The ASPIRE Act of 2009

1. What does the bill do?
2. Why is a bill to promote asset building for children necessary?
3. Who is eligible? Will illegal immigrants or children who become citizens get accounts?
4. Will children born before the bill takes effect get accounts?
5. Why do wealthy people get these accounts?
6. Why do poor people who don't pay taxes get accounts?
7. Is it unrealistic to expect those with low incomes to save when they already struggle to get by?
8. How much money will the government put into an account?
9. How much of the benefits will go to lower-income families?
10. Will assets in the accounts penalize people applying for public assistance?
11. Who can contribute to the accounts?
12. Why is there a limit on private contributions to the account?
13. Who will control the accounts?
14. How much will this cost?
15. Can America really afford this? How is this paid for?
16. Shouldn't the government be encouraging households to spend, not save during a recession?
17. Are there restrictions on account withdrawals? How can money in the account be used?
18. How will the account be taxed?
19. Why is there a minimum account balance, even after age 18?
20. Has this been done before?
21. How do Lifetime Savings Accounts differ from the UK's Child Trust Fund Accounts?
22. Will this raise college tuition?
23. What if my child needs money to pay for college before they are 18?
24. Who will manage this program?
25. Can the private sector offer accounts?
26. Why not let the private sector handle all of the accounts?
27. How much can a child save in a Lifetime Savings Account? What will they have when they are 18?
28. Where will money in Lifetime Savings Accounts be invested?
29. How will this bill help promote financial literacy?
30. What is the legislative strategy for moving this bill through Congress?
31. How is this year's bill difference from previous versions?

1. What does the bill do?

The America Saving for Personal Investment, Retirement, and Education Act ("The ASPIRE Act of 2009") will provide a Lifetime Savings Account for every newborn child in 2010 and beyond. Each account will be endowed with an initial $500 contribution, and children living in households earning below the national median income will be eligible for both a supplemental contribution of up to $500 at birth as well as the opportunity to earn additional matching funds for amounts saved in the account. All federal contributions will be readjusted for inflation every five years.

Withdrawals cannot be made from the account until the account holder turns 18. After the account holder turns 18, their account will be governed by rules similar to Roth Individual Retirement Accounts (Roth IRAs). These rules allow for tax-free withdrawals without penalty for select pre-retirement uses including post-secondary education and first-time home purchase.

2. Why is a bill to promote asset building for children necessary?

Success in America today depends not just on a job and growing income, but increasingly on the ability to accumulate a wide range of assets. Yet one-quarter of white children and half of non-white children grow up in households without any significant levels of savings or resources available for investment. It is the combination of both income and assets that provides the means to take advantage of the broad opportunities offered by a prosperous society. Owning a home, obtaining an education, and building a stock of financial investments are some of the essential elements of security and economic well-being because they provide the basis for building and expanding wealth.

To take full advantage of these opportunities, it is important to have a familiarity with financial assets. A Lifetime Savings Account will get every child and their family thinking about their future. Each child will grow up knowing they own a modest pool of resources that can help them get started in life as a young adult. For some, this asset pool can be used to seed profitable and productive investments, for others, it may provide a sense of security many now lack. The public investment signals that society has an interest in the success of every child, and they, in turn, will be responsible to make appropriate choices throughout their lives. By creating an inclusive system of children's accounts, the ASPIRE Act has the potential to expand opportunity, broaden asset ownership, and fortify the American economy for the long haul by helping children and their families plan to save.

Federal policy has historically discouraged asset building among households with fewer resources while heavily subsidizing it for non-poor households. This makes no sense. A smart policy would encourage all Americans to own assets. 

3. Who is eligible? Will illegal immigrants or children who become citizens get accounts?

Every child born in the United States after December 31, 2009 is entitled to receive an account. Eligible individuals must be U.S. citizens or legal residents according to Section 431 of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (the welfare reform bill). Children who become citizens before the age of 18 will be eligible to open accounts and receive account benefits.

4. Will children born before the bill takes effect get accounts?

Only children born after December 31, 2009 will receive accounts and be eligible for account benefits.

5. Why do wealthy people get these accounts? 

Policies that include everyone but are targeted to people with greater needs have proven to be most enduring, while avoiding the stigma attached to means-tested programs. So, getting everyone in the same system will provide the strongest foundation for increased savings. While a Lifetime Savings Account will be universally accessible to each and every child, the majority of benefits will flow to families with modest incomes. Over the first ten years, approximately 83% of the benefits will go to families earning below the national median income (around $48,000 in 2006).

Ensuring that every child has an account will increase the opportunity to use these accounts as teaching tools to facilitate financial education. Also, since a family's income level can fluctuate over the course of a lifetime, this universal structure will ensure that children are not unfairly included or left out of the program because their parents' income level reached a high or low point around the time they were born.

6. Why do poor people who don't pay taxes get accounts?

The value of assets is based not only on the economic security they provide but in how they enable people to make investments in their future and exert a stake in the broader society that income alone cannot provide. The ability to move up and out of poverty often depends on one's ability to accumulate assets. But millions of Americans live in households with few or no assets. One-quarter of white children and half of non-white children grow up in households without any significant levels of savings or resources available for investment. This represents an important dimension to the problem of inequality, which is usually discussed in terms of income. Wealth inequality is more severe than income inequality. According to the most recent Survey of Consumer Finances, conducted by the Federal Reserve in 2007, the top 10 percent of households in the U.S. ranked by income had a median net worth of $1,119,000.  In contrast, the bottom 20 percent had a median net worth of $8,100, nearly 140 times less than the top 10 percent.  The median net worth among all families was $120,300, which was still nearly 10 times less than the top 10 percent. It's not that the rich have too much; it's that the poor don't have enough wealth to move their lives forward.

Public policy currently offers many asset building incentives through the tax code. But these incentives are not as accessible to the families that would benefit from them the most. Many lower-income households simply do not have large enough tax liabilities to take advantage of these tax expenditure programs.

7. Is it unrealistic to expect those with low incomes to save when they already struggle to get by?  

Recent findings from a national demonstration project of matched savings accounts for low-income individuals found that the poor can save when given the right incentives and savings products.  In the American Dream Demonstration, a national study that established over 2,300 matched savings accounts, low-income families were able to save a net average of $17 each month over four years. In fact the poorest families ended up saving a higher percentage of their incomes than families that were better off. Participating families also saw a 5 percent increase in new homeownership compared to a control group. Overall, saving is not easy for the poor and they typically can only save small amounts, but even small amounts can lead to positive outcomes in the lives of children. 

8. How much money will the government put into an account?

There will be an automatic contribution of $500 for every account. A child will qualify for a one-time supplemental contribution if their household income is below the national median income (around $48,200 in 2006). The maximum supplemental contribution will be $500. The bonus amount will be evenly pro-rated so that a child receives the full amount if their household income is below 75% of the national median Adjusted Gross Income (AGI), or about $24,100 in 2006, and a lesser amount as the household income approaches 100% of the national median AGI.

Eligible account holders can receive a one-to-one match up to $500 on private contributions to their accounts each year until the account holder reaches the age of 18.

All contribution amounts will be indexed for inflation every five years.

9. How much of the benefits will go to lower-income families?

In the first year, approximately two-thirds of the account benefits go to families earning under national median income. Thirty-nine percent of the account benefits go to families earning below 50% of national median income (about $24,100 in 2006). Further, only 11% of the account benefits go to families earning over 200% of the national median income (roughly $96,000). As more cohorts become eligible for the means-tested matched savings, the percentage of benefits to lower-income families increases.

Household Income                                                               Percent of Benefits Distributed over Time

First Year                       First 10 Years             First 18 Years

 

$0 - $24,100
(0% to 50% of national median)                                 39%                                43%                                43%
25% of all households

 

$24,101- $48,200
(50% to 100% of national median)                             31%                                39%                                43%
25% of all households

$48,201 - $72,300
(100% to 150% of national median)                           11%                                 7%                                 6%
18% of all households

$72,301 - $96,400
(150% to 200% of national median)                           8%                                    4%                                3%
14% of all households

$96,401 and above
(0ver 200% of national median)                                  11%                                  6%                                5%
18% of all households

 

10. Will assets in the accounts penalize people applying for public assistance?

No. Amounts in accounts will not be considered when determining eligibility for any Federally-funded benefit.

11. Who can contribute to the accounts?

Private, voluntary contributions can be made to each account each year. These contributions will be after-tax and can come from any source, including parents, grandparents, friends, employers, non-profit organizations, and children themselves. The bill allows for contributions up to $2,000 a year.

12. Why is there a limit on private contributions to the account?

Earnings on contributions to Lifetime Savings Accounts will be tax-free. These accounts are not intended to be tax shelters but vehicles to build assets. As such, it is necessary to impose a cap on how much money can be deposited into the account to prevent these accounts for being used as shelters.

13. Who will control the accounts?

Parents and legal guardians will serve as account custodians and make investment decisions until the account holder reaches the age of 18. The account holder's custodian shall elect how money in the Lifetime Savings Account is invested. If no election is made, a life cycle investment option will be specified as a default.

14. How much will this cost?

The estimated cost for this bill is $37.5 billion over the first ten years (2010-19).  Accounts would start being created in 2010. The cost in the first year when accounts are opened is $3.25 billion. Annual costs will rise as each new participant is eligible for benefits. Over twenty years, the total estimated cost is $86.5 billion (2010-2029). As a point of comparison, the annual cost to the government of allowing pension contributions to be excluded from income is more than $111 billion.

15. Can America really afford this? How is this paid for?

The cost of the legislation in 2009, if approved, would be $3.25 billion, a small fraction of the projected $3.1 trillion Federal budget in that year. However, this cost is different than virtually all other proposals for new spending or tax cuts because none of it would constitute a reduction in national savings - for the first 18 years of the program, all "outlays" would be fully invested, which would help spur the economy and promote long-term economic growth. In fact, the bill should increase national savings to the extent that its matching benefits and other incentives would encourage families to save more. Nevertheless, the current federal budget deficit is a significant public policy issue that will affect consideration of all existing and proposed federal policies. The bill does not assume that the legislation's outlays would be offset by any particular revenue source. However, the bill sponsors have expressed a commitment to pay for this proposal with other budgetary offsets.

16. Shouldn't the government be encouraging households to spend, not save during a recession?

For a number of reasons, the expenditures of government should necessarily increase during a recession. The efficacy of pursuing balanced budgets over the course of the business cycle remains a reasonable proposition, and there will be a time to revisit this debate at a later date. As for now, it will be irresponsible (fiscally and otherwise) for the government not to undertake increased deficit-financed spending. This spending should be focused on three primary objectives, including ameliorating economic hardship, creating the conditions for the next economic recovery, and promoting robust economic growth over the long term.

However, increased government spending does not remove the importance of saving, especially at the household level. This attention afforded to consumption as a driver of the economy seemingly undermines the argument to increase savings. But the case for saving is not intended to be a one-time shot in the arm like flooding the economy with rebate checks. While it is true that declining consumption in the near future will increase recessionary pressure on the economy, it is also true that the economic health and stability of many families will require they realign their spending and debt with their long-term savings needs.

This does not have to happen all at once. The recession will naturally push up savings rates as economic uncertainty will drive people to prefer holding on to more of their income (a liquidity preference is what the economists call it). This preference is exactly what the increased government spending must counter, so economic activity continues even though consumer spending declines.

Although the spending of the American consumer is remarkable in many respects, it should not be considered a birthright or an obligation. We can't place the responsibility of ending the economic slowdown on the spending households that are already in debt and with low savings. We need to be thinking now about creating the set of incentives, institutions, and policy supports that can establish the long-term foundations of our economy.

In the near term, government spending should offset declines in consumer spending associated with the recession, but over an extended time horizon, there is a strong case to be made for increased savings and a justification for a policy response that enables greater savings to occur, especially for families with lower incomes and fewer resources.

17. Are there restrictions on withdrawals from Lifetime Savings Accounts? How can money in a Lifetime Savings Account be used?

There are a set of restrictions that apply to account withdrawals which are designed to ensure that the accounts are used by the account holders for productive, asset building purposes. No withdrawals can be made from the Lifetime Savings Accounts until an accountholder turns 18 and a minimum balance equal to the automatic government contribution (initially $500) must be maintained until the account holder reaches retirement age, as defined by Roth IRA regulations.

Between the ages of 18 and 25 the only allowed use of the funds will be for post-secondary education with distributions being made directly to post-secondary education providers. After reaching the age of 25, homeownership and retirement security will be the additional allowed uses in accordance with Roth IRA rules. Other distributions will be taxed and penalized at a rate of 10% for earnings on private contributions, and 100% for government contributions - that is, if you don't use the funds for a specified asset building purpose, you lose all the government matching funds.  Accountholders can access their private contributions without penalty after age 18.

18. How will the account be taxed?

Withdrawals will be taxed according to Roth IRA rules. Qualified distributions from these accounts will be tax-exempt. Non-qualified distributions will be subject to tax along with a 10% penalty and a 100% tax on government contributions. Voluntary contributions to each account will be after-tax, and will not be tax deductible. Public contributions and deposits will not be included in federal income tax calculations.

19. Why is there a minimum account balance, even after age 18?

The bill requires a minimum balance in the Lifetime Savings Accounts held by the ASPIRE Fund at all times until retirement age. This will ensure Lifetime Savings Accounts serve as a savings platform for retirement security and life-long asset building. The minimum balance required is equal to the automatic contribution, initially $500. Rollouts to other accounts would be permitted for balances above the minimum.

20. Has this been done before?

The ASPIRE Act is innovative in many respects, but it has historic precedents both here and abroad. Internationally, the United Kingdom will create a national system of Child Trust Fund accounts. Every child born in the UK after September 2002 is eligible to receive a voucher of 250 pounds and an additional 250 pounds if they live in lower-income families. Funds will be invested until children reach the age of 18. Canada has recently proposed helping lower-income families save for their children's education with Learning Bonds. This program will give low-income children a $500 endowment into a Registered Education Savings Plan at birth and additional $100 top-ups every year. In addition, families with low incomes will be eligible to receive a matching grant on the first $500 saved into the account.

In the United States, historic initiatives, such as the Homestead Act of 1862, the GI Bill of 1944, and the creation of the Federal Housing Administration (FHA) in 1934, have expanded access to important elements of wealth creation and produced tangible results. The Homestead Act provided an opportunity to build wealth by developing property. Of the million and a half people that successfully took the government up on its offer, passing this wealth and property on to the next generation proved to be one of the most enduring legacies of the Act. The GI Bill offered veterans grants to pay for training and higher education, loans for setting up new businesses, and mortgages to purchase homes. Through this law, some $14.5 billion was spent by the federal government between 1944 and 1956 benefiting almost 8 million veterans. A congressional report has estimated that the GI Bill generated returns of up to seven dollars for every dollar invested, an impressive performance by any standard. The FHA was created to help many Americans purchase a home. Through its mortgage insurance and other financing products, FHA has played a role in the country's rising homeownership rate, which reached an all-time high of almost 70% in 2002.

Programs that have targeted children, such as TANF and its predecessor AFDC, traditionally have focused on income security, and thus have taken the form of ongoing children's allowances. This approach, which is very important, is quite distinct from complementary ones that focus on long-term savings and asset building strategies.

21. How do Lifetime Savings Accounts differ from the UK's Child Trust Fund Accounts?

There are two main differences. First, Lifetime Savings Accounts include matching of voluntary savings-this should substantially increase incentives for saving. Second, Lifetime Savings Accounts limit withdrawals to investment-related uses, whereas the UK program allows funds to be used for any purpose once an individual becomes an adult.

22. Will this raise college tuition?

Although many children may have increased levels of savings that could be used to pay for a college education, there is no clear evidence that this will lead to corresponding tuition increases by colleges. Lifetime Savings Accounts, rather, will be one of a number of tools-such as education savings plans, tax credits, and student aid-that families can use to help make college more accessible and affordable. A Lifetime Savings Account may enable lower-income students to work fewer hours while in school, thereby increasing their chances for graduating and completing college at a faster pace. These accounts may also increase the competition between and quality among colleges, who will have to compete for the growing numbers of students that find themselves in a better position to shop around for a college education. In addition, many people may decide not to use their Lifetime Savings account for education and instead use it to buy a home or build up a nest-egg for retirement.  

The bill stipulates that any amounts in Lifetime Savings accounts shall not be taken into account in determining any individual's eligibility for any Federally-funded benefit, including student financial aid.

23. What if my child needs money to pay for college before they are 18?

The bill allows for account withdrawals only after accountholders reach the age of 18.

24. Who will manage this program?

The bill creates a Fund that will be established within Treasury and will be governed by a Board of Directors similar in structure to the Board overseeing the Thrift Savings Plan (TSP), the retirement program for federal employees. The Director of the Fund will be appointed by the Board and shall have the same powers and responsibilities as the Director of the TSP.

25. Can the private sector offer accounts?

Yes, they can. Account holders have the choice to either keep their accounts within the ASPIRE Fund or transfer their accounts to private sector Lifetime Savings Account providers. This rollout may occur at anytime after the initial account has been opened. To maintain the account as a savings platform for retirement security and life-long asset building, a minimum balance equal to the automatic contribution (initially $500) is required in the Lifetime Savings Accounts held by the ASPIRE Fund at all times until retirement age.

26. Why not let the private sector handle all of the accounts?

The Thrift Savings Plan model is more appropriate for handling small accounts because of its lower administrative costs. In addition, those who lack experience with financial investments may benefit from the simplicity of the TSP approach, with its limited set of investment options.  Research from the field of behavioral economics also demonstrates the importance of having an initial default investment, which the TSP model is best suited to serve as given its lower costs and simplicity. 

27. How much can a child save in a Lifetime Savings Account? What will they have when they are 18?

Account balances will depend on several factors including how much money is saved in the account, where it is invested, administrative fees, and the investment performance. As we have seen over the past year, market conditions and investment performance can vary greatly. There are real risks involved in any type of investment and money can be lost. However, over the long run market investments are still one of the best ways to build assets for families of all incomes. Furthermore, historically most funds in the Thrift Savings Plan have performed well over the long-term. A variety of different investment options will be available with exposure to varying levels of risk. Products like lifecycle funds will also be available, which automatically become more conservative in their investments as the account owner approaches college age or retirement. Every financial prospectus will include a detailed description of risk.

Assuming an average annual return of 7% over 18 years with steady contributions of $300 (for a family that qualifies for the match rate each year) can lead to an account balance of over $20,000.  Assuming an average annual return of 5% under the same conditions can lead to an account balance of over $15,000. With a 3% return a family could still have over $12,000, which could help them pay for the higher education expenses of their child. Under each of these scenarios, a family would only have to contribute $25 a month to have funds of these sizes available for their children when they turn 18. 

28. Where will money in Lifetime Savings Accounts be invested?

A private sector professional manager will oversee a range of investment options. These investment options will be similar to those offered by the Thrift Savings Plan, including a government securities fund, a fixed income investment fund, a common stock fund, and other funds that may be created by the Board.

29. How will this bill help promote financial literacy?

The bill explicitly calls for the development of programs to promote financial literacy among both children and parents alike. While parents and legal guardians will serve as account custodians and initially make investment decisions, children will have a stake in learning about an account that has their name on it. Additionally, providing every child with an account will facilitate introducing financial education into K-12 curriculum. Research suggests an iterative relationship between account ownership and financial education, that is, individuals are more likely to benefit from financial education when an account is present.

30. What is the legislative strategy for moving this bill through Congress?

The legislation will be introduced in both the House and the Senate later in 2009. An initial version of the bill was introduced in the 108^th Congress in July of 2004 and was reintroduced in the 109^th Congress in April 2005 as S. 868 and H.R. 1767.  In the 110^th Congress, a new version of the bill was introduced in the House in 2007 as H.R. 3740 and in the Senate in 2008 as S. 3557.   

31. How is this year's bill different from previous versions?

The new version of the bill has made several technical adjustments which more effectively meet the legislative intent of the co-sponsors.