New Research: Long Term Effects of Youth Savings Accounts on Adult Saving Behaviors

Recently the Assets and Education Initiative (AEDI) at the University of Kansas’s School of Social Welfare released a working paper, “It Is Not Just Families; Institutions Play a Role in Reducing Wealth Inequality: Long Term Effects of Youth Savings Accounts on Adult Saving Behaviors” by William Elliott, Graham Rifenbark, Paul Webley, Terri Friedline, and Ilsung Nam. Using data from the Panel Study of Income Dynamics and its supplements, they ask, if low-income ($50,000 or less) and black adolescents receive the same benefit (i.e., similar rates of savings and similar amounts saved) from participating in the formal banking system that higher income and white adolescents do across adulthood. This is the first paper I know of that examines whether having a savings account as an adolescent is associated with having a higher savings rate and more saved across adulthood (at ages 18, 28, 38, 48, and 58).

They find that white adults who had a savings account as youth had a higher rate of savings at each ten-year interval than if they did not.  In contrast, there is little evidence of a difference between black adults who had savings as youth at each ten-year interval and black adults who did not have a saving account as adolescents.

With respect to low-income adolescents, a higher rate of low-income adults who had savings as adolescents had savings at each ten-year interval than low-income adults who did not.  However, surprisingly, when high-income adults who had savings as adolescents were compared to high-income adults who did not have savings as adolescents the benefit was not as big as it was when they compared low-income adults who had savings as adolescents to low-income adults who did not have savings adolescents. This suggests that low-income adults benefit more from having savings as adolescents. Despite this, high-income adults, regardless of whether they had savings as adolescents, had higher rates of savings than low-income adults with or without savings as adolescents.

In regards to amount saved across adulthood, when comparing white adults to black, with the exception of age 18, white adults with or without savings as adolescents save more than black adults at each ten-year interval throughout their adult lives. While smaller in most cases, there still is a noticeable difference in savings amount between white and black adults even when black adults had savings as adolescents.

High-income adults with savings as adolescents had more saved than high-income adults without savings as adolescents. The same is true of low-income adults. Low-income adults with savings as adolescents had more saved than low-income adults without savings as adolescents.

These findings provide some preliminary evidence that having a savings account as an adolescent can lead to higher savings rates and more saved particularly among white, high-income, and low-income adults. There is some evidence that it reduces the inequity in amount saved between white and black adults but it is limited.

While AEDI’s main focus is on the relationship between assets and education, the case for providing adolescents or younger children with savings accounts goes beyond their potential for improving adolescents’ educational outcomes. The findings discussed here suggest that having a savings account as an adolescent can improve saving outcomes. Future research will want to examine whether having a savings account as an adolescent is related to other types of asset building such as investment in stocks, bonds, retirement funds, or CDs to name a few. It might be narrow minded to just think about the effects of early savings on adolescents’ educational outcomes even when framing the discussion for including savings in a comprehensive education plan. The benefits of adolescent savings may go well beyond improved educational outcomes. If this is the case, and adolescent savings does build assets that can be used across adulthood, this might be one way that asset-building policies are in stark contrast to policies that promote college loans or even grants.  Furthermore, it might lend support to thinking about children’s savings as a type of development account that has uses beyond the college years into retirement.

However, it should also be noted that findings discussed here also suggest that mainstream banking institutions, as they are currently constituted, may favor white and high-income adolescents.  Asset theorists posit that structural failures make it difficult for low-income families to provide their adolescents with the connections within and between financial institutions needed to save and accumulate assets. When the family is the primary institution that connects adolescents with the adult economy, it might be that adolescents walk into the pattern that has been established by the family. As a result, black and lower income adolescents might be at a distinct disadvantage when it comes to benefiting from mainstream banking institutions.  Given this, encouraging more black and low-income adolescents to save and build assets may require institutions other than the family or mainstream banking institutions. That is, these findings suggest that it is not just a matter of having access to institutions but also, the types of formal institutions black and low-income adolescents have access to.

Child Development Accounts (CDAs) are an example of a type of savings account that has been specifically designed to promote savings and asset accumulation among low-income and black adolescents. They typically provide adolescents with access to a federally insured account. They incentivize adolescents’ and their families through initial deposit, incentives, and matched savings. They also often help to supplement parental financial instruction and modeling by providing financial education classes.