America has long had a reputation as the land of upward mobility and equal opportunity. In recent decades, however, the United States has scored lower on measures of social mobility than many other economically advanced countries. This decline in upward mobility is driven by a stark inequality of opportunity early in Americans’ lives.
Regardless of their merit, many Americans often don’t have access to the opportunities they need to succeed, or must pay a heavy price for the same opportunities that their wealthy peers often get at no cost. Young adults from disadvantaged backgrounds might lack assistance paying for education without relying on burdensome debt or generous scholarships, struggle to secure well-paying job opportunities and professional connections, or be unable to rely on family help to cover emergency costs.
Compounding the problem is a low level of financial capability, also known as financial literacy. According to a survey by the Global Financial Literacy Excellence Center, respondents could give correct answers to a set of basic financial questions about saving and investing only 48% of the time. Financial literacy is especially low among the young, who have little experience with financial decision- making. This makes them particularly prone to making poor financial decisions early in life, which can set them back for years. Put together, unequal access to opportunity combined with low levels of financial literacy limit social mobility for children in low-income families.
As a result, many Americans remain stuck on the lower rungs of the economic ladder through no fault of their own. Remedying this inequality is not merely a moral problem, but an economic one. Talent is more evenly distributed than opportunity. Amongst the millions of Americans who lack promising opportunities or financial stability could be the founder of the next great American company or a scientist behind the next medical breakthrough. All young Americans should have the opportunity and habits to build a successful and financially stable future for themselves.
Child Development Accounts (CDAs) are one potential tool to address these problems. CDAs are accounts designed to help children and their families, especially low- and middle-income ones, build wealth for the future. Countries around the world, such as Singapore and Israel, have long had formal CDA policies. Several U.S. states, including Oklahoma, Maine, and Rhode Island, have also pioneered their own programs and found some success in improving opportunity and financial literacy for participants. There are also many proposals to establish CDA-like accounts at the federal level, the most prominent of which is a “baby bonds” proposal sponsored by Senator Cory Booker and Congresswoman Ayanna Pressley. However, as detailed more throughout this report, this plan is expensive, relies on accounting gimmicks to create the false appearance of wealth creation, and does little to help children build financial capability to grow wealth on their own.
PPI proposes instead to create “Child Opportunity Accounts” (COAs) that would better promote equal opportunity, self-sufficiency, and financial capability for all children. As the first section of the paper explains, these accounts would be universal: every child would receive an account at birth with a $700 balance, automatically invested in a diversified investment vehicle. Then, every year on the child’s birthday up to their 16th birthday, the government would make additional contributions of up to $700, depending on a household’s income. The universal provision of accounts provides all children a shared educational experience building wealth at relatively low cost to taxpayers, while the means-tested annual contributions ensure the most financial assistance goes to children whose parents would otherwise struggle to give them the same “starting capital” in life as their wealthier peers.
The next section focuses on how the accounts would help children and parents acquire the financial understanding and habits to effectively manage their assets. To help young Americans build financial capability, information about important topics would be embedded into the access portals for the accounts, and account holders would be required to pass a financial literacy assessment before accessing their funds at adulthood. This financial education can occur both in formal classroom settings and via informal family socialization.
This report then examines how account holders can use their COA savings to pursue opportunities, laying out allowable uses for withdrawals and guardrails to ensure they do not exhaust the account balance too quickly. Young adults would be permitted to withdraw up to 25% of the balance per year between ages 18 and 25 to use for a number of “qualified uses,” including education, health care, starting a business, a down payment for a house or car, select moving expenses, and/ or saving for retirement. Once they have reached age 25, account owners would be able to withdraw the remainder of the funds without adhering to the 25% limit. The report also explains how COAs can help establish a civic compact for America’s youth that reinforces their responsibility to positively give back to the nation, rather than merely acting as a new entitlement.
Finally, PPI offers several fiscally responsible options to pay for these accounts, so that the wealth they build for young Americans won’t be canceled out by a higher public debt burden that they will be forced to service. One particularly fitting pay-for, which PPI detailed in another major report last month, is reforming the taxation of inheritances. This pair of policies would work in tandem to equalize opportunity by taxing the birthrights of people born in the richest 1% of households to give every American child a birthright of their own. And unlike other welfare schemes, this combination of policies would neither give handouts to adults who could otherwise have earned the money themselves nor confiscate a single penny that someone earns through their own hard work to pay for it.