How Generation Accounts Can Secure College Dreams and Close the Racial Wealth Divide
In my book, A Few Thousand Dollars: Sparking Prosperity for Everyone, I propose a system of Generation Accounts to raise educational outcomes, close the racial wealth divide and fuel economic development throughout lifespans and across generations. The promise of Generation Accounts is grounded in an evolving understanding of children’s savings accounts (CSAs), which are now primarily a tool to help children accumulate savings for college at a very young age through initial deposits and incentives to make regular contributions.
In 2005, as part of the Saving for Education, Enterprise and Downpayments (SEED) Initiative, we asked Democratic and Republican focus groups what they thought of universal progressive children’s savings accounts (CSAs), the use of which were left open. Both groups approved of CSAs, and, in fact, preferred a candidate who supported CSAs over one who held all the standard partisan positions but did not support the accounts. However, when we asked participants why CSAs were important, they could not tell us, and support collapsed in the face of other priorities.
It soon become clear that the most obvious use of child accounts was to open access to postsecondary education. Of course, postsecondary education had been one of the three central uses of Individual Development Accounts, with the cost of college constituting a major barrier for low-income kids and families. While the use of CSAs was left open to a full range of asset-building uses, as the SEED acronym acknowledged, account programs became focused on college savings.
Since then, CSAs have gained considerable momentum outside of SEED. Dozens of CSA programs have sprung up across the country, and public, statewide CSA initiatives are emerging as well. More than 400,000 progressive accounts are open in 43 states. However, the size of initial deposits and incentives has shrunk, leading many to question the effectiveness of CSAs.
To that end, William Elliott, Professor at the University of Michigan, produced arguably the most potent finding in the development of the CSA field: Poor children with CSAs in their own name were three times more likely to attend and four times more likely to graduate college—even with less than $500 in their accounts. The finding reinforced the emerging field and cemented a new rationale for child accounts: their importance was as much psychological as financial. Accounts raised and established the expectation of attending college—an expectation that became a self-fulfilling prophecy.
Soon, the field began to recognize closing the racial wealth divide as perhaps the highest calling of child accounts. The idea that innocent children should start out equal and deserving of support—coupled with the power of compound interest and time to multiply the value of deposits at birth—further cemented the role of universal, progressive and substantial child accounts as a way of addressing the racial wealth divide and generating equity over generations.
Darrick Hamilton, Professor at the New School University, and Sandy Darity, Professor at Duke University, have proposed accounts knows as “Baby Bonds” of as much as $60,000 to $80,000 at birth to close the divide. A racial wealth audit by the Brandeis Institute on Assets and Social Development suggested that such large child accounts might shrink the racial wealth divide by 40 to 80 percent. William Elliott and Melinda Lewis, Professor at the University of Kansas, have proposed similarly hefty Opportunity Investment Accounts with purposes beyond education.
My proposal for Generation Accounts builds on all these ideas. Every child born in the country would be provided an endowment and a savings match on a sliding scale during the first five years of life. The poorest fifth of kids would receive $2,500 a year as a lump sum deposit and a four to one savings match in each of their first five years, leading to a possible accumulation of $25,000 by age five, which could double to $50,000 by age 18.
The endowments and match rates would step down for each wealthier quintile. This new foundation for lifetime opportunity, education and development could be funded through death taxes—the restoration of the estate tax to at least the levels of the early 2000s and the elimination of the stepped-up basis of capital gains at death. Instead of subsidizing only the inheritances of the lucky few, Generation Accounts would provide an inheritance and a future to all kids, and all future generations.
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