REDEEMING THE AMERICAN DREAM

Transcription

1 REDEEMING THE AMERICAN DREAM Children s Savings Accounts (CSAs) Build Children s Capacity For Economic Mobility William Elliott III

2 A s believers in a meritocratic system, when Americans dream, they do not dream of someone giving them a hand up the economic ladder; instead, Americans dream about how they will ascend with their own effort and ability. This belief in a meritocracy has been ingrained in the psyche of the American people. We learn it from such places as our families, our teachers, and even popular culture. We repeat it to ourselves because we want to believe that the system works as it should and that individuals have considerable control over their own fortunes. We learn of the American Dream prior to even having the knowledge to doubt its validity and it becomes part of how we see the world and the people in it. A part of the American meritocracy is the perception that in order to receive publically funded benefits (such as food stamps or money to help pay for college) without reprisal the use of these goods must be purchased with the investment of effort and ability. There is an implicit judgment, then, that seeks to ensure that people do not get comfortable with receiving a handout. Because measuring effort and ability directly is difficult, one s wages become a measure of the amount of personal resources one invests in his/her work; that is, people are perceived as being paid equivalent to their worth. Worth in the market is associated with one s contribution or productivity on the job, in common parlance if not in economic actuality. PAGE 2 CHILDREN S SAVINGS ACCOUNTS (CSAs) BUILD CHILDREN S CAPACITY FOR ECONOMIC MOBILITY

3 For many years, when unions were strong, globalization was only a thought, and technology enhanced people s productivity on the job, not replaced it, wages closely mirrored productivity in most cases, reinforcing this widely-held belief in the minds of many Americans. 1 Indeed, from 1948 to 1973 wages and productivity grew in concert (Mishel, 2012). However, during the last three decades, there has been a decoupling of these elements among wage earners (i.e., the vast majority of Americans for whom wages make up the bulk of their personal income). This decoupling over time, of wages and productivity, has led to a crisis of confidence only deepened by the Great Recession. As their fortunes fell, more households began to question whether the American Dream of doing better than the last generation is truly within their grasp. As their increased work effort failed to result in higher earnings, and as their real purchasing power eroded in the face of high health care and higher education costs, more Americans wonder whether this old Dream has become obsolete and ought to be exchanged for a more modest Dream of mere financial security. Instead of aspiring to upward mobility, increasingly Americans seem to be contenting themselves with simply not slipping backwards. A recent poll conducted by the Washington Post-Miller Center (2013) finds that 53% of Americans in the middle class perceive that they will either remain there or slip backwards in the next few years. The experiences of Americans whose main source of personal income is their wages contradict every day the assumption about the value of work and belie their own hopes that they can somehow work their way to prosperity. Fifty-eight percent of Americans say they earn less than they deserve and six in 10 workers worry they will lose their jobs because of the economy (Washington Post-Miller Center, 2013). While these economic insecurities may have escalated during the recent recession, the erosion of wage earners ability to leverage employment for real economic mobility may be understood as a longterm trend demanding significant policy change, not a temporary downturn that will naturally self-correct (Harrison & Bluestone, 1988; Piketty, 2014). Research suggests that for at least the last 40 years income from labor has not been an adequate tool for facilitating economic mobility. The question then becomes, what is? The answer is not all that elusive; it lies in the components of personal income. Personal income not only consists of income from labor but also income from capital and transfers. If personal income is a three legged stool and one of the legs, labor income, is diminishing in its strength to hold wages up with one s investment of personal resources, then it may be concluded that policies are needed that strengthen the role of the other two components. Income from assets and transfers already helps to facilitate economic mobility among the wealthy. Among the top 1% of households, only 39% of personal income is derived from labor income (Rosenberg, 2013), while 53% is capital income (e.g., business profits, dividends, net capital gains, taxable interest, and tax-exempt interest). Having most of their personal income come from capital income also means these households receive a discount on their taxes, because long-term capital gains tax rates top out at about 23.8% while standard income taxes go all the way up to 39.5% (IRS, 2013). As will discuss later, the tax code provides then, primarily for the wealthy, a type of non-stigmatized transfer. In this paper it is suggested that Children s Savings Accounts (CSAs) are an investment that may embody the meritocratic values that Americans have for so long professed, values that demand that effort and ability decide why one person succeeds and another fails. More specifically, it is suggested here that CSAs are a type of institution that addresses the problem of building people s capacity to use personal resources to achieve economic mobility. In order to better understand how CSAs can be part of a solution for assisting people to move up Among the top 1% of households, only 39% of personal income is derived from labor income (Rosenberg, 2013), while 53% is capital income (e.g., business profits, dividends, net capital gains, taxable interest, and tax-exempt interest). Having most of their personal income come from capital income also means these households receive a discount on their taxes, because long-term capital gains tax rates top out at about 23.8% while standard income taxes go all the way up to 39.5% (IRS, 2013). 1 Productivity is the amount of goods and services workers produce per hour worked. CHILDREN S SAVINGS ACCOUNTS (CSAs) BUILD CHILDREN S CAPACITY FOR ECONOMIC MOBILITY PAGE 3

4 The aim is to provide a conceptual framework for why work is an insufficient solution for creating economic mobility and how education, assets, and transfers help build people s capacity to advance. the economic ladder, I start off by drawing a distinction between standard of living and wellbeing. The aim is to provide a conceptual framework for why work is an insufficient solution for creating economic mobility and how education, assets, and transfers help build people s capacity to advance. Next, I articulate how CSAs align with American values. In so doing, I suggest that Americans actually support transfers but only if it is perceived that people are required to use their effort and ability to secure them. Next, it is suggested that CSAs, which have primarily been conceptualized in more recent years as an instrument for increasing access to post-secondary education are, in the end, a tool for increasing economic mobility. The paper ends by presenting evidence of CSA effects during different transitions (i.e., before, during, and after post-secondary school) over the course of a child s life. CSAs ALIGN WITH AMERICANS BELIEF IN A MERITOCRACY From the perspective presented in this paper, each step on the economic ladder represents a different standard of living (i.e., the level of material goods and services associated with living in a specific socioeconomic class such as the underclass, working poor, or middle class). The amount of income a person has indicates on which rung on the ladder a person sits because income is used for consumption. When people think of income, they typically have in mind income from labor. When we see individuals move from one rung of the ladder to a higher rung we see a change in their personal income and their level of consumption along with it. However, this observed change in income does not explain how economic mobility occurs, only that it has occurred. From this perspective, income alone is insufficient to explain the process of economic mobility (i.e., improving one s overall position in society, as compared to peers relative intragenerational mobility) particularly in today s context of declining wage power of most poor families or, even, a growing number of the shrinking middle class (e.g., Piketty, 2014). With regard to the typical American, it is posited here that in order for economic mobility to occur he/she needs to: (a) obtain the skills required to move into a higher class on the ladder and get a job that pays at that skill level, which most often requires an accumulation of savings to pay for post-secondary education and/or willingness to assume significant debt; (b) find ways to use some of his/ her wages to accumulate assets; and/or (c) receive transfers that place him/her at a higher level on the economic ladder. Whereas standard of living is the amount of goods and services one can consume, wellbeing is a state where one has the capacity to achieve economic mobility. That is, wellbeing has more to do with the kinds of goods and services available to people and what people can do with those goods and services, the real opportunity they have to move up the economic ladder, than how many goods and services they can consume (see Sen, 1999; Sherraden, 1991). Standard of living is an important part of wellbeing but insufficient for creating the conditions necessary for people to have the real opportunity to advance economically. This means, of course, that policies that center on transferring improvements in standard of living, through increased consumption power, will never be PAGE 4 CHILDREN S SAVINGS ACCOUNTS (CSAs) BUILD CHILDREN S CAPACITY FOR ECONOMIC MOBILITY

5 adequate for constructing a foundation for economic progress and, therefore, poor substitutes for the growth-focused investments delivered to more privileged Americans. It is not Just About the Jobs I posit that wages are set by the market for a particular class of workers. Individuals cannot move themselves up the ladder through their labor income alone, in part because market demand constrains the prices paid for given goods and services and, in turn, the wages one can earn for delivering that product. Given this, social class researchers like Gilbert (2008) can state, then, that the workingpoor relegated mostly to specific industries have incomes below $20,000 and the middle class earn about $40,000, with a fair amount of certainty. There may still be differences in the standard of living within a particular class; that is some working-poor, for example, have a lower standard of living than others, and wages can contribute to making these types of measured changes in standard of living among individuals and families within a particular social class. So, when people on welfare, for example, are forced to take a job classified as working-poor, there is little reason to believe they will move securely out of poverty by working unless their wellbeing is also considered (i.e., their capability for moving up the economic ladder). Similarly, depending on transfer income from means-tested and social insurance programs (including Temporary Assistance for Needy Families, Supplemental Nutrition Assistance Program, and Supplemental Security Income, but also initiatives like the Earned Income Tax Credit) can move households out of the underclass, in some circumstances, but these programs are not designed to build families capacity for economic mobility, only to move them to near poverty. That is, while necessary, they do not facilitate the kinds of economic behaviors that correlate to mobility. These limitations may make asset accumulation, with its associated potential for capital income creation, an essential mechanism for creating economic mobility. The Wages a Person Earns should not be Confused with their Effort and Ability Americans perceive that what a person earns at her job is closely linked to his/ her use of effort and ability. This creates the conditions for income generated by assets to potentially distort perceptions about the amount of personal resources people invest. This is meaningful because people of color and lower income families are less likely to have income generating assets; thus, their use of effort and ability in earning wages may be unjustly devalued. For the American Dream to be viable in today s economy, movement up and down the ladder must be determined by people s use of effort and ability; and for a long time, this has meant effort and ability exerted at work. A vivid example of how personal resources fail to align with one s wages can be seen in research on the relationship between student loan debt and wealth accumulation. Hiltonsmith (2013) finds that although households with college graduates and student debt the same or have higher earnings immediately after leaving college than households without student debt, by the time the graduates reach their 40s their income falls behind that of households with college graduates and no student debt. Hiltonsmith (2013) suggests that this disparity may occur because indebted students are not able to build assets soon after graduating from college at the same levels as students with no student debt. Then, because assets can be converted back into income (e.g., rent from real estate, dividends from stocks, or interest from bonds) in the future, as they age these indebted students have less income available. So the point here is that graduates with student debt do not work less hard in college, or after college, and yet they are still lagging behind graduates without student debt because of their inability to accumulate assets. Hiltonsmith (2013) finds that although households with college graduates and student debt have higher earnings immediately after leaving college, by the time the graduates reach their 40s their income falls behind that of households with college graduates and no student debt. Hiltonsmith (2013) suggests that this disparity may occur because indebted students are not able to build assets soon after graduating from college at the same levels as students with no student debt. CHILDREN S SAVINGS ACCOUNTS (CSAs) BUILD CHILDREN S CAPACITY FOR ECONOMIC MOBILITY PAGE 5

6 For both low wealth and high wealth households, assets boost their capacity for generating income beyond what they could generate through labor alone or even education. Moreover, it may suggest that having more assets to begin with (i.e., initial asset levels) matters when considering the return received from owning assets. The asset-based arm is largely designed for middle- and upper-income families, in that it primarily rewards behaviors disproportionately evidenced by these upper classes and relies on incentives particularly through the tax code disproportionately beneficial to them. Instead of thinking that people need a certain level of income before they can save, it may be that having a certain level of savings positions them for greater earning. Evidence on the importance of initial asset levels hints to this. Research conducted by the Assets and Education Initiative suggests that at the onset of the Great Recession, in 2007, for each dollar increase in initial capital income derived from assets (such as income from interest, dividends, and trust), total household income increases by $1.22 for households at the 25th percentile of capital income, but by $5.26 for those at the 75th percentile. At the end of the Great Recession in 2011, we find similar disparate increases in total income of $0.58 and $1.29, respectively (Elliott & Lewis, 2014). This points to the fact that for both low wealth and high wealth households, assets boost their capacity for generating income beyond what they could generate through labor alone or even education. Moreover, it may suggest that having more assets to begin with (i.e., initial asset levels) matters when considering the return received from owning assets. American meritocratic values demand, then, that the poor receive transfers in the form of assets (e.g., initial deposits, matches, and incentives) and access to structures that facilitate ongoing asset development so that effort and ability are isolated as the determining factors for how much capacity they have for moving up the economic ladder in adulthood and not unequal access to institutions. Policy should also ensure that those in poverty are not further disadvantaged in their pursuit of asset accumulation by the strict asset limits that accompany their use of means-tested consumption supports. If creatively envisioned, designed explicitly for equity and mobility, and situated within a redesigned public assistance system, Children s Savings Accounts provide the plumbing (i.e., infrastructure) for these transfers to be passed to children over their life course and, then, leveraged for a true chance at mobility. Transfers as Currently Conceptualized are also Insufficient for the Poor The American welfare system is a bifurcated system with a consumptionbased arm and an asset-based arm. On the one hand, the asset-based arm is largely designed for middle- and upperincome families, in that it primarily rewards behaviors disproportionately evidenced by these upper classes and relies on incentives particularly through the tax code disproportionately beneficial to them. Practically, then the goal of the asset-based arm becomes to create the capacity for economic mobility through asset accumulation, however, inequitably favoring upper income households. The asset-based welfare system s use of the tax code confirms the goal of asset development and provides considerable subsidies to do so through programs such as the home mortgage interest deduction, preferential treatment of capital gains, and exclusion of employer-provided retirement benefits from taxable liability (Cramer, Black, & King, 2012). However, the distribution of benefits heavily favors households who already have wealth (Cramer et al., 2012). On the other hand the consumptionbased arm is largely designed for lowincome families and helps maintain basic standards of living. The important function that the consumption-based arm fills is to lift the poor out of abject poverty into near poverty. Accordingly, survival needs must first be fulfilled before PAGE 6 CHILDREN S SAVINGS ACCOUNTS (CSAs) BUILD CHILDREN S CAPACITY FOR ECONOMIC MOBILITY

7 The asset-based welfare system s use of the tax code confirms the goal of asset development and provides considerable subsidies to do so through programs such as the home mortgage interest deduction, preferential treatment of capital gains, and exclusion of employerprovided retirement benefits from taxable liability (Cramer, Black, & King, 2012). However, the distribution heavily favors households who already have wealth (Cramer et al., 2012). people can begin to take concrete actions related to building their capacity to move up the economic ladder. Given this, there is a real role for the safety net to play and CSAs are likely to work best when a robust safety net is in place and the two work in harmony with each other. Still, many of the programs within the consumption-based arm are seen as entitlements, which in America, is tantamount with receiving a handout. As such, they are highly stigmatized and mostly designed to phase out as soon as someone begins to be less abjectly disadvantaged. Unlike the asset-based arm, the consumption-based transfers that comprise the system typically thought of as welfare not only fail to facilitate asset accumulation, but can explicitly work against it and sometimes strip the poor of the assets they have. While asset-based transfers such as the mortgage interest deduction, tax incentives for retirement, and college savings subsidies actively encourage saving and asset building, many low-income households can face steep financial disincentives penalties, even, in the form of asset limits embedded within the eligibility determination process for managing to convert some of their income flows into reserved capital. In this way, poor Americans may be forced to choose between asset accumulation and satisfaction of basic needs, even while asset-based welfare policy facilitates the simultaneous current security and future mobility of more privileged Americans. This is important, because initial levels of assets may help determine future asset accumulation (i.e., initial assets beget future assets) and even future income (i.e., initial assets beget future income). The latter is based on the recognition that personal income consists of labor, capital, and transfer income. Effort and Ability Mixed with Transfers, Makes Sense to Americans Generally, Americans dislike transfer programs because they are viewed as being contrary to their meritocratic beliefs. However, the distinction between transfer programs that enhance instead of replace effort and ability are more favorably viewed. For instance, Aid to Families with Dependent Children (AFDC), a consumption-based program, was renamed Temporary Assistance for Needy Families (TANF) in 1996 to reflect the change to mandatory work and the short-term basis on which poor families could expect to receive any aid. TANF was largely applauded by most Americans as a symbolic alignment of American values with policy expectations. Unfortunately, as discussed, work itself, whether compelled or not, is not adequate to facilitate mobility. So, the poor need an institutional framework that provides them with the plumbing to receive transfers (i.e., public resources) that leverage their effort and ability in support of mobility enhancing pursuits, such as building assets, rather than those solely dependent on income from work and perceived to be a handout. CSAs present a more efficient and equitable mechanism for advancing the constellation of currently administered transfers through the tax code or financial aid system. Essentially, U.S. policy is already directed at using public resources to subsidize retirement, homeownership, postsecondary education, and entrepreneurship as behaviors that channel effort and ability. But these considerable investments are poorly tar- Unlike the assetbased arm, the consumptionbased transfers that comprise the system typically thought of as welfare not only fail to facilitate asset accumulation, but can explicitly work against it and sometimes strip the poor of the assets they have. CHILDREN S SAVINGS ACCOUNTS (CSAs) BUILD CHILDREN S CAPACITY FOR ECONOMIC MOBILITY PAGE 7

8 Unlike basic savings accounts, CSAs leverage investments by individuals, families, and, sometimes, third parties. Ideally these geted, aimed at either the wrong people or the wrong understanding of the problem and the best approaches. Mixing effort and ability with transfers is a very American way of thinking about how government can best augment people s use of effort and ability. Further, the mixing of personal resources with transfers might have advantages over other education reform innovations, including the recently-popular proposals to artificially reduce the costs of higher education. This is because when children are asked to invest personal resources into paying for school, research suggests that it motivates them to give their fullest in their post-secondary school work (Hamilton, 2013). According to Hamilton (2013), children may direct more effort to school when they personally feel the economic costs of poor performance (p. 74). So, for example, a way to potentially increase the effectiveness of a program like Pell, might be to take the billions of dollars now allocated to it and give a percentage of this money each year to students in as early as 5th grade, allowing the student and their families to leverage this money to accumulate even more assets for college or other investments later in life. In this way, in addition to being a vehicle for household savings, CSAs can be seen as a type of infrastructure, in particular but not exclusively for low-income children because the tax code does not work to deliver savings incentives for them, where they can receive asset transfers in a way that is consistent with American values. Finding ways to transfer significant sums of money into CSAs that are compatible with the American value system will be essential for building the capacity of lower income Americans so that effort and ability can truly be the deciding factor in who succeeds and who fails. This idea is not foreign to Americans. When is the last time we as a country had a wealth building program as grand as the Homestead Act or the GI Bill? The convergence of forces including rising student loan debt and erosion of affordability, stagnating wages and constrained economic mobility, and the shifting of risks onto the backs of individuals unprepared without adequate asset holdings suggests that the time has come. investments are catalyzed with an initial deposit and/ or matching funds adding public or philanthropic funds to families savings, usually on a ratio ranging from 1:1-5:1, in order to extend meaningful incentives for saving and parallel the support for building balances already available to higher-income households through tax benefits. CSAs BUILD CHILDREN S CAPACITY FOR ECONOMIC MOBILITY Children s Savings Accounts (CSAs) are savings vehicles, most commonly designed for higher education savings, that often incorporate specific incentives and explicit structures to encourage savings by disadvantaged youth and families who otherwise may not have equitable access to financial institutions. While they have specifically designed features for encouraging saving among disadvantaged youth and families, they are meant to universally serve all young people. Unlike basic savings accounts, CSAs leverage investments by individuals, families, and, sometimes, third parties. Ideally these investments are catalyzed with an initial deposit and/or matching funds adding public or philanthropic funds to families savings, usually on a ratio ranging from 1:1-5:1, in order to extend meaningful incentives for saving and parallel the support for building balances already available to higher-income households through tax benefits. Growing Interest in CSAs CSAs are gaining traction around the country, not as a fad or a merely interesting alternative but as a potentially powerful tool with which to improve educational attainment and make existing institutions K-12 schools, universities, the financial aid system work better, especially for disadvantaged students. In the absence of passage of national CSA policy, some states and localities have developed their own children s savings initiatives, including programs that PAGE 8 CHILDREN S SAVINGS ACCOUNTS (CSAs) BUILD CHILDREN S CAPACITY FOR ECONOMIC MOBILITY

9 incorporate elements of CSA design into state 529 college saving plans. While the details vary, these CSA-style investments in children s futures include publicly funded initial contributions and matching contributions for low-income savers, opening accounts for children who reach specific educational milestones (such as kindergarten enrollment), and experimenting with school-based savings and financial literacy initiatives (Goldberg, Friedman, and Boshara, 2010). North Dakota, for example, provides a $100 grant for any newborn in the state, provided that the $100 is matched by a private contribution before the child s fourth birthday. 2 Enacted in 2010, Nevada s Silver State Matching Program provides a 1:1 match on contributions for households earning annual incomes below $41,400 and a 50% match up to $300 per year for households earning annual incomes between $41,400 and $61,950. The Alfond Challenge automatically opens a 529 account with an initial deposit of $500 for any parent of an infant in Maine. A number of other states are in the planning stage for beginning a CSA in the next year or two. In other parts of the country, school districts, counties, and municipalities are also stepping into the breach. San Francisco, California, became the first locality in the United States to provide opt out college savings accounts to all enrolled kindergarteners, in Cuyahoga County, Ohio, began a similar effort in fall 2013, specifically citing as a rationale for their investment the potential for improved educational outcomes by helping families and students finance college through savings. 4 Collectively, these innovations are helping thousands of low-income students, while testing different policy mechanisms and strengthening the case for broader CSA implementation. Growing interest in CSAs in the early 2000s led to the first national test of CSAs through the Saving for Education, Entrepreneurship, and Downpayment (SEED) initiative. Beginning in 2003, SEED was a 4-year demonstration project, in which over 1,300 low-income children and youth in 12 locations across the country received matched savings accounts and financial education. The SEED for Oklahoma Kids (SEED OK) research experiment tests the effects of CSAs opened at birth in a full population. 5 By combining random selection from a full population of births, random assignment, and longitudinal data collection, SEED OK is well-positioned to answer key questions about effectiveness of universal and progressive CSAs for a general population (Nam, Kim, Clancy, Zager, & Sherraden, 2013). Improving Children s Post- Secondary Performance, a unique outcome of CSAs? While CSAs are meant to promote asset accumulation for homeownership, retirement, and capitalizing a business venture, there are important reasons for making higher education an important aspect of the problem CSAs are meant to solve. First, much of the recent interest in CSAs stems from their potential as a strategy for improving children s educational outcomes. This rationale appears to align with what people think children should save for, and it taps into a growing national conversation and, indeed, concern, about the extent to which higher education is still a good investment for American children and how growing reliance on student debt might compromise educational and financial well-being. In a survey of 801 registered voters, 40% believe that making education more affordable should be the top priority of government. No other priority garnered favor from a larger proportion of study participants (Goldberg, Friedman, & Boshara, 2010). More to the point, 58% of registered voters in the study thought that the most effective use for CSAs would be to help families save for college. Non-financial value of higher education notwithstanding, most people attend post-secondary institutions for the purpose of improving their financial wellbeing. In this vein, attaining postsecondary credentials is still very effec- In a survey of 801 registered voters, 40% believe that making education more affordable should be the top priority of government. No other priority garnered favor from a larger proportion of study participants (Goldberg, Friedman, & Boshara, 2010). 2 The Child First Program, Section 529, enacted in For more information on the Kindergarten to College initiative, see 4 See, for example, statements by the Cuyahoga County Executive, US/ college-savingsaccount.aspx. 5 For more information and initial findings go to Pages/SEEDOK.aspx CHILDREN S SAVINGS ACCOUNTS (CSAs) BUILD CHILDREN S CAPACITY FOR ECONOMIC MOBILITY PAGE 9

10 tive at increasing the capacity of children to move up the economic ladder. For instance, Urahn, Currier, Elliott, Wechsler, Wilson, and Colbert (2012) found that 47% of children born in the bottom family income quintile remain in the bottom quintile as adults if they do not earn a college degree. In contrast, only 10% of those children born in the bottom family income quintile with a college degree remain there as adults. Children who are born into the bottom family income quintile and attain a college degree are as adults three times more likely to make it to the top family income quintile, and four times more likely to move from the bottom family wealth quintile to the top, compared to those poor children who do not earn college degrees. Household saving for post-secondary education during a student s younger years has demonstrated effects on children s preparation for college, enrollment in college, and graduation from college. These relationships between asset holdings and later educational attainment raise the stakes even higher, then, as those whose limited asset holdings constrain their economic mobility also struggle to access the educational achievement that could vault them to a higher plane of economic wellbeing. Accordingly, CSAs work to foster economic mobility both directly, as asset levels may affect the extent to which additional income and assets generate wealth, and indirectly, by facilitating greater educational attainment. From this it should be clear how education and mobility are related. Policymakers and advocates need not choose whether to design CSAs to facilitate educational attainment or mobility, because these asset interventions are equipped to address both. Further, we can begin to see how CSAs can be thought of as a life course intervention beginning to demonstrate effects as early as age 4 and extend beyond college to effect children s capacity as young adults for moving up the economic ladder (see Table 2). 6 In the next section some of the evidence for the relationship between CSAs and children s educational outcomes is reviewed. For more information, the Assets and Education Initiative (AEDI) at the School of Social Welfare at the University of Kansas released a comprehensive report on the assets and education field (Elliott, 2013a) that documents in greater detail the evidence, from field demonstrations, theory development, and analyses of secondary datasets, linking asset accumulation with improved educational outcomes. It is worth noting that, at this point, it is not any one study or finding that makes the potential of CSAs for improving children s educational outcomes compelling; it is the collection of studies using a variety of methods that makes it compelling. Further, now that evidence is starting to come in from the SEED OK experiment that supports theory (e.g., asset effects occur, at least in part, through expectations) and findings found in studies using secondary data (e.g., small dollar account effects), there is more reason for optimism. Preschool (Ages 0 5) 7 While this paper primarily focuses on children s outcomes, during the ages of 0 5 parent outcomes are included. This is because it is early in the child s development to measure many of the outcomes of interest related to children and because there are clear ways in which parental attitudes and behaviors influence children s educational trajectories. Early findings from the SEED OK experiment Table 2: Issued Addressed by Children s Savings Accounts (CSAs) Age Postsecondary Education 0-5 Preschool Account Ownership (i.e., expect to go to college & have strategy to pay for college) Socioemotional Well-Being of Child Mental Health of Parents (e.g., improved parental expectations and maternal depression) CSAs Accumulation of Savings Postsecondary Ed. Prep Postsecondary Ed. Enrollment Postsecondary Graduation Math, Reading, College Saver Identity Higher Odds of Enrolling Higher Odds of Graduating Initial Assets Gateway Financial Instrument Accumulation of Assets Balance Sheet Health Economic Mobility Diversified Asset Portfolio (savings account, stocks, retirement savings, homeownership) Reduced College Debt Initial Assets (the amount of assets young adults start off with will be important to determining the amount of assets they are able to accumulate) } More Assets (e.g., net worth, home value) More Income from Assets Initial Assets More Retirement Savings PAGE 10 CHILDREN S SAVINGS ACCOUNTS (CSAs) BUILD CHILDREN S CAPACITY FOR ECONOMIC MOBILITY

11 indicate that mothers who have CSAs (i.e., treatment group) report lower levels of depressive symptoms than mothers without CSAs (i.e., control group) (Huang, Sherraden, & Purnell, 2014). Further, findings from SEED OK indicate that having a children s savings account has positive effects on social-emotional development of children, particularly low-income children, approximately four years old (Huang, Sherraden, Kim, and Clancy, 2014). These effects occur even though families have saved very little money in the account to date. Post-Secondary Preparation (Ages 6 17) Enrolling in college is not only a question of financial preparedness; evidence suggests that the longer term challenge of ensuring that students are academically equipped to succeed in college is just as important and perhaps even more difficult to address. Here, too, asset possession shows the potential for positive outcomes, largely through cultivating a college-saver identity that increases student engagement and builds parents expectations of higher education (Elliott, Destin, & Friedline, 2011). A student with a college-saver identity expects to go to college and has identified savings as a strategy to pay for it. That is, it s not enough to imagine that college is in your future; you have to believe that there s actually a way to get there. Students with college-saver identities are more likely to attend and graduate from college than even students who have college-bound identities. Wide gaps in college expectations by income levels and race almost disappear among all students with college savings of $500 or more (see Table 1). This is where judging the potential power of a CSA intervention by a metric other than mere asset accumulation in the form of growing balances is essential. Clearly, even when balances are not enough to actually finance the college education, there are other factors those aspirational, attitudinal, and behavioral effects at work. The college-saver identity appears to have implications for students academic preparation, in the long run, likely a greater policy challenge than even facilitating enrollment. Specifically, findings suggest that children with savings designated for school have statistically significant higher math scores than their peers without designated savings (Elliott, 2009; Elliott, Jung, & Friedline, 2010; Elliott, Jung, & Friedline, 2011). Moreover, Elliott s (2009) findings suggest that part of this relationship can be explained by the effects of children s savings on children s college expectations, a proxy for the college-saver identity. That is, part of how children s savings may influence math scores is through their relationship with children s college expectations. To the extent to which students academic futures will be influenced by their qualifications at the point of college application, CSAs potential effects on achievement earlier in their educational careers may be another important dimension. Post-Secondary Enrollment (Ages 18 21) Today, a sizable number of minority and low-income children with the will and academic ability to attend college fail to transition to college after high school graduation or to succeed once enrolled. This is wilt, and reducing it represents one of the most promising approaches to improving the educational outcomes of disadvantaged youth, since it builds on their own hopes and aligns their experiences with their dreams. Here, the narrative that would have us believe that poor children have different values or priorities than more advantaged ones is belied by evidence of the gap between these students expectations and aspirations, and their educational attainment. Evidence that having a college-saver identity reduces wilt includes the following: One study found that 75% of children with their own savings are on course compared to 45% of children without savings of their own (Elliott & Beverly, 2011). 8 Findings indicate that only 35% of low- to moderate-income (below $50,000) children are on course compared to 72% of high-income ($50,000 or above) children. Regarding children s savings, Table 1. Descriptive Statistics on Savings Account and College Expectations By Race Black White School-designated savings of $ % 97% School-designated savings of $1-$499 87% 90% No account 64% 78% By Income Low-Income (> $50,000) High-Income (>$50,000) School-designated savings of $ % 97% School-designated savings of $1-$499 82% 98% No account 66% 76% 6 If the field chooses to view CSAs as being capable of both addressing the problem of post-secondary attainment and building the capacity of children for moving up the economic ladder, this might have implications for the kind of delivery system chosen or at least how that system will have to be adapted to allow for multiple purposes that extend across a child s life. 7 It is important to point out that the age groups do not represent when the studies discussed in each section are conducted; but rather, they represent theoretical developmental time points when CSAs may focus on different outcomes. 8 Students who are currently enrolled or who have graduated from college are defined as being on course, whereas, children who are not currently enrolled and have not graduated from college are defined as being off course. CHILDREN S SAVINGS ACCOUNTS (CSAs) BUILD CHILDREN S CAPACITY FOR ECONOMIC MOBILITY PAGE 11

12 Children in low- and moderate-income households (i.e., those that have incomes below $50,000 per year) with college-saver identities and school-designated savings of $1 to $499 or $500 or more are about three times more likely to graduate college than children who have a collegebound identity only. 46% of low- to moderate-income children with school savings of their own are on course; conversely, only 24% of low- to moderateincome children without savings are on course (Elliott, Monique- Constance, & Song, 2011). Among black students, only 37% are on course compared to 62% of white students. Controlling for similar factors as the previous two studies, findings suggest that both black and white children who have savings are about twice as likely to be on course as their counterparts without savings of their own (Elliott & Nam, 2011). Wilt provides one of the more vivid illustrations of the failure of the education path to act as the great equalizer in today s society. However, the potential of CSAs to enhance education s ability to reduce wilt provides a promising approach to improving disadvantaged youth s educational outcomes. Post-Secondary Graduation (Ages 22 25) In contrast to high-dollar student loans, which show some potential for negative effects on college graduation (Dwyer, McCloud, & Hodson, 2012; Kim, 2007), research suggests that college savings shows some potential for improving a student s chances of making it all the way to graduation: In the aggregate, children who have a college saver identity and $500 or more in school designated savings are about two times more likely to graduate from college than children who have a college-bound identity only (Elliott, 2013b). Children in low- and moderateincome households (i.e., those that have incomes below $50,000 per year) with college-saver identities and school-designated savings of $1 to $499 or $500 or more are about three times more likely to graduate college than children who have a college-bound identity only (Elliott, Song, & Nam, 2013). Further, Black children with college-saver identities and schooldesignated savings of $500 or more are about two and half times more likely to graduate from college than Black children with a collegebound identity only (Friedline, Elliott, & Nam, 2013). Educational achievement is worth striving for and is commonly believed to be the best-known lever for building children s capacity for upward mobility. However, given the growing gap in educational attainment by family income, the current education system and higher education, in particular does not provide poor children with the same opportunity for economic mobility that it does for higher-income children (Haskins, 2008). Confronting this gap has never been more important than today. We must turn to enhancing opportunities for students to increase their selfefficacy and expectations related to educational achievement and for their families to prepare financially for college. We also must consider whether our policies place college graduates in a strong position to succeed financially as young adults as well. Asset-building strategies may be a way to make progress on all of these goals and maximize the benefit of going to college. For example, if family savings correlate with better student engagement at an early age, CSAs may allow them to take full advantage of the primary and secondary education they receive and position them for greater college achievement. If household asset accumulation correlates to greater academic performance, students may be better able to compete successfully for financial aid, as the landscape shifts from need- to merit-based scholarships. Given the relationship between engagement and academic attainment, the prospect of affecting children s orientation toward their education for relatively small initial investments deserves greater attention. PAGE 12 CHILDREN S SAVINGS ACCOUNTS (CSAs) BUILD CHILDREN S CAPACITY FOR ECONOMIC MOBILITY

13 CSAs, AN INSTITUTIONAL FRAMEWORK THAT PROVIDES THE PLUMBING FOR THE POOR TO RECEIVE TRANSFERS AND BUILD ASSETS According to Sherraden and Barr (2005), a formal institution within the applied social science context can be thought of as a type of intervention to alter behaviors and outcomes of individuals. It is suggested here that CSAs are a type of institution that addresses the problem of building people s capacity to use their own effort and ability to achieve economic mobility by augmenting their capacity to gain additional skills and use wages to accumulate assets, and by providing people with an institutional structure to receive asset building transfers. Reducing Post-Secondary Debt, Does it Improve Young Adults Balance Sheets? The post-college period is tremendously important for building a foundation for asset accumulation and subsequent mobility in adulthood, particularly given emerging evidence about the long-term effects of asset deprivation in young adulthood (Elliott and Lewis, 2013; Hiltonsmith, 2013). For example, findings indicate that in the short term households with college debt have 63% less net worth, 40% less home equity, and 52% less retirement savings than those with no outstanding student debt (Elliott & Lewis, 2013). Over the long term, Hiltonsmith (2013) finds that an average student debt load ($53,000) for a dualheaded household with bachelors degrees from four-year universities leads to a lifetime wealth loss of nearly $208,000. Although human capital is created by student debt, and graduates can leverage this human capital into earnings and wealth accumulation potential, it appears that they still end up far behind their peers without student debt and that even the higher earnings potential secured with their advanced degree may not be sufficient to accumulate an adequate asset base. Moreover, Hiltonsmith (2013) suggests that students who graduate with average student debt are forced to invest significantly less in retirement savings, or to delay purchasing other wealth-building items like a home, during the early part of their working lives. Given the relationship between initial asset levels and subsequent economic mobility, these early losses may account for much of the wealth inequality seen later in life. While young people who go to college are undoubtedly better off than those who do not attend college, the evidence of student debt s harmful financial effects on borrowers lives post-college sheds serious doubt on the rationalization of our student loan model. This model holds that any accumulation of student debt in pursuit of a college education is a wise investment (see, for example, Rothstein & Rouse, 2011). Especially for capital accumulation, timing matters. Contrary to the current understanding about when and how borrowers manage their debt obligations, the comparatively heavy burden imposed by student debt repayment at the period of a borrower s lowest earnings (immediately following college) may create particular problems and inequities later in life. This effect is realized through assets effects on later asset accumulation and income potential. Oliver and Shapiro (2006) suggest that the high unmet need for college is largely the result of low asset accumulation. However, asset advantages start during the preparation stage. According to Lino (2012), on average, families allocate about 17% of their total budget to education-related expenses from birth through age 17. This adds up to about $38,576 in educationrelated expenditures before figuring in college costs. These investments are increasingly in human capital development, not consumer goods (Kornrich & Furstenberg, 2010). Given this, inequality in parental investments may lead to some children gaining an advantage over others in preparing for college, irrespective of innate ability. The advantages extend into the college years. For example, higherincome families are more likely to have saved money for their children s education than their lower income counterparts, making college more affordable (Sallie Mae, 2012; Steelman & Powell, 1991). This savings may lead to less student loan debt. Findings suggest that graduates with parents who had put aside college savings for them when they were high school sophomores are about 39% less likely to have student loan debt than graduates who did not have parents who had put aside college savings for them when they were high school sophomores. Further, graduates with parental college savings have $3, less student loan debt than graduates who did not (Elliott, Lewis, Nam, & Grinstein-Weiss, 2014). Freed from the inequitable effects of high student loan debt that erode the relative value of their post-secondary degrees, low and middle income American youth may realize a greater return on their educational investments and begin their adulthoods with healthier balance sheets. Assets May Increase the Capacity of Income to Translate to Assets Underscoring the potential balance sheet effects, research suggests that initial asset levels are also important for future asset accumulation; that is, assets beget assets. Households at the 75th percentile enjoy over five times the return on asset holdings experienced by households at the 25th percentile (Elliott & Lewis, 2014). CHILDREN S SAVINGS ACCOUNTS (CSAs) BUILD CHILDREN S CAPACITY FOR ECONOMIC MOBILITY PAGE 13