Cash on delivery

The movement to give every American a trust fund at birth

Supporters of government-created trust funds compare them to other broad asset-building programs like the GI Bill and the Homestead Act of 1862, in which families could earn a piece of land by settling it. (MPI/Getty Images)

TRUST FUNDS, IN the popular imagination, go along with Park Avenue addresses, weekend jaunts to Paris, and summer as a verb. Like a private SAT tutor or a boarding-school diploma, a trust fund symbolizes the enormous edge enjoyed by the rich before adulthood even starts.

But a growing movement argues that every baby should be a trust fund baby: a modest trust fund should be a basic right, like education and adequate nutrition. By opening a savings account for every American newborn, the thinking goes, the government would give all citizens a foothold in the financial system, as well as access to a nest egg, however small.

In the most commonly promoted version of the plan, the government would contribute an initial deposit at birth, with low-income families receiving a supplement. The family could add to the fund, which would accrue interest tax-free, and the government would offer some matching incentives. At 18, the accountholder could begin to withdraw money for higher education, homeownership, and eventually, retirement.

As proponents see it, universal trust funds, or children's savings accounts, would confront major issues that current policy fails to address. They would foster a culture of saving in an era when the rising price of important goods, such as college, has made assets increasingly crucial to achieve the good life free of indebtedness. They would work against the rampant debt that has contributed to the current financial crisis. And they could help remedy the overlooked problem of wealth inequality, or disparity in assets, which dwarfs even the income gulf between rich and poor.

For the poor, income is necessary to survive, but to escape poverty - to attain education and financial security, to plan ahead and provide offspring with prospects - assets are essential. Social scientists have even identified an "asset effect": owning an asset, whatever the size, appears to impart a greater sense of control and confidence about the future.

"We've structured social welfare spending as a get-through-the-month idea," says Michael Sherraden, director of the Center for Social Development at Washington University. Children's savings accounts, by contrast, would make headway on a more ambitious goal, he says: "How do you develop personal and household capacity over the long run?"

Sherraden's center, along with the Washington-based think tank the New America Foundation, is studying and promoting the idea in the US and around the world. The initiative has attracted the support of powerful Democrats such as Joe Biden, who advocated it during his presidential campaign, and Rahm Emanuel, who as a congressman pushed relevant legislation in the House. But its appeal cuts across ideological lines: prominent conservative fans include the columnist David Brooks and former senator Rick Santorum, who find it compatible with notions of an "ownership society."

In the past few years, children's savings accounts have started to be implemented in practice. A philanthropic foundation is working to open a trust fund for every child born in Maine, and Oklahoma is conducting a pilot project to test the idea. Multiple bills in Congress have recently proposed variations of the program. In the UK, a policy is in full swing: every child born after September 2002 has received a Child Trust Fund account with a small government contribution. Other nations, such as Singapore, South Korea, and Canada, have begun similar experiments.

A few liberal critics have expressed concerns that the idea represents a step down a slippery slope toward a privatized social safety net. Others worry that it will divert money from under-funded programs like Head Start or primary education. Conservative opponents, meanwhile, see it as another expensive government outlay that would add to the already massive bill for entitlements like Social Security and Medicaid.

"All you're doing is borrowing from the future and giving to the present," says Michael Tanner, a fellow at the Cato Institute, who has studied the idea.

In certain ways, now may be an inopportune time for this policy. The government is already committing to an immense stimulus package, and the consensus is that spending at the household level, not saving, is needed to reinvigorate the economy. Furthermore, the sudden drop in the value of investments over the past several months has made some kinds of assets look distinctly less appealing.

But in the long run, supporters contend, saving is exactly what Americans need to do to avoid future financial disasters - or to cushion themselves in the event that they occur. As of now, some say, there is a serious problem with the way most Americans approach money. Universal children's savings accounts could begin to change that approach, reviving, to some extent, the more prudent and farsighted ethic of our forebears.

"One of the lessons of the current crisis is that there are limits on what we can borrow," says Ray Boshara, director of the asset building program at the New America Foundation. "We need to start saving again as a nation. The only way to do that is to start with kids."

Universal trust funds might sound radical, but the government has been in the business of helping Americans build their assets for decades. The popular mortgage interest deduction, for example, is a way to steer people toward homeownership instead of renting. And starting in the early 1970s, a series of tax-advantaged accounts has been introduced to encourage saving - IRAs and 401(k)s for retirement, 529 plans for college tuition.

These plans, however, chiefly benefit the middle class and the wealthy. The unemployed, or fast-food workers, will not be offered 401(k)s. And since low earners pay little or no income tax, they don't benefit from tax-deferred savings. In some cases, public policy has even discouraged the poor from saving money by limiting the assets they can accumulate while remaining eligible for public assistance. (Widely recognized as perverse, many of these rules have been modified in recent years.)

In the mid-1980s, Sherraden began to realize how much an asset-building plan might help the poor. Trained in social work and psychology, he had been investigating the welfare system, and through conversations with recipients found that the minority of the poor who manage to pull themselves out of poverty do so by building assets - by saving and investing in education, property, small businesses, and other enterprises. He and his colleagues proposed various kinds of accounts for low-income people. One innovation, which sparked a number of small-scale demonstration projects, was government-matched savings accounts for the working poor to save toward a particular asset, such as college or homeownership. Another brainchild - more ambitious and slower to catch on - was the vision of universal trust funds.

Today, the problems of wealth inequality are even more acute than when Sherraden started his research. According to a recent paper by the Joint Center for Housing Studies at Harvard, in 2004, the top quartile of households held 87 percent of the nation's wealth, while the bottom quartile, taking debt into account, had no assets at all. An estimated 20 percent of Americans do not even have bank accounts.

Trust funds starting at birth, Sherraden and other supporters say, could help to redress these imbalances. They would accrue interest for years before they could be used, creating wealth and providing a shelter for any money the family added. While it may seem wasteful to offer them to the wealthy as well, universal social programs have a history of greater stability and popularity than those targeted strictly at the poor.

Perhaps the most important philosophical argument for universal trust funds is basic fairness. Americans are willing to accept unequal outcomes, Boshara says, but "We all believe in equal opportunity." Bruce Ackerman, a professor at Yale Law School and coauthor of "The Stakeholder Society," says that these accounts shouldn't be considered charity for the less fortunate, but rather the "citizen's inheritance" of a prosperous nation. Every American, he says, deserves to benefit from the efforts of previous generations. "The schoolteacher, the policeman build this country as much as the stockbroker," he says. He calls this ideal the "polar opposite" of Republican efforts to eliminate the estate tax.

In his support of children's savings accounts, Boshara compares them to other great American policies such as the 1862 Homestead Act, which gave 160 acres to anyone willing to live on the land and work it for five years, or the 1944 GI Bill, which sent veterans to college and helped them buy houses. These programs, Boshara has written, "equalized the distribution of wealth in America - not by punishing the rich but by expanding opportunities and the ownership of assets."

In the modern economy, another argument for the accounts is their educational value. According to Barbara Butrica, an analyst at the Urban Institute in Washington, the accounts would serve as a tool to help children understand the basics of personal finance. Once every student had an account, schools would be likely to incorporate financial literacy, now woefully lacking, into their curricula.

The goal of simply connecting all Americans to the banking system may seem humble, but, according to some proponents, providing that infrastructure is a crucial step. "If you put the platform in place, people will save," says Fred Goldberg, former commissioner of the IRS, who strongly supports the idea.

Some critics characterize the idea as well-intentioned but misguided. In a paper for the Cato Institute, Michael Tanner and Jagadeesh Gokhale estimated that accounting for population growth, it could cost as much as $266 billion over the next 75 years. They wrote that such a policy could have unpredictable and unwelcome repercussions - for instance, causing parents to save less and consume more of their own money. Others question whether the savings would really add up to meaningful capital. Although Butrica supports the policy for its instructional value, her research suggests that the assets would likely fall far short of the amount needed for the intended purposes.

Still, in recent years, growing numbers of academics and policymakers have taken an interest in the idea of children's savings accounts. In 2005, the UK introduced the first universal policy, opening these accounts for every child born after September 2002. Following a birth, the family receives a voucher worth 250 pounds (double that for low-income families), supplemented with more when the child turns 7. Family and friends can also contribute to the account. The money is locked up until age 18, at which time it can be withdrawn and used without restrictions.

In the US, the most prominent legislation so far has been the ASPIRE Act, originally co-sponsored by Senators Rick Santorum and Jon Corzine, which has been introduced in each of the last three Congresses. The bill would spend $38 billion over a decade to give each child a $500 deposit at birth, with more available for children living in households with incomes below the national median, including annual matching funds for family contributions. The money would eventually be channeled to post-secondary education, a first home, or retirement. The bill's sponsors estimate that if the family takes full advantage of the matching opportunities, an accountholder could have an account worth at least $20,000 by age 18. The bill has not yet made it to a vote, but according to Boshara, who helped craft it, it will be reintroduced this year.

The idea has also begun to be implemented on a smaller scale, with private funds. The founder of Dexter Shoes in Maine, who died recently, left instructions to open a college savings account for every child born in Maine with his foundation's money. As of January, every child born in the state is eligible for an account with a $500 deposit.

In Oklahoma, Sherraden's center is affiliated with a pilot project in which more than 1,000 randomly selected newborns received "seed accounts" with a $1,000 initial deposit invested in a mix of stocks and bonds. The family is eligible for some matching money, depending on income. At 18, the accountholder will be able to use the funds for higher education. The project, funded primarily by the Ford Foundation, started in 2007, and the beneficiaries will be monitored to see if the accounts increase their likelihood of attending college.

"The way to break the cycle of poverty is through education and asset accumulation," says Scott Meacham, the Oklahoma state treasurer. "This touches on both."

The power of savings to break the cycle of poverty may also be partly psychological. Rajiv Prabhakar of the London School of Economics, author of "The Assets Agenda: Principles and Policy," says that owning an asset "causes people to think differently about the world - to plan for their own future, to take responsibility."

Research by Columbia University professor Fred M. Ssewamala indicates that assets lead to a lower propensity to engage in risky activities. Other research, published by the British Institute for Public Policy Research, suggests that simply having an asset - any asset - at a young age makes people less likely to get divorced or to smoke later in life. These effects appeared to be largely independent of income and even the size of the asset.

In recent months, better-off Americans have seen their 401(k)s and other investments deteriorate, a sobering sight for supporters of asset accumulation - although bank savings accounts have been safe. "You get some abrupt disruptions like you have right now," acknowledges Sherraden. But, in his view, the greater risk is that more than half the population doesn't have a 401(k). "Let's put everybody in the same game."

Rebecca Tuhus-Dubrow is a contributing writer for Ideas. She can be reached at rebecca.tuhusdubrow@gmail.com.