It is a truism of the American economic system that, barring an act of God — or a purposeful redistribution of wealth authored by the government — capitalism is a perpetual motion machine. It builds capital through dint of its own existence, and so far it hasn’t proven to have an expiration date.
But wealth and the assets it purchases are not distributed equally. Non-White households have been cut out of opportunities to acquire financial security, in part through private sector discrimination, but perhaps most effectively through government policy.
The result? According to the 2016 Survey of Consumer Finances, the median White household had $140,500 in wealth while the median Black household had $3,400 and the median Latinx household had $6,300.
Politicians and policy wonks are contemplating government interventions that could help repair some of that damage.
They imagine long-term savings accounts for children seeded by public money and turned over to their owner when they become adults. Forms of Children’s Savings Accounts (CSAs) exist at the local and state levels, serving as many as 382,000 children in 32 states and the District of Columbia, according to a Prosperity Institute report.
Many of these programs are tied directly to higher education under the logic that higher education is expensive and starting a savings account early can relieve financial pressure later in life while opening access to higher-grossing jobs.
According to research out of the University of Michigan, this is true to an extent: Low-income children with CSAs are three times more likely to go to college than their peers, even when their CSA holds $500 or less, and are three times more likely to graduate than peers who do not have savings set aside.
But graduating from college is not a jobs guarantee. As young people see themselves saddled with tuition debt and declining wages, the usefulness of a college degree is not what it once was in generations past. Still, studies show that mothers are less likely to be depressed, feel more financially secure and are more likely to see their children as “college bound,” which has knock on effects for the children’s emotional health.
Washington policymakers have shifted to programs modeled on “529 Plans” (college savings plans that offer tax and financial aid benefits for saving money), said Jennifer Tran, a senior policy analyst with the Washington Center for Budget and Policy Priorities.
“We imagine that every account would be seeded with state dollars,” Tran said. From there, plans can be customized. Money could accrue when a person first logs into their account, Tran said, or get a boost from other participation-based incentives.
Making programs attractive to low-income and marginalized communities is key. According to a 2012 report from the Government Accountability Office, fewer than 3 percent of families used 529-style plans in 2010. Those people tended to be wealthier.
Some college savings programs require the use of a Social Security number, making them inaccessible to undocumented people.
“There are ways to be creative in how we design it to make it more inclusive,” Tran said.
The nonprofit progressive thinktank Prosperity Now argues that CSAs often exclude low-income people by building them as “opt-in” programs, which makes it more difficult for people to enroll in and receive the benefits from such savings. CSAs often rely on a family’s ability to contribute to the savings, and local governments tend to not match the funds families contribute.
Design and matching are critical to making college affordable and to cutting down the racial wealth gap.
Some want to go further. Sen. Cory Booker (D-New Jersey) has proposed a plan referred to as “baby bonds,” nest eggs whose generosity depends on a family’s income. His bill, titled The American Opportunity Accounts Act, would create an account with $1,000 for every child. Each subsequent year, that kid would get up to an additional $2,000. They couldn’t touch the money until they were 18, at which point the cash could be used on higher education or homeownership.
Assuming an annual accrual of 3 percent interest, a kid living in a family of four making roughly $25,100 would receive an estimated $46,215 when they turned 18. The annual payments go down based on the family’s income; an 18-year-old in a family of four making $125,751 would expect $1,681 when they got control of their account.
“This proposal is about helping families break through barriers that keep so many Americans from wealth-creating opportunities like higher education and homeownership,” Booker said in a press release.
To pay for the plan, Booker is proposing progressive tax policies that would target very wealthy households, such as a reversion for the 2009 estate tax. Before the passage of the Republican tax bill, the federal government collected a 40 percent tax on estates worth $11 million for married couples. That threshold is now $22 million, reducing the amount of taxable revenue available to the government.
Booker plans to file his bill when the Senate reconvenes in November.
Ashley Archibald is a Staff Reporter covering local government, policy and equity. Have a story idea? She can be can reached at ashleya (at) realchangenews (dot) org. Follow Ashley on Twitter @AshleyA_RC
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