal poverty level would have about $46,215 in their
account when they were 18. It is worth noting, the Federal investment
would not include the potential for additional assets to flow into
these accounts from third parties.
History Teaches Us That a Significant Federal Investment--Though It
Might Seem Unthinkable at the Time--Can Have a Measurable
Impact on American Outcomes and Be Heralded in Hindsight as a
Cornerstone of American Opportunity
History tells us that the GI Bill made higher education and housing
possible for millions of veterans. Undoubtedly the expense seemed
unthinkable to many at a time when the country was recovering from war
spending. In 1944 the U.S. spent $14.5 billion (about $139.6 billion in
2020 dollars) on the GI Bill, nearly doubling the number of college
graduates between 1940 and 1950 (Wells, 2022). Despite the heavy
financial cost of war, this post-war investment not only improved
millions of lives, but within 8 years of the bill's signing, it had
returned every dollar invested in education nearly seven-fold in
economic output and Federal tax revenue (Improving access to preschool
and postsecondary education, 1988). Returning veterans represented a
crisis to the postwar economy, and a significant investment was
necessary to restore faith that the American dream was still attainable
for all. Investment in CSAs shows signs of also being such an
investment. An analysis by Jose Diaz, an economist with the
Constellation Fund, showed that every dollar invested in 401Kids
Accounts would generate $2.61 in benefits to society. The benefits,
Diaz noted, would come from ``increased income, improved health,
additional tax revenues, and savings to other government sectors''
(Diaz, 2023).
Notably, investment does not have to solely fall at the feet of the
Federal Government. The CSA design proposed in 401kids distinguishes
itself from other wealth building policies not only for its social and
psychological effects, but because it provides a structure that allows
for multiple streams of assets to flow into a child's account.
The True Wealth-Building Power of CSAs Is in Their Ability to Allow
for Multiple Streams of Assets to Flow into a Child's Account
CSAs that include targeted ongoing progressive deposits as outlined
in 401Kids provide a financial infrastructure for reducing the level of
wealth inequality in society. The ability to provide targeted ongoing
deposits provides the Federal Government with a type of valve that can
be used to facilitate the flow of assets into households. The
transformed 529 plan detailed in 401Kids acts as the plumbing for
carrying assets wherever children need them throughout the country,
leveling the playing field.
By allowing multiple streams of assets to flow into accounts, in
addition to the government and families' own participation in asset
building, third parties such as extended family members, employers,
philanthropists, communities, as well as other entities are also given
access to valves that can also be used to increase the flow of assets
making sure they get to where they are needed. These types of
institutions are already available in high-income communities. Not
giving low-income communities access to this type of financial
institution only prevents them from being able to distribute the wealth
they do have more easily to those in need in their communities.
The idea that CSAs provide the opportunity to have multiple streams
of assets is not merely theoretical. CSA programs have begun to tap
into the power of CSAs to bring together multiple streams of assets
into a child's account. For example:
New York City's Kids RISE program announced in December of
2022 that 1,200 first graders from Canarise and East Flatbush
will receive a $1,000 community scholarship to be placed into
their Kids RISE accounts (Cox, 2022).\8\
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\8\ To learn more about NYC's Kids RISE and how it is leveraging
CSAs' capacity for facilitating multiple streams of assets to flow to
its children, go to https://aedi.ssw.umich.edu/sites/default/files/
documents/Reports/csa-doorway/csa-doorway-case-study-5.pdf?v=1.0.
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The Community Foundation of Wabash County's Early Award
Scholarship Program in Indiana informs donors that their CSA
program allows them to transform traditional scholarships
awarded at age 18 into early award scholarships. For example,
recently a donor opted to put $1,000 in the accounts of all
children in K-4 who are participating in the program as an
early award scholarship (Weaver, 2020).\9\
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\9\ To learn more about how the Early Awards Scholarship program is
leveraging CSAs' capacity for facilitating multiple streams of assets
to flow to its children by transforming traditional scholarships into
early award scholarships, go to https://aedi.ssw.umich.edu/sites/
default/files/documents/Reports/csa-doorway/csa-doorway-case-study-
2.pdf.
---------------------------------------------------------------------------
Pennsylvania's statewide CSA program, Keystone Scholars, has
a program called, The Bright Future Booster. It provides an
additional, one-time $50 deposit to accounts for babies born
between January 1st and June 30, 2021, to mothers enrolled in
the Special Supplemental Nutrition Program for Women, Infants,
and Children (WIC) at the time of their baby's birth. It was
the first automatic targeted deposit at scale in a statewide
CSA program.\10\
---------------------------------------------------------------------------
\10\ To learn more about The Bright Future Booster and how Keystone
Scholars is leveraging their CSA infrastructure, go to https://
aedi.ssw.umich.edu/sites/default/files/documents/Reports/csa-doorway/
csa-doorway-case-study-1.pdf.
---------------------------------------------------------------------------
The College Board (2013) recommended supplementing the Pell
Grant program by opening savings accounts for children as early
as age 11 or 12 who would likely be eligible for Pell once they
reached college age and making annual deposits of 5 percent to
10 percent of the amount of the Pell Grant award for which they
would be eligible.
The city of Saint Paul, MN is not only rigorously testing the power
of CSAs to provide an infrastructure that allows multiple streams of
assets to flow into a child's account, but they are also testing how
this same infrastructure can be used to connect income strategies
together with asset strategies in an experimental study they call
CollegeBound Boost. This program builds on their existing citywide CSA
program, CollegeBound, by adding a guaranteed income component and
ongoing targeted deposits (like 401Kids and Baby Bonds).
The experimental study provides families individual interventions
related to education, income, and the racial wealth gap using CSAs as
the scaffolding to bind them together:
No-treatment control condition.
Quarterly CSA deposits only condition ($250 quarterly, total
of $1,000 annually).
Guaranteed income payments ($500 per month) + quarterly
deposits condition.
This experiment augments the ability of families to save by
providing them with additional cash to meet their basic needs, which in
turn increases the amount of income they have left over to save. It
also boosts the total assets they have for paying for college by
directly transferring city funds into the CSA of children living in the
city. Finally, St. Paul uses the CSA infrastructure as a financial
mechanism to deliver 401Kids or Baby Bond-type deposits to their
constituents. As such, it serves as one of the first tests of whether a
small dollar CSA could act as a delivery system for large ongoing
targeted deposits.
The potential of different types of assets flowing into a CSA makes
it a tool that can provide a way for not only government but
foundations, faith-based organization, philanthropists, employers, and
many others to help finance college and reduce wealth inequality.
Furthermore, CSAs' potential to connect different poverty, wealth
building, and even education (to include financial education)
strategies so that they can work together under one umbrella might be a
game changer in the fight against poverty, wealth inequality, and
eroding return on degree.
poverty and wealth inequality are financial capability problems
From a financial capability perspective, solving poverty is not
mainly an issue of feeding, clothing, and sheltering children. Nor is
solving wealth inequality mainly a problem of transferring wealth to
families to reduce the wealth gap. Both are important for equipping
children with what they need to become financially capable, but they
are not sufficient. In short, what I am suggesting is that the root
cause of poverty and wealth inequality is lack of financial capability.
Building on Sherraden (2013), Zheng and I (2023, November) have posited
that to be financially capable, children must have access to financial
institutions (e.g., CSAs), assets (e.g., 401Kids or Baby Bond-like
deposits), and financial literacy (e.g., financial education training).
If a goal of social welfare policy is to make children financially
capable, then ending poverty and wealth inequality would be byproducts
not the primary goals of social welfare policy. The financial
capability perspective is reflected in the saying, ``give a person a
fish, and you feed them for a day; teach a person to fish, and you feed
them for a lifetime.'' However, teaching in the context of financial
capability emphasizes experiential learning, which means inclusion in
financial institutions, having access to income and assets, and access
to quality financial education are necessary parts of becoming
financially capable.
Generally, the CSA movement has been associated with the effort to
create the institutional structure so that everyone can have access to
wealth, the Baby Bonds movement with supplying enough wealth to be able
to build one's new wealth, and the financial education movement with
assuring children have enough financial knowledge and skills to be able
to use financial institutions and income and wealth to become producers
of wealth; that is, fishers. It seems that to solve poverty a financial
capability framework is needed that brings all three poverty and wealth
alleviation strategies under one umbrella. The CSA infrastructure may
be that umbrella as demonstrated by the CollegeBound Boost experiment
in Saint Paul, MN.
policy recommendation
The proposed 401Kids Savings Account Act would establish a Federal
CDA policy with universal, automatic, and progressive features. By
serving all children at birth through a centralized savings platform--a
transformed 529 college savings plan--this policy would promote asset
building, wealth equity, and child development, particularly for people
of color and disadvantaged families. Research has shown that this
evidence-based policy design is efficient and sustainable, and it has
often garnered bipartisan support in the States. Legislation is now
before the Senate Committee on Finance, the House Committee on Ways and
Means, and the House Committee on Energy and Commerce. I recommend that
policymakers consider evidence from sound research in developing an
effective, sustainable policy to advance equity and address wealth
inequality.
More specifically I make the following recommendations:
Connect the size of the Federal investment in CSAs over the
course of 18 years for an individual child to what it would
cost to provide children with a free college education (roughly
$45,000 currently). This amount is in line with the 401Kids
proposal and the American Opportunity Accounts proposal.
Changes to section 529 of the Internal Revenue Code of 1986
that were prescribed in 401Kids be enacted. Specifically, that
expanded uses beyond education to include buying a home,
starting a business, or saving for retirement be allowed. As of
January 1, 2024, the Code has already been changed to allow
funds to roll over into a beneficiary-owned Roth IRA tax-free
and
penalty-free. Allowing for expanded uses would better equip the
CSA infrastructure to act as a deliver system for other
children's asset building programs such as Baby Bonds
proposals.
Regarding the 401Kids bill and the annual contributions cap
of $2,500. I recommend, in the case of low-income families, it
only apply to Federal matching funds. Restricting contributions
to $2,500 per year for low-income families will have the effect
of limiting the ability to take advantage of the full power of
CSAs to build wealth (i.e., the ability for multiple streams of
assets to flow into an account) discussed in this testimony. If
third parties (e.g., family members, employers,
philanthropists, communities, and other entities) can
contribute amounts over the $2,500 for low-income children,
this will reduce wealth inequality while leveling the playing
field for all children.
Regarding concerns of wealthy families unfairly taking advantage
of the opportunity to save in 401Kids and thus potentially increasing
wealth inequality, this would be muted by the fact that children living
in wealthier families would not be able to receive contributions that
totaled more than $2,500 per year in their 401Kids account.
Accounts should remain in place from birth until retirement,
taking full advantage of the potential for assets to continue
to flow into or remain in accounts throughout an individual's
life.
Again, I would like to thank the committee for the opportunity to
participate in today's hearing.
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http://EconPapers.repec.org/RePEc:oxp:obooks:9780195650389.
Sen, A. (1999b). Development as Freedom. Oxford University Press.
https://oxford.co.za/shop/higher-education/economics-
higher-education/9780192893307
-development-as-freedom/.
Shapiro, T., Meschede, T., and Osoro, S. (2013). The roots of the
widening racial wealth gap: Explaining the Black-White
economic divide (Research and Policy Brief). Brandeis
University, Institute on Assets and Social Policy. https://
heller.brandeis.edu/iere/pdfs/racial-wealth-equity/racial-
wealth-gap/roots-widening-racial-wealth-gap.pdf.
Sherraden, M. (1991). Assets and the Poor: A New American Welfare
Policy. M.E. Sharpe.
Sherraden, M., and Clancy, M.M. (2021). Transforming 529 college
savings plans: Grow assets for everyone, grow the country.
In R. Boshara and I. Rademacher (Eds.), The future of
building wealth: Brief essays on the best ideas to build
wealth--for everyone (pp. 251-257). Federal Reserve Bank of
St. Louis and Aspen Institute. https://futureofwealth.org/
wp-content/uploads/2021/09/Sec-5.pdf.
Sullivan, L., Meschede, T., Shapiro, T., Asante-Muhammed, D., & Nieves,
E. (2016). Equitable investments in the next generation:
Designing policies to close the racial wealth gap. https://
prosperitynow.org/files/resources/IASP_CFED
_Equitable_Investments_in_the_Next_Generation-FINAL.pdf.
Tough, P. (2023, September 5). Americans are losing faith in the value
of college. Whose fault is that? New York Times. https://
www.nytimes.com/2023/09/05/magazine/college-worth-
price.html.
Wells, M. (2022). The post-9/11 GI Bill: Fewer veterans are using their
education benefits. Is this trend a problem--or a sign of a
more welcoming job market? Econ Focus. https://
www.richmondfed.org/publications/research/econ_focus/
2022/
q2_feature_1#::text=March%20of%20the%20GI%20Bills&text=The%2
0
program%20cost%20the%20federal,%24139.6%20billion%20in%20202
0%20
dollars.
Wolff, E.N. (2017). A century of wealth in America. Harvard University
Press.
______
Questions Submitted for the Record to William Elliott, Ph.D.
Questions Submitted by Hon. Benjamin L. Cardin
Question. Child savings accounts provide viable options for
families to have the opportunity to save money for their children's
education. However, persistent economic disparities exist that may
prevent certain children from enrolling in college or vocational
schools. This is why it is important that underserved communities have
access to child savings plans as these accounts act as important
vehicles to ensuring access to education.
As of 2023, there are 121 child savings account programs in 39
States and DC, with 5.8 million accounts. Access to child savings
accounts can remove certain economic barriers increase the likelihood
that individuals in underserved communities have the option to pursue
higher education.
Can you speak to some of the barriers that exist which prevent
families from starting a child savings account?
Answer. Inclusion can be defined as having access to an asset-
building program for children. From this perspective, the focus of
inclusion is on ensuring every child has access to the USAs. Inclusion
as access aligns with an opt-in approach to enrollment. Policies and
programs that adopt an opt-in approach require participants to enroll.
However, there are barriers that low-income families face to enrolling
that make opt-in less than desirable if full inclusion is the goal. For
example, they are very busy trying to make it day to day and so a
lengthy application process is likely to discourage enrolment, low
financial knowledge can also be a barrier, and many low-income families
simply are not aware of the programs or their benefits.\1\ Not
surprisingly then, opt-in programs invariably end up favoring higher-
income families. This can be seen in examples Dr. Elliott's uses in his
testimony on the Canada Education Savings Program, UK's National Child
Trust Fund and Individual Savings Accounts (ISAs), and Maine's My
Alfond Grant programs also copied below in the second part of this
question as well.\2\
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\1\ Clancy, M., and Lassar, T. (2010). College savings plan
accounts at birth: Maine's statewide program (CSD Policy Brief 10-16).
St. Louis, MO: Washington University, Center for Social Development;
Government of Canada (2024). Budget 2024 (see section entitled ``Making
it Easier to Save for Your Child's Education''). Find at Chapter 2:
Lifting Up Every Generation | Budget 2024 (https://budget.canada.ca/
2024/report-rapport/chap2-en.html#s2-2).
\2\ Hearing on Child Savings Accounts and Other Tax-Advantaged
Accounts Benefiting American Children, U.S. Senate Finance Committee,
118th Cong. (2024). (Testimony of Colleen J. Quint). https://
www.finance.senate.gov/imo/media/doc/
05212024_colleen_quint_testimony.pdf.
In contrast, inclusion can mean ensuring every child has an
account, or as close to full inclusion as possible. Inclusion as having
an account aligns with an opt-out approach to enrollment. Policies and
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programs that adopt an opt-out model automatically enroll participants.
Question. What can be done by the Federal Government to reduce
these barriers and ensure equitable access to child savings accounts
for low-income families?
Answer. In a recent brief I presented three examples that
illustrate why automatic enrollment is the best way to ensure equitable
access to CSAs for low-income families (Elliott, 2024, June). Here are
the three case studies that can help inform the discussion about the
different approaches to enrollment (opt-in or opt-out):
child account policy example no. 1:
maine's statewide my alfond grant program
Maine's My Alfond Grant (originally called the Harold Alfond
College Challenge) is a statewide CSA program that uses the State's 529
platform called NextGen529. My Alfond Grant was first administered
statewide in 2009 as an opt-in (i.e., families chose to enroll)
program. To enroll and receive the $500 Alfond Grant, families had to
open a NextGen account within 1 year of a child's birth. Using the opt-
in model, the My Alfond Grant program was able to enroll about 25,000
Maine families. So, about 35 percent of eligible children received the
$500 grant.\3\ Importantly, research also showed that children who
lived in households that were less educated, who did not have other
investments, and who did not have a financial advisor were less likely
to be enrolled.\4\
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\3\ Hearing on Child Savings Accounts and Other Tax-Advantaged
Accounts Benefiting American Children, U.S. Senate Finance Committee,
118th Cong. (2024). (Testimony of Colleen J. Quint). https://
www.finance.senate.gov/imo/media/doc/
05212024_colleen_quint_testimony.pdf.
\4\ Ibid.
However, in 2014 the My Alfond Grant switched to an opt-out model
(i.e., all newborn babies were automatically enrolled). Using an opt-
out model they were able to achieve nearly 100-percent enrollment, or
nearly full inclusion.
child account policy example no. 2:
the canada education savings program
In 1972 the Canadian Government created the Registered Education
Savings Plan (RESP). RESPs are similar to U.S. State 529 education
savings plans. However, like enrollment rates in U.S. State 529 plans,
higher-income families are far more likely to enroll in
RESPs.\5\, \6\
---------------------------------------------------------------------------
\5\ Hannon, S., Moore, K., Schmeiser, M., and Stefanescu, I.
(2016). Saving for college and section 529 plans. Board of Governors of
the Federal Reserve System. FEDS Notes. Find at FRB: FEDS Notes: Saving
for College and Section 529 Plans (https://www.federalreserve.gov/
econresdata/notes/feds-notes/2016/saving-for-college-and-section-529-
plans-20160203.html).
\6\ Frenette, M. (2017). Which families invest in registered
education savings plans and does it matter for postsecondary enrolment?
Analytical Studies Bank Research Paper Series. Statistics Canada. Find
at Which Families Invest in Registered Education Savings Plans and Does
It Matter for Postsecondary Enrolment? (https://www150.statcan.gc.ca/
n1/pub/11f0019m/11f0019m2017392-eng.htm).
In 1998, Canada launched the Canada education savings program
(CESP) to help increase participation in RESPs. When it began, families
had to open an RESP (i.e., opt in) and once enrolled, Canadians were
eligible for the Canada Education Savings Grant (CESG)--a 20-percent
match from the Government of Canada on contributions up to $2,500 (or a
maximum grant of $500 per year, to a lifetime amount of $7,200). The
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CESG is available for youth up to age 17.
Despite access to RESPs and even with the advent of matching funds,
the Canadian Government in 2004 recognized that low-income families
were using these registered accounts at much lower rates than middle-
and higher-income families. To encourage higher uptake, the government
introduced the Additional CESG (A-CESG) and created the Canada Learning
Bond (CLB). Both the A-CESG and the CLB are income-tested benefits,
with the thresholds updated yearly. Through the A-CESG, families with
incomes between $53,360-$106,717 CAD (threshold for July 2023 through
June 2024) receive an additional 10-percent match on the first $500
contributed to the RESP, while those with lower incomes ($53,359 or
less) receive an additional 20-percent match, meaning an extra $50/$100
respectively per year.
Through the CLB, the Canadian Government provides up to $2,000
without requiring any RESP contributions, with eligibility based on
adjusted income ($53,359 or less) and family size. The CLB consists of
a $500 payment the first year a child is eligible, and $100 each
subsequent year they are eligible up to age 15. An eligible youth can
also request their CLB retroactively until they turn 21. The only
requirement is to open an RESP and request the CLB. But awareness of
eligibility for these funds is low, and even for families who are aware
of the program, it can be challenging to first open an RESP for a
child.\7\ Children in care of the State are also eligible for the CLB,
but there are often significant challenges to enrolling them. Thus,
despite the additional money available to low-income families, higher-
income families continue to be more likely to have an RESP and to
receive the majority of the CESP benefits.\8\
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\7\ Employment and Social Development Canada (2022). Evaluation of
the Canada education savings program. Government of Canada. Find at
(https://www.canada.ca/content/dam/esdc-edsc/images/corporate/reports/
evaluations/education-savings/cesp-2022-en.pdf).
\8\ Government of Canada (2024). Budget 2024 (see section entitled
``Making it Easier to Save for Your Child's Education''). Find at
Chapter 2: Lifting Up Every Generation | Budget 2024 (https://
budget.canada.ca/2024/report-rapport/chap2-en.html#s2-2).
Therefore, the data showing low uptake made it increasingly clear
to the Canadian Government that the only way to achieve full inclusion
and ensure low-income children can access their CLB payments is by
automatically enrolling all eligible children. So, starting in 2028-
2029 the Canadian Government plans to automatically open an RESP for
all eligible low-income children born in 2024 or later, and auto-
deposit the CLB payment into the account.\9\
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\9\ Government of Canada (2024). Budget 2024 (see section titled
``Making it Easier to Save for Your Child's Education''). Find at
Chapter 2: Lifting Up Every Generation | Budget 2024 (https://
budget.canada.ca/2024/report-rapport/chap2-en.html#s2-2).
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child account policy example no. 3:
the u.k.'s national child trust fund program
The U.K. example differs from both the Maine and the Canadian
example. Whereas to achieve full inclusion Maine and Canada moved from
an opt-in approach to an opt-out approach, the U.K. moved from an opt-
out approach to an opt-in approach.
Asset-building work in the U.S. led by Michael Sherraden and his
center, Center for Social Development at Washington University in St.
Louis, MO, directly led to and informed the Child Trust Fund policy in
the U.K.\10\ In 2005 the U.K. set up universal savings accounts for
children born from September 2002 onwards with an initial deposit of
=250 (about $312 today) or =500 (about $624 today) for low-income
children.
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\10\ Finlayson, A. (2008), Characterizing New Labour: The Case of
the Child Trust Fund. Public Administration 86(1), 95-110.
Interestingly for this conversation, in the U.K., unlike the U.S.
or Canadian versions of automatic enrollment that use birth records or
tax data to enroll children, the parent/guardian was expected to open
an account. Only if the parent/guardian did not open an account did the
government open an account for the child. Research shows that the
government had to set up 28 percent of accounts on behalf of
children.\11\ This highlights the potential benefit of automatic
enrollment for ensuring full inclusion.
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\11\ National Audit Office (2023). Investigation into Child Trust
Funds. London. https://www.nao.org.uk/reports/investigation-into-child-
trust-funds/.
Importantly for this discussion, in 2010 the U.K. government ended
the Child Trust Fund program for children born after January 2, 2011,
and replaced it with what they called Junior Individual Savings
Accounts (ISAs). Junior ISAs did not come with government
contributions, and families had to opt into the program. They resemble
State 529 plans, as they have a maximum annual contribution cap of
=9,000 (about $11,234 today). Like State 529 plans, higher-income
families are far more likely to have a Junior ISA, and to save far more
in their ISA.\12\, \13\
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\12\ Hannon, S., Moore, K., Schmeiser, M., and Stefanescu, I.
(2016). Saving for college and section 529 plans. Board of Governors of
the Federal Reserve System. FEDS Notes. FRB: FEDS Notes: Saving for
College and Section 529 Plans (https://www.federalreserve.gov/
econresdata/notes/feds-notes/2016/saving-for-college-and-section-529-
plans-20160203.html).
\13\ Broome, Corlett, and Leslie (2023). ISA ISA Baby: Assessing
the government's policies to encourage household saving. Resolution
Foundation. https://www.resolutionfoundation.org/app/uploads/2023/01/
ISA-ISA-baby.pdf.
While these case studies make clear that adopting a full-inclusion
approach assures everyone has access, the approach still does not
ensure everyone will have an account. Further, access would appear more
appropriate if wealth-building in 401Kids accounts, for example, was
limited to individual saving. However, if the government makes
contributions, both the Canadian and U.K. examples support the notion
that full inclusion is a more applicable approach, assuring that
everyone receives these contributions. Similarly, research and practice
in U.S. CSA programs indicate that CSAs support not only individual and
government contributions, but also third-party contributions from such
entities as foundations, philanthropists, employers, communities, and
many others.\14\ Full inclusion assures that these funds can flow to
everyone. Additional evidence supporting the full inclusion approach
demonstrates that just owning an account produces important social and
psychological impacts that complement their economic impacts.\15\
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\14\ For information on how CSA can facilitate third-party
contributions (i.e., multiple streams of assets), see Unleashing the
Power of Children's Savings Accounts | Center on Assets, Education, and
Inclusion (https://aedi.ssw.umich.edu/unleashing-the-power-of-children-
savings-accounts).
\15\ For a review of these findings, see Elliott, W. (2024, Jan.).
Assessing the evidence for Children's Savings Accounts (CSAs) as an
effective strategy for improving children's postsecondary outcomes: The
continuum of evidence of effectiveness. University of Michigan. Center
on Assets, Education, and Inclusion (AEDI). Find at (https://
aedi.ssw.umich.edu/sites/default/files/documents/Reports/evolution-of-
csa-research.pdf?v=1.1).
Question. Housing is a key priority in closing the wealth gap as
homes can be the primary nest egg for many families in this country and
a tool to build and pass down wealth. Under the Biden administration's
leadership, we have made progress towards ensuring that families that
otherwise would not have access to homeownership can make strides
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towards purchasing a home.
Tax credits such as the Low-Income Housing Tax Credit (LHITC) and
my proposed legislation, the Neighborhood Homes Investment Act (NHIA),
support affordable housing developments and wealth building for
individuals. This is ultimately intertwined with family savings. By
creating incentives for affordable housing, we can increase the supply
and access to home ownership for families.
Can you speak to the specific benefits of incentivizing
homeownership as it relates to wealth building and family savings?
Answer. The Pew Research Center finds that in 2021 half of U.S.
homeowners derived more than 45 percent of their wealth from the equity
in their homes.\16\ Homeownership is even more important for building
wealth among Black and Hispanic households. About 63 percent of Black
homeowners net worth is derived from home equity and about 66 percent
for Hispanic homeowners. Importantly, while about 62 percent of U.S.
households own their home, they also find that only 40 percent of Black
households owned their home and 47 percent of Hispanic households.
Furthermore, households who do not own a home are also far more likely
to be asset poor (i.e., living in a household that does not have enough
assets to allow them to remain above the official poverty line for 3
months).\17\ It stands to reason, policies that help to increase
homeownership rates, particularly among Black and Hispanic households,
can help households build wealth.
---------------------------------------------------------------------------
\16\ Pew Research Center (2023). The assets households own and the
debts they carry. Urban Institute. Washington, DC. https://
www.pewresearch.org/2023/12/04/the-assets-households-own-and-the-debts-
they-carry/#::text=Among%20U.S.%20homeowners%20overall%20%E2%80%
93%20that,the%20other%20half%20derived%20less.
\17\ Rank, M.R. and Hirschl, T.A. Estimating the life course
dynamics of asset poverty. Center for Social Development, Washington
University in St. Louis. https://openscholarship.wustl.edu/cgi/
viewcontent.cgi?article=1836&context=csd_research.
It is commonly recognized that one of the biggest barriers to
buying a home is lack of funds for down payment and closing costs.
Individual Development Accounts (IDAs) are matched-savings accounts
primarily targeted to adults and designed to assist low-income
households build assets through homeownership, education, or
entrepreneurship.\18\ The American Dream Demonstration (ADD)\19\ began
in 1997, initiated by the Corporation for Enterprise Development,\20\
to test whether lower-income families and households could build assets
in IDAs. The 5-year ADD demonstration concluded with promising results
that produced insights that have informed the design of other asset
building interventions.\21\ During that same year, the Assets for
Independence (AFI) Act was passed into law, which established a Federal
grant program to provide nonprofits and government agencies with funds
to offer IDAs to lower-income families and households.\22\
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\18\ Sherraden, M. (1991). Assets and the poor: A new American
welfare policy. Armonk, NY: M.E. Sharpe.
\19\ For more information, see https://csd.wustl.edu/areas-of-
work/.
\20\ They are now called Prosperity Now. For more information, see
https://prosperitynow.
org/.
\21\ Richards, K.V. and Thyer, B.A. (2011). Does Individual
Development Account Participation Help the Poor? A Review. Research on
Social Work Practice, 21(3), pp. 348-362.
\22\ For more information, see https://www.hudexchange.info/
resource/4482/assets-for-indepen
dence-program-fact-sheet/
#::text=AFI%20is%20a%20federal%20program,income%20individuals
%20and%20their%20families.
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Regarding homeownership, findings from the ADD experiment show:
The treatment had a significant positive effect on the rate of
homeownership. After 48 months, the homeownership rate was 6.2
percentage points higher in the treatment group than in the
control group. Proportionally, this was a 14-percent increase,
relative to the homeownership rate for the control group (42.9
percent at month 48). The favorable effect on homeownership was
pronounced among the following subgroups (as defined at
baseline): those who did not own a home, African-Americans,
families comprised of two or more adults with children, those
with more than $1,100 in total financial assets, those not on
public assistance, and those with a checking or savings
account. Additionally, the extent to which baseline non-
homeowners subsequently engaged in activities preparatory to
home purchase (such as attending an open house or repairing
credit to apply for a mortgage) was significantly higher among
those in the treatment group.\23\
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\23\ Abt Associates Inc. (2004). Evaluation of the American dream
demonstration: Final evaluation report (p. vi). file:///C:/Users/ellio/
OneDrive/Documents/Evaluation%20of%20the%20
American%20Dream.pdf.
Sherraden initially proposed that IDAs should be opened early in
life--ideally, at birth--to promote asset building and well-being
across the life span. Sherraden writes, ``Because asset-based welfare
is a long-term concept, some of the best applications of IDAs would be
for young people. Young people would be given specific information
about their IDAs from a very early age, would be encouraged to
participate in investment decisions for the accounts, and would begin
planning for use of the accounts in the years ahead.''\24\ As
implemented, however, in part due to funding constraints and the need
to produce demonstrable outcomes on timelines acceptable to
philanthropic and government investors, IDAs have continued as short-
term programs to assist families and households in achieving home
ownership, education, enterprise, or other development goals. In the
ADD experiment, the average total asset (net deposits plus match)
accumulation in an IDA was $1,543 (among savers it was $2,755).\25\
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\24\ Sherraden, M. (1991). Assets and the poor: A new American
welfare policy. Armonk, NY: M.E. Sharpe.
\25\ Schreiner, M., Clancy, M., and Sherraden, M. (2002). Saving
performance in the American Dream Demonstration. Center for Social
Development, Washington University in St. Louis. https://
openscholarship.wustl.edu/cgi/
viewcontent.cgi?article=1342&context=csd_research.
IDAs were the precursor to children's savings accounts (CSAs). The
401Kids legislation, a type of CSA policy, has the potential to have a
far greater impact on housing outcomes of low-income families. This is
because it allows wealth to start accumulating in these accounts from
birth. And they are not solely reliant on individual contributions for
building wealth in these accounts. Estimates by the Joint Economic
Committee of the U.S. Congress indicate that if a child of an EITC-
eligible single parent received the 401Kids deposits from birth, the
child's account could accumulate over $53,000 by age 18.\26\ This does
not even include the potential of CSAs for producing wealth from
multiple streams of assets beyond individual and government
contributions (e.g., from philanthropists, employers, foundations,
communities, and other third parties).\27\
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\26\ Casey, B. (2024). 401Kids: Building Wealth for the Next
Generation. U.S. Senator, Pennsylvania. https://www.casey.senate.gov/
imo/media/doc/401kids.pdf.
\27\ Elliott, W. (2023, March). Unleashing the power of Children's
Savings Accounts (CSAs): Doorway to multiple streams of assets.
University of Michigan, Center on Assets, Education, and Inclusion.
https://aedi.ssw.umich.edu/sites/default/files/documents/Reports/csa-
doorway/csa-doorway-full-report.pdf?v=1.2.
Combining 401Kids with legislation like the Neighborhood Homes
Investment Act, which helps families to develop and renovate their
homes would only further increasing the equity families have in their
homes.\28\ Funding for home repairs is particularly important for low-
income families and families of color being able to stay in their home
and for increasing the value of the home.\29\
---------------------------------------------------------------------------
\28\ See https://www.congress.gov/bill/118th-congress/senate-bill/
657.
\29\ Eisenberg, A., Wakayama, C., and Cooney, P. (2021).
Reinforcing low-income homeownership through home repair: Evaluation of
the make it home repair program. University of Michigan, Ann Arbor.
Poverty Solutions. https://poverty.umich.edu/files/2021/02/
PovertySolutions-Make-It-Home-Repair-Program-Feb2021-final.pdf.
______
Questions Submitted by Hon. Elizabeth Warren
Question. You testified about the importance of education as an
equalizer in the U.S. economy, but also emphasized the clear unequal
return on degrees by family wealth. Your research has also found that
taking out just $10,000 in student loans is associated with an 18-
percent decrease in the rate of achieving median net worth.\30\
Addressing wealth inequality, investing in children's futures, and
reducing future student debt are powerfully important, but
unfortunately, today more than 43 million borrowers in the United
States already carry a total of $1.6 trillion in student debt and more
than 2 million borrowers have been repaying those loans for at least 20
years.\31\
---------------------------------------------------------------------------
\30\ Testimony of William Elliot, Ph.D., professor, University of
Michigan, and director, Center on Assets, Education, and Inclusion,
U.S. Senate Finance Committee, ``Child Savings Accounts and Other Tax-
Advantaged Accounts Benefiting American Children,'' May 21, 2024,
https://www.finance.senate.gov/imo/media/doc/
05212024_william_elliott_testimony.pdf.
\31\ Federal Student Aid, ``Federal Student Aid Posts New Quarterly
Reports to FSA Data Center,'' press release, August 30, 2023, https://
fsapartners.ed.gov/knowledge-center/library/electronic-announcements/
2023-08-30/federal-student-aid-posts-new-quarterly-reports-fsa-data-
center; U.S. Department of Education, ``Biden-Harris Administration
Announces New Plans to Deliver Debt Relief to Tens of Millions of
Americans,'' press release, April 8, 2024, https://www.ed.gov/news/
press-releases/biden-harris-administration-announces-new-plans-deliver-
debt-relief-tens-millions-americans.
What role does student debt cancellation play in addressing
---------------------------------------------------------------------------
inequities in our higher education system?
Answer. The U.S. Federal student loan program has received
considerable policy attention in recent years. However, the policies
proposed almost exclusively focus on softening the blow dealt by
student loans, rather than avoiding the damage in the first place.
Approaches such as income-based repayment plans, in their various
iterations, are all designed to help borrowers cope with the
consequences of their student borrowing, yet none have been
demonstrated to truly avoid the educational, social, and financial
hazards of using student loans to finance college in the first place.
extending payment periods may actually
exacerbate inequity in higher education
Even as understanding of student loans as a dis-equalizing force
has permeated popular discussion to some degree, there has been little
reconsideration of the fundamental wisdom of relying so heavily on
student loans to level the education playing field. Indeed, some
proposals might even exacerbate inequity in higher education. For
example, if we encourage low-income students to enroll in less
expensive 2-year schools to reduce their expenses,\32\ institutions
where they would still need to borrow to pay for them, and economically
advantaged students can choose their schools without worrying about how
to pay for college, we run a real risk of creating an explicitly two-
tiered structure, particularly since all institutions are not created
equal in terms of educational outcomes.\33\
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\32\ Goldrick-Rab, S., and Kendall, N. (2016). The real price of
college (College Completion Series: Part Two). Washington, DC: The
Century Foundation. Retrieved from https://tcf.org/content/report/the-
real-price-of-college/.
\33\ National Center for Education Statistics. (2011). Community
college student outcomes: 1994-2009. NCES 2012-253.
Reimagining, and then, rebuilding, the U.S. financial aid system
must begin with a more complete accounting for the true costs of
student loans, to students and the larger economy.\34\ And so, while
current proposals largely center on reducing monthly payment burdens
for students to reduce the incidence of delinquency and default, they
do little to address the long-term effects of student loans, before and
after college.
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\34\ Hiltonsmith, R. (2013). At what cost: How student debt reduces
lifetime wealth (pp. 1-15). New York, NY: Demos. https://www.demos.org/
research/what-cost-how-student-debt-reduces-lifetime-wealth.
About 21 percent of borrowers avoid delinquency by using
deferment or forbearance.\35\
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\35\ Cunningham, A.F., and Kienzl, G.S. (2011). Delinquency: The
untold story of student loan borrowing. Washington, DC: Institute for
Higher Education Policy. Retrieved August 2, 2014 from http://
www.ihep.org/assets/files/publications/a-f/delinquency-
the_untold_story_final_
march_2011.pdf.
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Nine years after leaving school, the 2005 cohort has paid
down only 38 percent of its original student debt. Under a
standard 10-year amortization schedule, these loans would be
approaching full repayment, and only about 10 percent of the
original balance would remain.\36\
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\36\ Brown, M., Haughwout, A., Donghoon, L., Scally, J., and van
der Klaauw, W. (2015). Looking at Student Loan Defaults through a
Larger Window. Liberty Street Economics. New York, NY: Federal Reserve
Bank of New York. Retrieved January 12, 2016 from: http://
libertystreeteconomics.newyorkfed.org/2015/02/
looking_at_student_loan_defaults_through_a_
larger_window.html#.VpVJeStGmKz.
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Racial Disparities: 4 years after earning a bachelor's
degree, Black graduates in the 2008 cohort held $24,720 more
student loan debt than White graduates ($52,726 versus
$28,006). It was less than $2,000 in 1993.\37\
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\37\ Scott-Clayton, J. and Li, J. (2016). Black-white disparity in
student loan debt more than triples after graduation. Washington DC:
Brookings. Economic Studies. Find at https://www.brookings.edu/wp-
content/uploads/2016/10/es_20161020_scott-clayton_evidence_speaks.
pdf.
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Of high-balance borrowers, 22 percent have student loan
balances higher in 2014 than they did in 2009, even without
ever falling into severe delinquency or default.\38\
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\38\ Brown, M., Haughwout, A., Donghoon, L., Scally, J., and van
der Klaauw, W. (2015). Looking at Student Loan Defaults through a
Larger Window. Liberty Street Economics. New York, NY: Federal Reserve
Bank of New York. Retrieved January 12, 2016 from: http://
libertystreeteconomics.newyorkfed.org/2015/02/
looking_at_student_loan_defaults_through_a_
larger_window.html#.VpVJeStGmKz.
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Racial Disparities: Nearly half (48 percent) of all
Black graduates owe more on their Federal undergraduate loans
than they did at graduation, compared to just 17 percent of
White graduates.\39\
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\39\ Scott-Clayton, J. and Li, J. (2016). Black-white disparity in
student loan debt more than triples after graduation. Washington DC:
Brookings. Economic Studies. Find at https://www.brookings.edu/wp-
content/uploads/2016/10/es_20161020_scott-clayton_evidence_speaks.
pdf.
Indeed, policies that seek to reduce the strain on student
borrowers by extending the repayment period or making other
modifications to the student loan program may only prolong the harmful
effects on students financial and life outcomes.
failure of student loans
Research suggests that student loans' fail to catalyze greater
educational achievement, increase students' engagement in school, and
foster stronger economic foundations.\40\ There is a growing body of
evidence that reveals the dimensions on which student loans endanger
the well-being of individual borrowers, the institutions dependent on
them, and our macro-economy.\41\ Data reveal that disadvantaged
students, particularly low-income and students of color, are
disproportionately affected by these forces,\42\ unacceptable effects
given the desired role of higher education in fostering greater equity
and upward mobility.\43\ Research shows, when comparing students who
graduate from college with student loan debt and those who graduate but
with no debt, those without debt do better:
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\40\ Cofer, J. and Somers, P. (2000). A comparison of the influence
of debt load on the persistence of students at public and private
colleges. Journal of Student Financial Aid, 30, 39-58; Perna, L. W.
(2000). Differences in the decision to attend college among African
Americans, Hispanics, and Whites. The Journal of Higher Education,
71(2), 117-141; Heller, D.E. (2008). The impact of student loans on
college access. In S. Baum, M. McPherson, and P. Steele (Eds.), The
effectiveness of student aid policies: What the research tells us (pp.
39-68). New York: College Board.
\41\ Frizell, S. (February 26, 2014). Student loans are ruining
your life. Now they're ruining the economy, too. Time Magazine.
Retrieved August 13, 2014 from: http://time.com/10577/student-loans-
are-ruining-your-life-now-theyre-ruining-the-economy-too/. Korkki, P.
(May 24, 2014). The Ripple Effects of Rising Student Debt. The New York
Times. Retrieved August 13, 2014 from: http://www.nytimes.com/2014/05/
25/business/the-ripple-effects-of-rising-student-debt.html?_
r=0.
\42\ Fenske, R.H., Porter, J.D., and DuBrock, C.P. (2000). Tracking
financial aid and persistence of women, minority, and needy students in
science, engineering, and mathematics. Research in Higher Education,
41, 67-94. Retrievable at Springer website: http://link.springer.com/
article/10.1023%2FA%3A1007042413040 and Kim, D. (2007). The effects of
loans on students' degree attainment: Differences by student and
institutional characteristics. Harvard Educational Review, 77(1), 64-
100.
\43\ Greenstone, M., Looney, A., Patashnik, J., and Yu, M. (2013).
Thirteen Economic Facts about Social Mobility and the Role of
Education. Washington, DC: The Brookings Institution. Retrieved August
12, 2014 from: http://www.brookings.edu/research/reports/2013/06/13-
facts-higher-education.
Labor market decisions.\44\
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\44\ Rothstein, J. and Rouse, C.E. ``Constrained After College:
Student Loans and Early-Career Occupational Choices.'' Journal of
Public Economics, 95 no. 1-2 (2011): 149-163.
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Delay marriage.\45\
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\45\ Gicheva, D. ``Does the student-loan burden weigh into the
decision to start a family?'' University of North Carolina at
Greensboro, 2011. http://www.uncg.edu/bae/people/gicheva/
Student_loans_marriageMarch11.pdf.
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Earn less by the time they reach their 40s.\46\
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\46\ Hiltonsmith, R. (2013). At what cost: How student debt reduces
lifetime wealth (pp. 1-15). New York, NY: Demos. https://www.demos.org/
research/what-cost-how-student-debt-reduces-lifetime-wealth.
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Less net worth.\47\
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\47\ Elliott, W. and Nam, I. (2013). Is Student Debt Jeopardizing
the Long-Term Financial Health of U.S. Households? Review 95(5): 1-20.
https://www.stlouisfed.org/household-financial-stability/events/
20130205/papers/Elliott.pdf.
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Less retirement savings.\48\
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\48\ Egoian, J. (2013, Oct.). 73 Will Be the Retirement Norm for
Millennials. Nerdwallet, October 23, 2013. http://www.nerdwallet.com/
blog/investing/2013/73-retirement-norm-millennials/.
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Less likely to own a home.\49\
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\49\ Cooper, D. and Wang, C. ``Student Loan Debt and Economic
Outcomes.'' Current Policy Perspectives (Washington, DC) 2014. https://
www.bostonfed.org/publications/current-policy-perspectives/2014/
student-loan-debt-and-economic-outcomes.aspx.
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Less likely to start up a new business.\50\
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\50\ Ambrose, B.W., Cordell, L., and Ma, S. (2015). The impact of
student loan debt on small business formation. (working paper). Federal
Reserve Bank of Philadelphia.
From an equity standpoint, the underlying problem is not high
default rates, for example, the underlying problem is funding education
through student loans in the first place. Extending the time people
have to pay back loans in order to maintain a broke system of financing
college through loans only reduces the opportunity for building wealth
over a longer period of time.
even small amounts of debt can have negative impacts
A closer examination of student loans reveals not only the
different dimensions on which student loans may harm prospective,
current, and former college students and their households, but also the
serious limitations of reforms that relies on student loans as a way of
financing college. Contrary to popular belief, it is not only the
extremely ``high-dollar'' loans--still relatively rare--that should be
alarming.\51\ One of the things that makes loans particularly risky is
that it is not clear what is a ``safe'' level of student loan debt to
have. Analysis reveals negative effects on asset accumulation and
subsequent financial well-being at levels even far below
``recommended'' thresholds, revealing the limitations of any efforts to
protect students by simply trying to avoid huge loans.\52\ Researchers
measure mobility as the likelihood and rate of achieving median
household net worth among 4-year college graduates or above who were at
least age 22. After controlling for key differences, they found that
acquiring the relatively small amount of $10,000 in student loans is
associated with a 18-percent decrease in the rate of achieving median
net worth.\53\
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\51\ Egoian, J. (2013, October). 73 Will Be the Retirement Norm for
Millennials. Nerdwallet, October 23, 2013. http://www.nerdwallet.com/
blog/investing/2013/73-retirement-norm-millenni
als/.
\52\ Akers, B. and Chingos, M.M. (2014). Is a Student Loan Crisis
on the Horizon? Washington, DC: The Brookings Institution. Egoian, J.
(2013, Oct.). 73 Will Be the Retirement Norm for Millennials.
Nerdwallet, October 23, 2013. http://www.nerdwallet.com/blog/investing/
2013/73-retirement-norm-millennials/.
\53\ Elliott, W., and Rauscher, E. (2018). When Does My Future
Begin? Student Debt and Intragenerational Mobility. Sociology Mind, 8,
175-201. https://doi.org/10.4236/sm.2018.
82015.
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student debt can diminish the return on degree
Research has consistently shown that children from lower-wealth
families are less likely to attend and complete college than their
counterparts.\54\ However, maybe even more damaging is the growing
evidence that suggests even when low-income and minority children do
the right things and earn a degree, the degree is not an equalizer.
Researchers find that bachelor's degree holders from low-income
families start their careers earning about one-third less than those
from higher-income families.\55\ Hispanic and Black American students
with a degree have less income and net worth than their White and Asian
counterparts.\56\ Furthermore, during the Great Recession, Black and
Hispanic college-grad families experienced wealth declines far greater
than White families without a college degree.\57\ This suggests that
having a degree provides less financial protection for Black and
Hispanic graduates.
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\54\ Pfeffer, F. (2015). How Has Educational Expansion Shaped
Social Mobility Trends in the United States? Social Forces, 94(1), 143-
180.
\55\ Hershbein, B. (2016). A college degree is worth less if you
are raised poor. Brookings Social Mobility Memos. Retrieved from http:/
/www.brookings.edu/blogs/social-mobility-memos/posts/2016/02/19-
college-degree-worth-less-raised-poor-hershbein.
\56\ Emmons, W.R. and Noeth, R.J. (2015). Why didn't higher
education protect Hispanic and black wealth? Retrieved from https://
www.stlouisfed.org//media/Publications/In%20the%20
Balance/Images/Issue_12/ITB_August_2015.pdf.
\57\ Ibid.
The unequal return on a degree suggests that strategies that focus
only on college affordability, even free college, will fail to achieve
some of our most cherished aspirations for education to fulfill its
role as an antipoverty strategy or equalizer. It also means that where
you start off in life matters and whether you have assets growing up
matters for the types of outcomes you will be able to achieve and for
whether education pays off equally for all. When it comes to investing
in higher education as a path to the American Dream of equitable
opportunity for all, then, ``free'' without asset building will fail to
reduce inequality.
how can student loan cancellation help?
Today, though, we see that we cannot articulate children's savings
accounts (CSAs) as mere ``complements'' to student loans, although we
still believe that it might, theoretically, be possible to build a
policy structure that incorporated both elements to some extent. In the
footprint of the current U.S. system, however, garnering the political
will and fiscal resources needed to catalyze national commitment to
children's asset-building must begin with a shared acknowledgement of
the failures of our student loan experiment, particularly as practiced
in the past few decades. In part, this need for a moment of reimagining
of financial aid from a debt dependent model to an asset building model
is fiscal and pragmatic, though it would have to happen incrementally,
as a long-term strategy.
The Federal Government must also recognize that it cannot simply
pivot away from the loans' central role in financial aid and pretend
that it then begins with a blank slate. Instead, in addition to a new
future direction, the Federal Government must also extend some help to
those harmed by debt-dependence (i.e., through loan cancellation
policies). Critically, if constructed correctly, loan cancellation
policies could not only help millions of American households escape
oppressive debt loads and the footprint left by their discharged debt
but could also improve families' asset positions. This should include
debt forgiveness on a wider scale than seen to date, with the objective
of ensuring that college leavers are out from underneath their debt in
time to build positive financial assets during the critical young adult
period. Simulations show that a progressive student loan forgiveness
policy would dramatically reduce the racial wealth gap among low-wealth
households. Eliminating student debt among those making $50,000 or
below, for example, would reduce the Black-White wealth gap by nearly
37 percent among low-wealth households, and a policy that eliminates
debt among those making $25,000 or less reduces the Black-White wealth
gap by over 50 percent.\58\
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\58\ Huelsman, M., Draut, T., Meschede, T., Dietrich, L., Shapiro,
T., and Sullivan, L. (2015). Less debt, more equity: Lowering student
debt while closing the black-white wealth gap. Retrieved from http://
www.demos.org/publication/less-debt-more-equity-lowering-student-debt-
while-closing-black-white-wealth-gap.
Acknowledging the difficulties students have faced in trying to
finance college safely with a flawed product, a thoughtful and fair
policy of debt forgiveness need not incur moral hazards (i.e., having
to once again forgive loans in the future). This is because enacting
student debt cancellation policies alongside a long-term plan to
prevent families from having to rely on loans to pay for college like
401Kids does, eliminates the need for future generations having to rely
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on loan forgiveness in the first place.
______
Prepared Statement of Adam N. Michel, Ph.D.,
Director of Tax Policy Studies, Cato Institute
Chairman Wyden, Ranking Member Crapo, and members of the committee,
thank you for inviting me to testify today.\1\
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\1\ The views I express in this testimony are my own and should not
be construed as representing any official position of the Cato
Institute.
Saving is an important foundation for economic growth, personal
well-being, and intergenerational support. When economists and
policymakers determine that an activity, like saving, is important, the
impulse is to encourage more of it. Today, I will urge you to first
address the places where the government makes it harder for individuals
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to save.
The tax code is a major impediment to savers. The income tax double
and triple-taxes investment income, discouraging Americans from putting
money away for their kids, their retirement, or their dream of opening
a business. The trillions of dollars the Federal Government spends on
social welfare programs each year also undermines incentives to save,
crowding out personal savings for government promises.
Thankfully, the tax code has many features, such as qualified
investment accounts and lower capital gains taxes, that reduce some of
the built-in disincentives to save. However, more work must be done to
simplify and equalize the tax code's treatment of savers.
Instead of subsidizing personal savings, Congress should simply get
out of the way. You could start by ensuring the 2017 tax cuts are made
permanent so American families and businesses can have the certainty
they need to plan and save for the future. Further reforms to the tax
code, such as universal savings accounts (USAs) and lower income and
capital gains taxes, would remove additional disincentives to save. Tax
cuts that are paired with cuts to spending programs that crowd out
personal wealth would be most effective at allowing Americans to save
for their own priorities.
Following pandemic-era stay-at-home orders and massive government
financial support, Americans accumulated $2.1 trillion in excess
savings (savings above the previous trend). As of March 2024, that
excess savings has been spent, and Americans are drawing down other
assets as savings rates are again historically low, solidifying a half-
century decline.\2\ Checks from the government fueled more inflation
than wealth building. Getting government policy out of the way is a
better way to reverse the decline in American's savings.
---------------------------------------------------------------------------
\2\ Hamza Abdelrahman and Luiz Edgard Oliveira, ``Pandemic Savings
Are Gone: What's Next for U.S. Consumers?'', Federal Reserve Bank of
San Francisco blog, May 3, 2024. https://www.frbsf.org/research-and-
insights/blog/sf-fed-blog/2024/05/03/pandemic-savings-are-gone-whats-
next-for-us-consumers/.
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the tax code double taxes savers
Traditional income tax systems encourage consumption over saving by
assessing multiple layers of tax on interest and investment returns.
Wages are first taxed by income and payroll taxes. Individuals then
choose to spend or save their after-tax income. Saved income is delayed
consumption, saved to be spent in the future--in retirement, for a down
payment on a home, to start a business, or to pay for education. A
saver's earned interest income or investment returns are what the
market pays to delay spending.
Under the income tax system, the increased value of investments is
often taxed again as interest, capital gains, dividends, and transfers
at death by the estate tax. The corporate income tax adds another layer
of tax on income earned from corporate equity investments. Taxing
investment returns reduces the market incentives to save by lowering
the payment to delay consumption. Proposals to tax unrealized capital
gains through mark-to-market taxes and wealth taxes would further
increase effective tax rates on saving.\3\
---------------------------------------------------------------------------
\3\ Chris Edwards, ``Taxing Wealth and Capital Income,'' Cato
Institute Tax and Budget Bulletin No. 85, August 1, 2019, https://
www.cato.org/tax-budget-bulletin/taxing-wealth-capital-income; and
Nicole Kaeding, ``Structural Questions Abound With New Mark-to-Market
Tax Proposal,'' National Taxpayers Union Foundation Policy Paper,
December 18, 2019, https://www.ntu.org/foundation/detail/structural-
questions-abound-with-new-mark-to-market-tax-proposal.
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saving and investment are key to growth
The level of investment is one of the three main components driving
long-run economic growth: capital investment, paired with labor
(workers), and technological innovation. When businesses invest in
capital, such as machinery, buildings, and factories, the economy can
be more productive, generating more goods and services using the same
quantity of labor. Since personal saving is an important component of
overall investment, additional personal savings will lead to a larger
capital stock and economy.
A tax base that equally taxes income from labor and capital creates
the smallest economic distortions. Such a tax is commonly referred to
as a consumption tax.\4\ When the income tax system lowers the after-
tax return to savings, more income is consumed immediately, and
entrepreneurs have fewer resources to invest in future technologies,
expand their businesses, and raise wages. The U.S. tax system mitigates
the worst of these effects through lower capital gains and corporate
income tax rates, as well as tax-advantaged savings accounts, but
additional reforms are needed.
---------------------------------------------------------------------------
\4\ N. Gregory Mankiw, Matthew Charles Weinzierl, and Danny Yagan,
``Optimal Taxation in Theory and Practice,'' Journal of Economic
Perspectives, Vol. 23, No. 4 (2009), pp. 147-174, https://
pubs.aeaweb.org/doi/pdfplus/10.1257/jep.23.4.147; and Alan J. Auerbach,
``The Choice Between Income and Consumption Taxes: A Primer,'' NBER
Working Paper No. 12307, June 2006, http://www.nber.org/papers/w12307.
---------------------------------------------------------------------------
qualified accounts reduce the double tax
One way the tax code reduces the income tax systems' built-in bias
against saving is through qualified savings accounts, such as employer-
administered 401(k) retirement accounts, Individual Retirement Accounts
(IRAs), and 529 plan education savings accounts. Qualified savings
accounts remove capital gains and dividends taxes from investment
returns, although the corporate income tax still reduces the investment
return. In the accounts, savers can purchase a wide range of stocks,
bonds, mutual funds, and exchange-traded funds, although rules vary.
Qualified accounts allow taxpayers to contribute tax-deferred
income (traditional accounts) or after-tax income (Roth accounts).
Contributions to traditional savings accounts are deducted from taxable
income so that income taxes are not due when the contribution is made.
For Roth accounts that receive after-tax contributions, no tax is due
at withdrawal. If the contribution and withdrawal are made while the
taxpayer is in the same tax bracket, the effective tax rate on an
investment in Roth and traditional savings accounts is identical.
Table 1 shows an illustrative example. Tom and Dan are both 30
years old, in the 24-percent income tax bracket, and want to save
$5,000 this year. Tom deposits $5,000 directly into his traditional
401(k) and receives a corresponding income tax deduction, saving him
$1,200 in taxes this year. Dan also saved $5,000 of pretax income this
year but did not deposit it in a qualified savings account and paid
$1,200 of income tax on his saved income. If Dan and Tom both earn the
same 7-percent rate of return for 30 years, Tom will pay about $9,800
in taxes when he withdraws the savings, leaving him with $31,000. Dan
only pays $4,600 in capital gains taxes when he sells his assets, but
because his original seed money was smaller, he is left with $26,400 in
after-tax savings ($4,700 less than Tom). Tom's marginal effective tax
rate is 24 percent, and Dan's is 35 percent.\5\
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\5\ This example builds on a similar work in Adam N. Michel,
``Universal Savings Accounts Can Help All Americans Build Savings,''
Heritage Foundation Backgrounder no. 3370, December 4, 2018, https://
www.heritage.org/taxes/report/universal-savings-accounts-can-help-all-
americans-build-savings.
Table 1. Qualified Accounts Lower Taxes on Saving
Tom Dan (savings
(traditional outside
qualified qualified
account) account)
Pre-tax contribution $5,000 $5,000
Income tax paid on contribution $0 $1,200
Value of account, year 1 $5,000 $3,800
Value of account, year 30 $40,831 $31,031
Income Tax paid on withdrawal $9,799 $4,655
After-tax value of savings $31,031 $26,377
Source: author's calculations.
Note: Calculations are based on an income tax rate of 24 percent,
capital gains rate of 15 percent, and a 7-percent continuously
compounded rate of return for 30 years. This is a simplified example
that does not account for discounting taxed in different time periods
and other timing complications.
Without qualified accounts, the income tax system increases the tax
rate on Dan's savings, discouraging him from setting money aside for
the future. All else being equal, Dan will save less for retirement
than Tom, and the broader economy will be poorer due to Dan's missing
contribution to the capital stock. Without protections from investment
taxes, the same is true for other types of savings.
Congress has created qualified accounts for several types of
savings:
Retirement: Employer-sponsored 401(k) accounts, IRAs, and
about 10 other types of accounts for special circumstances.
Education: 529 plans and Coverdell education savings
accounts.
Disability: ABLE 529.
Health care: Health Savings Accounts (HSAs). In addition to
the protection from capital gains and dividend taxes, HSAs are
fully exempt from income tax and payroll tax when distributions
are for qualified health expenses--sometimes called a triple
tax advantage.
universal savings accounts
The existing qualified accounts shield taxpayers from double
taxation, but they also come with income and contribution limits, age
restrictions, employer requirements, required minimum distributions,
and restrictions on what and when the savings can be spent. These rules
are enforced with additional tax penalties and regulatory hurdles
designed to increase the cost of accessing the savings for non-
qualified expenses. The complexity of this existing system and
penalties for mistakes discourage uptake, especially among young and
low-income savers for whom liquidity is most important. The
restrictions also act as an implicit subsidy for savings spent on
targeted activities, such as education and retirement.
To fix this problem, Congress could create a universal savings
account that would function similarly to retirement accounts--income
saved in the account would only be taxed once--but without restrictions
on who can contribute, when funds can be spent, or on what they can be
spent. Similar accounts have been set up in Canada, the United Kingdom,
and South Africa, where they are wildly popular, have increased
personal savings, and are used by people at every income level.\6\ In
2020, 40 percent of Canadian households contributed to a Canadian tax-
free savings account (TFSA)--almost 60 percent own a TFSA--and 51
percent of TFSA account holders earned less than Canadian $50,000
(about U.S. $37,000).\7\
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\6\ Ryan Bourne and Chris Edwards, ``Tax Reform and Savings:
Lessons from Canada and the United Kingdom,'' Cato Institute Tax and
Budget Bulletin No. 77, May 1, 2017, https://object.cato.org/sites/
cato.org/files/pubs/pdf/tbb-77-update-2.pdf.
\7\ ``Table 1C: TFSA Holders by Total Income Class,'' Government of
Canada, Canada Revenue Agency, last revised January 17, 2022, https://
www.canada.ca/content/dam/cra-arc/prog-policy/stats/tfsa-celi/2020/
table1c-en.pdf.
A similar reform proposed in President George W. Bush's Fiscal Year
2005 budget would have simplified the existing retirement system and
created a universal savings account, called a lifetime savings account,
that would have ``allow[ed] an individual to earn a tax-free return on
deposit amounts and withdraw the funds as needed without paying further
taxes and without facing a withdrawal penalty.''\8\ A small (annual
limit of $2,500) universal savings account passed the House of
Representatives in 2018 as part of the Family Savings Act.\9\ The
annual contribution limit should be at least $10,000 to ensure the
accounts can serve the majority of Americans' saving needs and could be
opened as custodial accounts for children to encourage saving in early
life.
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\8\ ``Promoting Prosperity, Expanding Opportunity,'' in Budget of
the United States Government, Fiscal Year 2005 (Washington: U.S.
Government Publishing Office), p. 33, https://www.gpo.gov/fdsys/pkg/
BUDGET-2005-BUD/pdf/BUDGET-2005-BUD-8.pdf.
\9\ Family Savings Act of 2018, U.S. House of Representatives,
115th Congress, (H.R. 6757), https://www.congress.gov/bill/115th-
congress/house-bill/6757.
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not everyone needs to save more
The appropriate savings rate varies significantly among individuals
and changes over the course of their lives. To the extent that
government savings programs go beyond removing disincentives to save,
they could make some people worse off. For example, default auto-
enrollment features and matching incentives may prompt some individuals
to save more than is optimal for lifetime financial needs. This over-
saving can reduce the resources available for current consumption or
lead to higher debt levels as individuals attempt to maintain their
lifestyles.
For instance, Andrew Biggs highlights the potential pitfalls of
automatic enrollment in State-level retirement saving programs. He
questions whether lower-income individuals--the target of the reforms--
actually need to save more for retirement, whether State-run auto-IRA
plans actually increase net household savings, and whether such plans
improve the financial well-being of the poor, especially when
accounting for interactions with means-tested government transfer
programs. Biggs concludes that ``the answer to all three questions may
be `no,' '' suggesting that savings incentives could leave some people
worse off.\10\
---------------------------------------------------------------------------
\10\ Andrew G. Biggs, ``How Hard Should We Push the Poor to Save
for Retirement?'', AEI Economics Working Paper, Updated October 2017,
https://www.aei.org/wp-content/uploads/2017/07/Biggs-WP.pdf; and Andrew
G. Biggs, ``How Much Should the Poor Save for Retirement? Data and
Simulations on Retirement Income Adequacy Among Low-Earning
Households,'' Presentation at ``Remaking Retirement? Debt in an Aging
Economy.'' Sponsored by the Pension Research Council/Boettner Center
for Pensions and Retirement Research, May 2, 2019, https://www.aei.org/
wp-content/uploads/2019/06/Biggs-Retirement-Saving-Goals.pdf.
Supporting this view, a study of the Federal Government's Thrift
Savings Plans found that automatic enrollment of Federal employees with
less than a high school education led to increased borrowing, likely to
compensate for lower take-home pay.\11\ A similar dynamic could result
from existing policies, such as the Saver's Credit, and proposed
policies, such as the saver match in 401Kids. Artificially induced
savings that incur additional tax penalties when accessed for non-
approved spending further reduce individual economic security and
wealth building.
---------------------------------------------------------------------------
\11\ John Beshears, et al., ``Borrowing to Save? The Impact of
Automatic Enrollment on Debt,'' The Journal of Finance Vol. LXXVII, No.
1 (2022), https://scholar.harvard.edu/files/laibson/files/
total_savings_impact_2017_12_06.pdf.
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government crowds out private wealth
Beyond the direct effects of the income tax system on personal
savings, social welfare spending can also displace individuals'
incentive to save.
Social Security likely crowds out the most private savings. Early
work from Martin Feldstein in the 1970s, corroborated and refined by
subsequent research, shows that each dollar of promised Social Security
benefits can reduce private savings by as much as 50 percent.\12\
Jagadeesh Gokhale, Laurence Kotlikoff, and John Sabelhaus find that
increased Social Security and Medicare benefits are significant factors
explaining the multidecade decline in the U.S. savings rate (which
declined from an average of 12 percent in the 1970s to 6 percent in
years before the pandemic).\13\ The lost private savings and resulting
smaller capital stock have likely placed significant downward pressure
on the size of the U.S. economy.\14\
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\12\ Congressional Budget Office, ``Social Security and Private
Savings: A Review of the Empirical Evidence,'' CBO Memorandum, July
1998, https://www.cbo.gov/sites/default/files/105th-congress-1997-1998/
reports/ssprisav.pdf.
\13\ Jagadeesh Gokhale, et al., ``Understanding the Postwar Decline
in U.S. Saving: A Cohort Analysis,'' NBER Working Paper No. w5571, May
1996, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3550.
\14\ Andrew G. Biggs, ``Social Security and Private Savings--Causes
and Effects,'' AEIdeas, September 17, 2009, https://www.aei.org/
economics/aging/social-security-and-private-savings-causes-and-effects/.
In addition to Social Security and Medicare, many other welfare
programs similarly reduce the incentive for Americans to save for their
own needs. The taxes necessary to finance these programs also reduce
the funds available to save. Chris Edwards and Ryan Bourne review
evidence showing that by crowding out private savings, and thus wealth
accumulation, welfare spending increases wealth inequality.\15\ It does
this by reducing the wealth of the lowest-income Americans who rely
most on the government alternative to private savings.
---------------------------------------------------------------------------
\15\ Chris Edwards and Ryan Bourne, ``Exploring Wealth
Inequality,'' Cato Institute Policy Analysis No. 881, November 5, 2019,
https://www.cato.org/policy-analysis/exploring-wealth-inequality.
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neutral, progrowth tax code is important for saving
Policymakers should work to remove existing government barriers to
saving and investment before considering new subsidies or transfer
programs. In addition to reforming and reducing spending programs that
crowd out wealth accumulation, Congress should build on the successes
of the 2017 Tax Cuts and Jobs Act (TCJA) by making it permanent before
the 2026 expiration and pursuing additional reforms.
The TCJA cut individual and corporate tax rates, made it easier for
millions of Americans to pay their taxes, simplified family benefits,
and overhauled the international tax system, among many other reforms.
As a result, the law increased the share of taxes paid by higher-income
taxpayers and successfully boosted economic growth, investment, and
wages.\16\
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\16\ Adam N. Michel, ``Protecting American Families from Higher
Taxes,'' Testimony, Committee on the Budget, United States Senate, May
17, 2023, https://www.cato.org/testimony/protecting-american-families-
higher-taxes.
Tax cuts can boost savings in two ways. First, allowing individuals
to keep more of their earnings gives them additional resources to save
and a greater incentive to invest in human capital, from which they can
keep more of the returns. Second, individuals will save more and
consume less if the tax cut increases the after-tax investment return
by cutting capital gains, dividends, estate, or business taxes. The
2017 tax cuts worked through both channels, cutting taxes for
individuals and reducing the after-tax cost of capital by cutting the
corporate income tax and allowing full investment deductions (full
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expensing).
Due to the structure of the 2017 tax cuts, the most economically
powerful incentives were for increased business investment, which can
be financed by domestic and foreign savings. Additional investment is
the primary channel through which the economy benefited from the tax
cuts, as businesses raised wages, added jobs, and produced more goods
and services. Kyle Pomerleau and Donald Schneider find that in the
years immediately after 2017, ``real GDP, consumption, business
investment, and payrolls grew more rapidly than expected.''\17\ Gabriel
Chodorow-Reich and coauthors report similar results. Using variations
in how the 2017 tax reform impacted different corporations, they found
that the tax cut ``caused domestic investment of firms with the mean
tax change to increase by roughly 20 percent relative to firms
experiencing no tax change.''\18\ Similarly, disposable personal
income, personal savings, and mortgage delinquency rates all improved
significantly for individuals in 2018 and 2019.
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\17\ Kyle Pomerleau and Donald Schneider, ``Making the Tax Cuts and
Jobs Act Permanent: Two Revenue-Neutral, Pro-Growth Options for Tax
Reform,'' American Enterprise Institute Report, updated April 8, 2024,
https://www.aei.org/research-products/report/making-the-tax-cuts-and-
jobs-act-permanent-two-revenue-neutral-pro-growth-options-for-tax-
reform/.
\18\ Gabriel Chodorow-Reich et al., ``Tax Policy and Investment in
a Global Economy,'' NBER Working Paper No. 32180, March 2024, https://
conference.nber.org/conf_papers/f191672.pdf.
The most progrowth tax changes must be permanent. Individuals and
businesses are always planning for the future and almost always, taxes
play a key role in their decisions. Thus, temporary tax changes have
little effect on long-term planning, savings decisions, or economic
growth. Making the TCJA permanent and continuing to cut tax rates by
reducing government spending and broadening the tax base would support
families, individual savings, and economic growth. With automatic tax
increases hanging over the economy, it is harder for individuals and
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businesses to save, plan, and invest.
______
Prepared Statement of Colleen J. Quint, President and CEO,
Alfond Scholarship Foundation
Chairman Wyden, Ranking Member Crapo, and distinguished members of
the Senate Finance Committee, my name is Colleen Quint, and I am the
president and CEO of the Alfond Scholarship Foundation located in
Portland, ME. Thank you for the opportunity to be with you today to
discuss children's savings accounts.
Children's savings accounts (CSAs) are restricted savings accounts
intentionally designed to help children save and build assets for their
future. They are usually automatically seeded with starter deposits
($50-$500) early in a child's life, most often at birth or at
kindergarten. Most CSAs are held in an ``omnibus'' account managed by
the State or the program--typically a 529 account--and funds are
accessed after age 18, when they can be used for restricted purposes
(e.g., postsecondary education and training). Families can save their
own funds, usually in an account they open that can be linked to the
omnibus account. These accounts build assets as well as a future
orientation for children and families.
With more than 121 programs in 39 States, children's savings
accounts are making a difference for children and families today, and
tomorrow. Nationally, over 5.8 million children in the United States
benefit from early investments towards future success.
Maine's CSA Program: Origins, History, and Milestones
Maine's CSA program, known as My Alfond Grant, is one of the oldest
and most established CSA programs in the country. We invest $500 at
birth for every child born a Maine resident, to be used for their
future education after high school. By the end of April 2024, we had
invested over $78 million for more than 156,000 Maine children. Perhaps
even more importantly, families have contributed greater than three
times that amount in their own funds. And when contributions from the
foundation and from families are combined with matching grants as well
as growth in the markets, it means a total of $477 million is at work
for these children and their future. (See below for a graphic showing
total invested dollars for the My Alfond Grant program).
We also have seen the ways in which our early investment builds
assets and spurs savings over time. The $500 that we invested at birth
is now worth $2,036 for the oldest of our grant recipients. For those
who have opened their own accounts and made contributions, the average
value of savings for their child's education is $11,581. The mean value
is $5,467. And, the median contribution this most recent quarter was
$255.\1\
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\1\ All figures as of March 28, 2024.
So, as exciting as the big picture is and as good as it is to know
that $477 million has been invested for these 156,000 Maine children,
it is also meaningful to think that for individual Maine families not
only has the Alfond Grant grown in value but also their own
contributions--even when modest--have helped build real assets to
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support their child's future success.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
The My Alfond Grant program is a legacy gift from Maine
businessman and philanthropist Harold Alfond. He recognized that
education after high school is key to keeping open doors of opportunity
for today's students. And his vision was that the program would have
both practical and aspirational benefits: real money for each Maine
child in an account, and the message to children and families that
their future matters. We also often think about the program as
operating at the micro and macro levels: it benefits individual
students and the paths they seek to pursue, and it also has a bigger-
picture impact by creating a more educated workforce and therefore
helping to secure the future prosperity of the State's economy.
Originally called the Harold Alfond College Challenge (HACC), the
first awards were made on a pilot basis to all children born at Maine
General Hospital in Waterville, ME in 2008. Then, the program expanded
statewide in 2009. During these first years of the program, it operated
on what is sometimes called an ``opt-in'' basis: families were required
to open a NextGen529 account (Maine's 529 plan) prior to the child's
first birthday in order to be awarded the $500 Alfond Grant. About
25,000 Maine families did just that. At its peak, annual account
openings represented about 35 percent of eligible children. This is a
strong outcome by many measures, yet fell far short of the goals of the
program of reaching and helping every Maine child.
After some internal conversation and exploration of various models,
in 2013 the program moved to an ``opt-out'' or ``universal'' model
through which all children born as Maine residents are now
automatically awarded the $500 Alfond Grant. There is nothing families
need to do to receive the grant. This important shift to automatically
awarding the grants was made because, ultimately, the Foundation wanted
to be sure that every Maine child actually had the Alfond Grant, not
just the opportunity to have it. At this time, the program also shifted
its name to My Alfond Grant (MAG) out of a desire to make a stronger
and more personal connection between grant recipients and the program.
In addition, we learned through parent interactions that the word
``college'' gave some families pause as it created a (false) assumption
that the grant could only be used in traditional, 4-year baccalaureate
programs. A new website, www.MyAlfondGrant.org, shares information and
resources with families throughout their child's life.
how maine's csa program works--administration
Three organizations are key to the workings and successes of the My
Alfond Grant program. The Harold Alfond Foundation (HAF) provides
funding for the program--both grants as well as operations. The program
is managed by the Alfond Scholarship Foundation (ASF), a Maine
nonprofit organization. And the Finance Authority of Maine (FAME), a
quasi-State agency, helps to administer the program and also
administers NextGen529 (Maine's 529 plan).
Approximately 12,000 babies are born in Maine each year (i.e., an
average of about 1,000 per month). Each month, FAME receives
information from the State's Bureau of Vital Records regarding births
of eligible children. FAME maintains the database of names, dates of
birth and contact information and reports an aggregate number of births
to ASF, which then coordinates with HAF on the funding of the grants.
Under our universal/automatic enrollment program in place starting
in 2013, all grant funds are deposited into an omnibus NextGen529
account that was opened and is owned by the Alfond Scholarship
Foundation. All children in any given monthly cohort (e.g., all babies
born Maine residents in January 2024) are awarded grants and invested
together as a cohort in ASF's NextGen 529 account. FAME then unitizes
the value of the $500 grant on the day the funds are invested in the
market, based on the value of funds that day and the number of children
in the cohort, and uses this unit value to track the value of the $500
grant over time for all children in each cohort. Funds are invested in
a Year-of-Enrollment sleeve within the NextGen529 Direct Series
Portfolio.\2\
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\2\ This is a relatively recent change. For most of the history of
the program, the funds were invested in an Age-Based portfolio within
the NextGen529 Direct Series. When NextGen transitioned from Age-Based
to Year-of-Enrollment portfolios in the Fall of 2023, all of the Alfond
Grant funds invested for each cohort were automatically migrated to the
new investment option.
Some details on the administration of the grants that may be of
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interest to the committee:
- Birth data is received on a trailing 3-month basis (e.g.,
information about babies born in January 2024 is sent to FAME
in April 2024) to ensure that the list does not inadvertently
exclude babies born at the end of the month or in other
circumstances such as home births that might mean their records
are not complete by month-end.
- FAME also adds 35 grants to the monthly total to account for
children who may likely be later identified as eligible but are
not yet showing on the birth data (e.g., the nearest hospital
is in another State, Mom serves in the military but Maine is
her home State for residency and tax purposes, et cetera). This
means that if a child is identified as eligible when they are,
say, 3 or 4 years old, their grant will have been invested at
the same time and in the same cohort as other eligible children
born in the same month and year--in other words, they are not
left out or left behind, and their grant is worth the same in
the market as their peers.
From the program's inception, we have used a 529 platform. There
are several reasons for this. First, we did not want to reinvent the
wheel and, given Mr. Alfond's goals around creating pathways for
success for individual students and a more educated workforce for the
State, 529s were the obvious and appropriate choice. Relatedly, we knew
that we would neither want nor need to build a large internal
infrastructure to manage the program and so contract with FAME--which
sits at the nexus between the My Alfond Grant program and the State's
529 program--to help administer it. Second, we wanted all children in
the program, including those from families who may have little or no
experience with investments, to be invested and have the benefit of
returns that would likely increase the value of that initial $500
through the power of the market. Finally, we wanted Maine families to
have the opportunity to learn how markets work and to see and
experience the power of compounding.
If and when families want to make their own contribution for their
child's future education, they open their own account. Because the seed
monies for the Alfond Grants are invested by cohort, there is not a way
to add money and allocate it to a specific child. Families are not
required to save. If families do decide to do so, they can use whatever
saving or investing vehicle is most appropriate for them. Many families
choose to open a NextGen529 account--in fact, about 35 percent of all
families with an Alfond Grant have taken that step. When they do so,
the Alfond Grant and the family's NextGen account are linked so that
everything can be seen in one place. And since families open their own
account, they are in full control of both the investment choices as
well as when and how the funds are used (in accordance with 529
regulations) in the account that they have opened. Importantly, this
also means that contributions can be made to the family-owned account
not just by parents but also by grandparents and other family members,
friends and community members, businesses and other philanthropic
organizations. This helps to build assets, and also a reinforces that
important motivator that ``someone else believes in my child and sees
them and their future as having value.''
Maine's 12,000 births annually and a $500 Alfond Grant for each
child means that the Harold Alfond Foundation funds about $6 million in
seed funds each year. This most recent fiscal year, another $1.3
million has been awarded by HAF to cover operating costs. The budget is
divided roughly into quarters: the administrative contract with FAME,
staffing at ASF (2.5 FTEs total), monthly and quarterly communications
to families, and marketing/communications/outreach/programs.\3\
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\3\ See below for additional description of monthly/quarterly
communications as well as general marketing, communications, program
and outreach efforts.
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how maine's csa program works--families and partners
At its core, the My Alfond Grant program has four key components:
awareness, engagement, aspirations, and family savings. For that $500
initial investment to make a difference--both as the child grows and
when it comes time to pursue education after high school--families need
to know their child has the grant. We also want them to engage with the
program by doing things like updating contact information and utilizing
the tools and resources we make available on our website. Raising
aspirations of Maine students in ways that encourage and support them
to pursue pathways to a future they are excited about is very much what
we are about. And, ultimately, getting families to take the step of
opening their own account and contributing their own money, even if
only modest amounts, gives them what Mr. Alfond would call ``skin in
the game.''
Throughout the first year after a child is born and awarded the
Alfond Grant, multiple communications are sent by ASF and by FAME.
Families receive congratulations cards and a contact card to complete
at hospitals, and these are resent to homes a couple of months later. A
``welcome kit'' that provides more information about the program and
how it works is sent to families at about 3 months. And then every
month or 2 after that some kind of email, postcard, or letter is sent
to get the program on the radar for busy families throughout the
child's first year of life.
Starting at about 9 months of age, we begin sending quarterly
communications. This is where we ``marry the message with the money''
and show the current value of the $500 grant and also share tips and
resources with families. Importantly, these quarterly communications
are designed to show a streamlined presentation of the current value
and change in value. If a family also has a NextGen account then any
contributions to that account as well as matching grants earned are
also shown. This provides families with current information about the
grant value as well as a regular update on the impacts of the market.
We view these quarterly communications as especially important
since they provide an 18-year platform for communicating information
about the grant, sharing tools and resources, and increasing financial
literacy.
With our oldest Alfond Grant recipients now in high school, we are
a few short years away from beginning to disburse the grants. When we
do so, they will go directly to the postsecondary institution to be
used for qualified education expenses. Before we get to that point, we
are building the partnerships and scaffolding to regularly connect with
students (and parents) as they chart their path after high school and
transition to whatever education or training they might pursue. Our
goal is to share information, tools and resources that will help
students think about their future, and how the Alfond Grant can be part
of their path towards the future they are building for themselves.
Please see below for illustrations of the Alfond Grant Update and
the Quarterly Summary sent four times each year to each family starting
at 9 months of age.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Sample Alfond Grant Update sent to Maine families with an Alfond
Grant (but no NextGen529 account), showing the current value of their
Alfond Grant and also sharing tips and resources.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Sample Quarterly Summary for Maine families with both an Alfond
Grant and a NextGen529 account, showing investments and change in
value, and sharing tips and resources.
Like many CSA programs, My Alfond Grant is by design a low-touch
model. With two and a half staff members and over 156,000 grant
recipients it has to be. This means that partnerships are a critical
part of how we reach and engage with families.
Hospitals share information about the grant with new parents and
encourage them to complete the Contact Card before discharge. ``We tell
families the Alfond Grant is the second best thing the bring home from
the hospital,'' says one Maine nurse. Head Start programs, libraries,
and others serving families with young children share information as
well--and to have families receive this information from a trusted
source helps to build both awareness and comfort with the program. We
routinely work with State agencies (Department of Education, Department
of Health and Human Services, Department of Labor) to train staff and
embed information about the Alfond Grant into the ways they work with
Maine families. Our tools and resources are developed with input from
the Maine Department of Education to ensure alignment with State
learning standards, and come with resource guides for teachers and
parents alike to encourage them to use the tools with their students/
children.
In addition, businesses across the State also support the effort by
offering payroll deduction for college savings. Over 100 Maine
businesses across sectors and geography have taken this step. Some even
also offer their own incentive grant (e.g., a one-time $100
contribution to an employee's NextGen529 account when they set up
payroll deduction) to encourage employees to take this step. Many
employers tell us that this kind of low-cost benefit sends a signal to
employees about their employer's interest in and support of them and
their families, which is highly valued in today's competitive
employment market.
what we have learned in maine
We know from both quantitative and qualitative research, as well as
direct conversations with families, that the Alfond Grant encourages
many Maine families to think differently about their child's future.
Seeing money in an account not only boosts parents' aspirations but
many also speak with us about what it means to them that someone else
believes in and values their child and thinks that their child's future
matters.
Given the opportunity and some additional scaffolding, even
families of more modest means are finding ways to save. We have found
that families with an Alfond Grant start saving for their child's
future when their child is quite young (many of them in the first few
years of a child's life) rather than waiting until middle school or
even high school which is more typical for those Maine families without
an Alfond Grant. With more money invested over a longer time period,
opportunities for financial growth as well as boosts to aspirations and
expectations are significant. Parents open accounts when they
themselves are younger, and grandparents often play a role in
supporting saving as well. And, we have found a somewhat broader
economic dispersion of those opening accounts than one might more
typically see with traditional 529 accounts.
Family Aspirations and Engagement in Their Child's Education
Our program regularly tracks aspirations of families with an Alfond
Grant and pays particular attention to how low-and-moderate income
families think about the Alfond Grant and their child's future. Our
biennial survey of parents with an Alfond Grant show us that while
there are some differences in how parents answer the question of
whether their child should continue their education after high school
based on household income, over 80 percent of parents believe their
child should continue. The differences are greater when asked if they
think their child will continue--where families in general maintain a
relatively high expectation that their child will continue, lower-
income families confidence level drops about 10 percent. Nevertheless,
parents report high levels of engagement with their child's education
and differences by income are quite small here.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Family Savings: Demographics of Those Opening Accounts (Calendar
Year 2023)
In the three charts below, you see data for NextGen529 account
opening for beneficiaries with an Alfond Grant (``Alfond'') and those
Maine accounts without an Alfond Grant (``Non-Alfond''). All figures
are from 2023 and are reported as percentages of the Alfond/Non-Alfond
categories account-opening by demographic filter.
Key take-aways:
- Parents with a child with an Alfond Grant open accounts at a
significantly younger age in their child's life, giving many
more years of opportunity for contributions to the account
(nearly 80 percent do so before the child turns 2).
- Parents with a child with an Alfond Grant open accounts when
they themselves are much younger (e.g., mid-20s to mid-40s)
thereby again providing more years with the opportunity to
contribute.
- Household incomes of those with an Alfond Grant opening
accounts are more dispersed that non-Alfond Grants.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Finally, some broader learnings from Maine's My Alfond Grant
program:
- Families want good things for their kids--and for kids to be
in the driver's seat for their own future.
- Seeing real money in a real account builds trust, raises
awareness and aspirations . . . and encourages families to take
the step of adding their own savings.
- Families are busy and it takes a lot of different
communications streams and messengers to get through--and
getting information from trusted messengers helps to raise both
awareness of and trust in the program.
- 529s provide an excellent, already existing platform to
support early investment for children. While some may see 529s
as problematic since their tax-advantaged savings most
typically appeal to and are used by moderate- and higher-income
households, they can be a good savings tool for families of a
variety of income levels. And, policy options to expand uses of
529s as well as to improve ease of account opening and of
contributions, could significantly contribute to 529s as an
excellent platform for a national early investment program.
In conclusion, Maine's children's savings account program (My
Alfond Grant) has already resulted in over $477 million in investments
to support the future education of 156,000 Maine children. More
children, and more dollars, come into the program every day. By making
these early investments--and by regularly communicating with families
both directly and through trusted partners--the program is having both
a practical and aspirational impact.
While the CSA field has grown dramatically in recent years, the
adoption of these programs has been driven by State and local actors.
This means that while many children have been reached, many have also
been left out. And, initial deposits are typically relatively small (at
$500 the My Alfond Grant program makes one of the larger investments in
seed monies to its grantees).
Senator Casey's proposed 401Kids Savings Account Act would make
substantial early investments in children using the existing 529
college savings platform--with extended reach and scope--to ensure that
every child in the country, not just those living in States or
communities with a CSA program, have access to the kind of early
investment that could yield significant benefits at individual,
societal and economic levels. We don't have to imagine what a national
infrastructure like that could do--we can see it already happening on
the ground. There's a saying in politics: ``As goes Maine, so goes the
Nation.'' Now there's an opportunity to see that in policy as well.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
The Finance Committee has a long, bipartisan tradition of working
together on issues related to helping people save. This morning's
hearing, with a focus on child savings accounts and other savings
programs for kids, is another opportunity for the committee to bring
fresh ideas forward.
There are a few key issues underpinning this discussion. First,
wealth inequality is still a big challenge. The gap between working
people and those at the top narrowed a bit when Congress passed major
economic rescue programs during the pandemic. But most of those
programs have expired.
Data from the Federal Reserve show that the wealth gap is getting
worse for young people who are paying more than ever for rent and
education.
Second, among young people in America, optimism is getting harder
to come by. A recent USA Today-Harris survey found that two-thirds of
Gen Z and three quarters of millennials believe they're worse off than
their parents were at a young age. They've got reason to feel that way.
A study by an expert group called the Equality of Opportunity
Project looked at how generations of Americans have fared economically
relative to those that came before them. Their research found that in
the middle of the last century, 90 percent of Americans out-earned
their parents. These days it's more like 50 percent--a coin flip.
People often say that getting an education is the surest way to
guarantee your future. But the reality is, young people today are
better-educated than ever before, and they're still finding it harder
and harder to get ahead. For those who aren't born into wealth, being a
young person in America today can feel like you're stuck underwater.
Congress must do more to change that.
There's big interest in using the tax code to help restore
opportunity for kids and young people. So this morning's hearing kicks
off our debate on the best ways to help people build their savings and
get ahead.
Child savings accounts are a proposal with enormous promise. We're
lucky to have a lot of champions for young people on this committee,
none bigger than Senator Casey, whose 401kids bill is really the gold
standard when it comes to child savings account proposals.
The idea behind them is, on Day One a newborn child automatically
gets an account with some seed money that grows over time. Later on,
with enough contributions, they're able to use it in a way that will
help them live out their own American Dream, whether it's getting an
education, buying a home, or starting a business.
These accounts are not some kind of radical, new idea. There are
more than 100 of these programs running in cities and States around the
country.
This morning the committee will hear about one such program in the
State of Maine. And these accounts are not all that different from
programs that already exist in Federal law, including 529s and
Coverdells.
In my view, this ought to be the kind of idea that's able to bring
Democrats and Republicans together. This committee has proven that
helping Americans save is a bipartisan priority. There's been a lot of
progress, but the numbers show that there's a lot more work to be done
making sure that lower-income families benefit too.
Child savings accounts can accomplish that in a few key ways:
first, by opening accounts automatically, which breaks down a barrier
that keeps too many Americans out of the financial system today; and
second, by starting them with seed money. All the evidence from
existing programs shows that that money not only unlocks opportunity
for kids, it's a smart investment that goes right back into our economy
down the road.
So there's a lot for the committee to discuss today. I'm looking
forward to working more with Senator Casey and the entire committee on
this issue. If you're looking out for kids in America and you've got
Senator Casey on your side, you're running with the right crowd.
I want to thank our witnesses for joining us today, and I look
forward to Q&A.
______
Communication
----------
Center for Fiscal Equity
14448 Parkvale Road, #6
Rockville, Maryland 20853
[email protected]
Statement of Michael G. Bindner
Chairman Wyden and Ranking Member Crapo, thank you for the opportunity
to submit these comments for the record.
Child Savings Accounts are a lovely idea, but only when families who
need and do not have adequate income for day-to-day living are taken
care of first. Without such income, CSAs are only useful for the middle
class. By middle class, we mean those who receive the middle third of
total adjusted gross income. Families with under $110,000 in AGI cannot
afford to save and many pay minimal taxes in the grand scheme of
things. There is not much tax to offset for those who earn the bottom
third of incomes.
Raising the minimum wage from a paltry $7.25 in many States to at least
$18 per hour will benefit this entire income class--as higher than
minimum wage employees will also receive more per paycheck, with
franchisees demanding renegotiated rates or a guaranteed minimum
salary. Congress can also require franchisers to adjust agreements to
make sure that small business owners are not stuck between a rock and a
hard place.
Even more important is an adequate and fully refundable child tax
credit. At the very least, the legislation passed by the House needs to
be passed by the Senate. The Minority cannot, in good conscience, favor
regulating abortion without providing for adequate funding for
families. Doing so would be the height of cruelty.
The level passed by the House could easily be doubled under our
proposal, provided the home mortgage deduction is ended, along with
Supplemental Aid to Needy Families, dependent care benefits under
Social Security survivors and disability benefits programs (thus
securing the program's long-term health) and the paperwork-
intensive Earned Income Tax Credit.
During the pandemic, the IRS managed CTC advance payments. This had the
``stink of welfare'' that even some Democratic Senators objected to,
which led to its discontinuance. We repeat our contention that, over
the long term, it would be more acceptable to distribute them either
through other government subsidies, such as Unemployment Insurance,
Disability Insurance, or a training stipend OR through wages.
For middle-income taxpayers whose increased credits are less than their
annual tax obligation, a simple change in withholding tables is
adequate. Procedures are already in place to deliver refundable credits
to larger families.
Employers can work with their bankers to increase funds for payroll
throughout the year while requiring less money for their quarterly tax
payments (or estimated taxes) to the IRS. The main issue is working out
those situations where employers owe less than they pay out. This is
especially true for labor intensive industries and even more so for low
wage employers. A higher minimum wage would make negative quarterly tax
bills less likely.
Tax reform can be used to facilitate this process. Instead of having
each family file to collect their child tax credits and EITC (as an end
of the year bonus), enact an employer-paid subtraction value-added tax
and make child tax credits and health insurance tax benefits an offset
to the payment of this tax and remove most families from having to file
taxes at all. Tax offsets could also be created to fund paid family
medical leave, sick leave, and childcare provided through employers.
Enactment of a Credit Invoice Value-Added Tax will make sure every
family pays something, especially wealthy individuals who dodge income
tax payments for themselves and their heirs by borrowing money against
their wealth rather than receiving it as income, taking advantage of
capital gains tax rules for the transfer of intergenerational wealth
and using insurance policies to do the same thing. Such a reform would
do more than offset a higher CTC. It will also help lower the deficit
by a significant amount.
Thank you for the opportunity to address the committee. We are, of
course, available for direct testimony or to answer questions by
members and staff.
[all]