Children’s savings accounts were designed to improve social mobility, but do they work?
Encouraging low-income families to squirrel away money for their children’s future sounds like a great way to help kids achieve financially stability. But children’s savings account programs may not be doing much to level the playing field for people of color in the U.S.
A new report from Prosperity Now (formerly the Corporation for Enterprise Development), a nonprofit based in Washington, D.C., said many children’s savings accounts or CSAs are ineffective at addressing the racial wealth gap.
“CSAs, as currently constructed, do not provide the incentives necessary to bridge the racial wealth divide or even significantly strengthen the wealth of most communities of color,” the researchers wrote.
What are children’s savings accounts?
Children’s savings accounts (CSAs) are long-term savings or investment accounts, most commonly used for a college education. The accounts typically provide incentives for participation, including initial deposits and savings matches.
Currently, 382,000 children in 32 states and the District of Columbia are participating in one of the 54 CSA programs in operation across the country. Funding for these programs comes from a variety of sources, including community foundations, individual donors, businesses and state, local and federal agencies.
More than half of the country’s CSA programs use a 529 plan as their savings account product, according to Prosperity Now, while other programs use bank and credit union accounts.
For instance, money saved through the Nevada College Kick Start CSA program is invested in an SSGA Upromise 529 Plan. The five-year average return on Nevada’s 529 plan varies from 0.64% for a cash savings account to 14.65% for those who invest the money in a specific ETF portfolio. Some of the investment options available to families through the SSGA Upromise 529 plan have also experienced negative returns.
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The difference between CSAs and 529s
Though many CSA program use 529 plans, the two are quite different. CSAs provide incentives to persuade participants to build savings more quickly. With 70% of CSA programs, the program’s sponsor will make the initial deposit into the savings account, according to Prosperity Now. Other incentives include savings matches where the sponsor matches money that families deposit into their accounts (52% of programs) and benchmark incentives where families are rewarded for meeting certain goals (43%).
A 529 plan meanwhile is simply a tax-advantaged savings plan for education-related costs, and they are typically sponsored by a state, a state agency or an educational institution.
Access to these savings accounts is uneven
As Prosperity Now’s report explains, these savings have some clear benefits. They have been demonstrated to improve social-emotional development among children and reduce stress for parents. Other research has suggested that they are effective in shrinking the college savings gap between low- and higher-income students.
But not all children have equal access to these programs. For starters, more than half of the children in these programs (51%) are white, according to Prosperity Now’s research. But only 35% of children in low-income families are white, according to data from the National Center for Children in Poverty.
Meanwhile, Latino and black children are under-represented in these programs relative to the shares of the country’s population of children in low income families. Latino children represent 27% of CSA participants, yet they represent 36% of children in low-income families. Similarly, while black children represent just 11% of CSA participants, they account for 20% of the children living in low-income households.
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The skewed demographics are in part a reflection of the size of a small number of programs. For instance, Nevada College Kick Start has 170,000 children participating, which constitutes 44% of CSA participants nationwide. And 42% of children in the Nevada program are Latino.
Moreover, wealthier families are far more likely to have a savings account for their kids, according to a 2012 U.S. Government Accountability Office report.
That unequal access to savings makes these programs an ineffective method of shrinking the racial wealth gap, the Prosperity Now researchers wrote.
How children’s savings accounts could address the racial wealth gap
Hope is not lost: Prosperity Now identified key ways that children’s savings account programs could be changed to benefit more low-income and minority families.
For starters, researchers argued that programs should move away from the opt-in model. Currently, roughly three-quarters of CSAs use opt-in enrollment systems, meaning that parents and guardians must actively seek out the programs and sign their kids up to get the benefits.
But studies have shown that low-income and immigrant families are less likely to be aware that these programs exist in the first place, which means fewer children from these households participate.
Additionally, researchers argued that programs should have larger initial seed deposits. Generally to have access to that money, families must then deposit their own funds into the account. The most common initial seed deposit today is $ 50, which Prosperity Now attributed to the lack of funding these programs receive.
That small of an initial deposit, Prosperity Now explained, isn’t enough to put a significant dent in the racial wealth gap. “To help CSAs have an identifiable impact on communities of color facing deep racial wealth inequality, policymakers should establish CSAs with larger initial deposits or greater wealth transfers,” the researchers wrote.
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‘Baby bonds’ could help close the gap
In particular, the researchers suggested that “baby bonds,” means-tested programs that give hundreds or thousands of dollars to low-income families could help make CSAs more impactful for these families.
One proposal of such a program envisioned giving babies born in the U.S. an average of $ 20,000, which they wouldn’t have access to until they turned 18. Former Democratic presidential candidate Hillary Clinton advocated for a federal “baby bonds” program during her presidential campaign, though she suggested a more modest amount of $ 5,000 per child to start.
Saving for college isn’t always the best financial move
Currently, most CSA programs require that the children put the money toward a college education even though the money in these accounts is likely not enough to cover the entire cost of a college education. Experts suggest making them more flexible.
In fact, some student advocates point to studies that say student-loan debt actually exacerbates the racial wealth gap because students of color must disproportionately rely on loans to pay for college.
Even for those who can afford to go to college, the benefits aren’t equal for all graduates: As Prosperity Now points out, black college graduates between the ages of 22 to 28 are twice as likely to be unemployed as their peers.
Therefore, researchers argued that the returns on college education must be equalized. And until then, they argued that saving account holders should be able to use the assets they build up in other ways that can improve the holder’s wealth, such as buying a home.