A very interesting initiative to promote savings is coming out of the White House.
Starting every child out with an initial deposit may sound like a good idea, and it is one that should be explored a little closer.
While setting up every baby with a savings account could foster savings growth, the reality is low interest rates minus inflation will not create a great return or growth of capital. In addition, the cost of money needs to be understood.
These free accounts being funded by the Government are being seeded with money that the Government Borrows (carrying an interest cost), thereby reducing the returns that are generated.
While saving since birth is a great idea and add up to a significant amount over time (use our annuity calculator to calculate your money growth over 65 years)
this can only be accomplished when the money used in the account is not bearing an interest charge.
Imagine borrowing money from on Credit Card to invest for your retirement. This is much the same way a Government funded savings plan would work.
What if every baby had a bank account?
New experiment aims to teach thrift, ensure college education
By AMY GOLDSTEIN
The Washington Post
August 21. 2005 8:00AM
hree weeks shy of his first day of kindergarten, Austin Sambrano is the only person in his family who has a savings account.
Living with his parents and older brother in a trailer park near Pontiac, Mich., he is part of an experiment called the SEED Initiative that is opening investment accounts for children, in an effort to ensure them a college education - and teach their families the habit of putting aside money for the future.
The $800 deposited in his name places the rambunctious, blond 5-year-old at the leading edge of a new wave of thought about how to create wealth, curb poverty and improve the abysmal savings rate among Americans, particularly those who are poor. The idea is to give newborns or young children a miniature version of what affluent families have long provided their offspring: a trust fund. To induce parents to save, families get their deposits matched if they add to the fund.
In today's economy, a savings account "is as fundamental as land was back in the 18th and 19th century," said Ray Boshara, of the New America Foundation, a think tank that advocates children's accounts.
Involving several hundred children in a dozen communities around the country, SEED (Saving for Education, Entrepreneurship, and Downpayment) - a four-year experiment being conducted by local social service agencies, studied by researchers and paid for by several nonprofit foundations - is a modest version of the ultimate goal.
Legislation has been introduced in Congress that calls for the government to open a KIDS Account of at least $500 for every baby born in the United States. And President Bush's first Treasury secretary, Paul O'Neill, has been giving speeches around the country, promoting an even bolder plan he has devised for children's accounts that he says would guarantee every American at least $1 million by age 65, eventually eliminating the need for Social Security.
Fostering savings from childhood is, in a sense, a spillover from the debate over whether to establish private investment accounts in Social Security, the nation's fragile retirement system. But unlike the partisan rancor that runs through the Social Security debate, children's accounts are gaining proponents across the ideological spectrum. Conservative Republicans see them as a form of the market-oriented "ownership society" that Bush touts. Liberal Democrats view them as an extension of the Great Society of the 1960s that created government programs to lift people from poverty.
"It's a simple kind of merging of the stereotypes of the parties," said Democratic Rep. Harold Ford Jr. of Tennessee, sponsor of a bill that would create KIDS Accounts. "You give to people; you put some responsibility on people to save, as well."
Despite bipartisan cheerleading, such accounts have skeptics on the right, who are disdainful of a new government handout, and on the left, who fear the expense would drain money from other social needs. So far, White House officials are unenthusiastic, saying that any available money should be used to prop up Social Security.
Still, proponents say that investing in children is a breakthrough in thinking about how to reverse a worrisome deterioration of savings habits. Since the early 1990s, the typical American's savings rate has plunged from $7.70 per $100 earned to $1.80, according to federal figures. Between 9 and 20 percent of U.S. households have no bank account, studies show, and the proportion is higher among African-Americans, Hispanics and the poor.
"I don't find the current political process doing justice to the fundamental question: What meaning should be given to creating financial independence? The president puts his head down and keeps saying the same thing over and over again,"said O'Neill. He said his plan, which he says would cost $144 billion, would create "a fundamentally different society than any one on Earth."
The idea for children's accounts has been germinating for years. In Britain, the government has begun mailing vouchers worth almost $450 to the parents of all 700,000 children born there each year.
In the United States, meanwhile, states and foundations are pursuing different experiments. In Kentucky, the Democratic state treasurer and Republican secretary of state have created the Cradle to College Commission, which is working with banks, colleges, businesses and foundations to design a test program of accounts for children. They hope eventually to propose legislation to expand it statewide.
And St. Louis-based Jim Casey Youth Opportunities Initiative began three years ago to offer "opportunity passports" as part of its work with a teen-agers graduating out of foster care. The program, in 12 communities around the country, provides $1,000 in matching funds for money these young people save for college, an apartment security deposit or a car. So far, slightly more than one-third of the 1,000 eligible participants are saving money.
The SEED Initiative is the most intensive effort so far in the United States. Investing in children of different ages and family incomes, it provides an initial deposit, then matches family contributions for four years - up to $1,200 in Michigan.
Organizers at some of its sites say they are discovering that giving away money can be harder than they imagined. In one SEED location, around Helena, Ark., Angela Duran, president of the Southern Good Faith Fund, said she and her co-workers had expected when they began looking for 75 families for SEED two summers ago that they would enroll them quickly through federally funded Head Start preschool centers for low-income children and a similar state preschool program. Instead, they have just finished setting up accounts - and only after opening them to other families in the area.
SEED organizers in Michigan found that one impediment was requiring parents to pay $25 up front to get an account.
But some parents say that they are learning new habits. "This program here gives me a chance to save. I know it's there. I can't mess with it," said Almedia Jones, of Lexa, Ark., who opened an account in May and made a $20 deposit in June and July. She took her daughter, Brianna, 5, to a SEED class where the children decorated two cans, labeled "savings" and "withdrawal," with butterfly stickers. Brianna began to put her allowance into a can.
One day, Jones took Brianna shopping for a present for another daughter, Brittney, who had just had surgery. Brianna spotted a pretty purse and turned to her older sister. "If you buy me this purse," Brianna said, "when I turn 18, you know I will have money in the bank, and if I go to college, I'll have even more money, and I'll pay you back."
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By AMY GOLDSTEIN
The Washington Post