Granting every child a $500 investment pot at birth fulfils a number of goals, says Jon Corzine. It encourages investment and extends equal opportunity
A new proposal is at hand that promises to redraw the landscape for national savings in America. Not only will it revolutionize the investment habits of young adults, it will also help boost the economic growth so urgently needed to tackle the impending burden of the retiring baby-boom generation. What’s more, its implications are potentially far-reaching: it could advance similar efforts around the world to grant equal opportunity to all.
The central idea of the so-called ASPIRE (America Saving for Personal Investment, Retirement and Education) Act, introduced by senator Rick Santorum and myself last July, is to set up investment accounts, or KIDS accounts, for every child in the country. Making every young person an investor in this way extends the basic value of equal opportunity. The proposal would also encourage self-reliance, promote savings and give every family a personal stake in America’s economy.
The potential impact of granting every child in the country a funded investment account is enormous. For the first time, everyone will have a meaningful incentive to learn the basics of investing, because he or she will have real resources to invest. Even families with modest incomes will have a significant incentive to save, to earn the government match. Most important, upon adulthood every child will have the ability to invest in themselves and in their own education.
This idea is based on values shared throughout the world. For example, Tony Blair, the British prime minister, recently implemented a similar initiative (Child Trust Funds) in the United Kingdom, and other nations, including Singapore, Australia and Canada, have also explored or implemented the concept in some form.
Under the act, an investment account would be established for every American child upon receiving a Social Security number. Each account would be funded initially with $500. Those with incomes less than the national median would receive an additional contribution of up to $500, and would receive a one-for-one government match for their first $500 of private contributions each year, up to a limit of $1,000 pre-tax.
Funds for education or home
Funds would accumulate tax-free and, when the child reaches the age of 18, they could be withdrawn either for higher education or for the purchase of a home. Unspent funds would be saved for retirement under rules similar to those that apply to individual retirement accounts (Roth IRAs). Once the account holder reaches the age of 30, the initial $500 government contribution would be repaid, though exceptions could be made.
Initially, accounts would be held by a government entity based on the successful Thrift Savings Plan, or TSP, which manages retirement accounts for federal employees. As with the TSP, investors would have a range of investment options, such as a government securities fund, a fixed income investment fund and a common stock fund. However, once an account holder reaches the age of 18, funds could be rolled over to a KIDS Account held at a private institution.
Considering its potentially significant social and individual benefits, the act requires a relatively modest investment. The bill’s cost would be only about one-tenth of 1% of the Federal budget. Yet the proposal differs from other proposals for new spending or tax cuts because, for the first 18 years, it would not reduce overall national savings at all.
Boost for economic growth
In that period, virtually every dollar of outlays would be saved, and would be available to expand long-term economic growth. In fact, the proposal would lead to an increase in national savings because of its incentives for families to save more. This would help create the economic growth we need to handle the added burdens associated with the impending retirement of the baby-boomers.
KIDS accounts would maintain America’s long tradition of promoting the middle class by broadening asset ownership. In 1862, the Homestead Act provided 160 acres (65 hectares) to anyone willing to work the land for five years, and today nearly one-quarter of all adults have a legacy of asset ownership traced directly to that Act.
In the 20th century, the GI Bill expanded opportunities for homeownership and higher education so successfully that it has returned up to $7 for every dollar invested. In the more global and dynamic 21st-century economy, America needs a comparable initiative to ensure all children have the financial assets to succeed.
We have been working on this legislation for many months, along with sponsors of identical legislation in the House, Congressmen Harold Ford, Patrick Kennedy, Thomas Petri and Phil English. We have been assisted by a range of experts and interested parties.
We are hopeful that those with an interest in the proposal will review the language of the bill and give us feedback in the coming months. We are open to suggestions for improvements and expect to introduce a revised version of the legislation in the next Congress.
The ASPIRE Act is a bold new idea based on simple, old-time values. It already enjoys strong bipartisan support from conservatives and progressives alike in both houses of Congress. I am hopeful that it can be enacted promptly, and that our efforts will further promote similar initiatives around the world to enhance financial literacy, increase saving and broaden opportunities for all individuals.
Senator Corzine is a Democrat from New Jersey.