Should US Consider $1,000 Newborn Seed Accounts?

Top economists and financial services executives have an idea to start people saving sooner: give them a federally funded $1,000 savings account at birth, to be augmented by matching contributions from their caregivers’ employers.

During a panel hosted by the Aspen Institute’s Financial Security Program event last week, two leading economists who are proponents of the idea previewed research they will be publishing with the Milken Institute later this year. One of the core arguments economists Robert Shapiro and Kevin Hassett made was that the program would help shrink a difficult-to-solve income inequality gap in the U.S. that affects multiple indicators, including education and home ownership.

“When the government gives everyone in a defined group a uniform monetary benefit—you could think of Medicare Part A hospital coverage for seniors or an investment account with a $1,000 stake for newborn children—it will ameliorate inequality on the margins,” Shapiro, a senior adviser at the Milken Institute, told a live and virtual audience. “Economic inequality has become an issue and factor in our society.”

Hassett, managing director of economic mobility at the Milken Institute, argued that while the U.S. economy is doing well on the macro level, there are many people not participating in its benefits. He then pointed to the power of compound interest as part of a “simple solution” to try and counter this disparity.

“Einstein called compounding the most powerful force in the universe,” he said. “The simple solution is to help people be connected to financial markets, so that everybody in the country shares the wealth.”

Karen Biddle Andres, Aspen’s project director for its retirement savings initiative, showed her enthusiasm for the idea with a post on LinkedIn, stating: “I came to The Aspen Institute nearly six years ago for days like this.”

In a call, Andres emphasized the initial bipartisan support for the idea she has heard from Congressional staffers and financial services firms, including a partner in hosting the event, The BlackRock Foundation.

“What was so notable [about the discussion of the account] was the laundry list of benefits that are attractive on the right and attractive on the left,” she said. “This is a really high return on investment for a policy, given the relatively low cost.”

Research

Andres, who, in her role, considers various retirement savings proposals and projects, believes providing Americans with an investment account at birth can also spur financial education and engagement over time.

“This is an incredible opportunity for everyone to gain access to the capital markets,” she says. “Later, when folks get into the workforce, they can continue that savings and investing throughout their working lives.”

Hassett said the forthcoming paper authored with Shapiro will detail the seed program, which would use taxpayer money to give every newborn $1,000 placed in an index fund managed by an asset manager for no fees. The accounts could take employer matches from caregivers’ parents, family members, state and local governments and the child themselves, after they’ve grown.

The paper will also cover the potential tax treatment to pay for the program and will analyze the effect of other early childhood savings programs.

Hassett went on to show a Monte Carlo simulation of what such a seed account might yield. For a child who had $1,000 invested at birth, with no further matching, by the age of 20, they’d have $8,308. At 40, they would have $69,024, and at 60, they would have $574,397.

“Equity returns are high and variable on average,” he said. “The variability I think is really interesting, because what it means is that it’s going to be fun to watch.”

That “fun” factor, Hassett says, will help spur financial literacy and interest from people invested in the markets.

Shapiro noted that 38 states have child savings programs of some kind, funding some 5 million children; a national seed account could build off those examples.

“As those assets grow … children from every background can gain the basis to imagine and plan to attend college or to hold on to the assets until they decide to buy a home or start a business,” he said. “In this way, the program can give every child a stake in the economy and a sense of their place in the economy.”

Critical Window

Andres sees 2025 as a “critical window” to push for a savings program to be introduced, with current tax policies sunsetting and negotiations happening for new policy.

She notes that Senators Cory Booker, D-New Jersey, and Bob Casey, D-Pennsylvania, have each proposed separate early childhood savings legislation. Booker’s proposal is a federally funded Baby Bonds program similar to ones run in states and cities; Casey’s is a “401Kids” savings account that could be used for post-secondary education, starting a business, buying a house or for retirement.

Andres points to a survey by BlackRock conducted in September that, among 1,000 U.S. voters of both parties, 68% would support the federal government establishing tax-advantaged savings accounts in each child’s name at birth. An even larger percent, 75%, would support allowing employers to contribute to the funds to accounts of employees’ children.

Meanwhile, she says, retirement industry players will have a role to play if the programs are to advance.

“We need folks to weigh in on the full range of design choices—from recordkeepers to plan sponsors to consultants,” Andres says. “We need to bring in the right expertise from the related ecosystem to help shape this.”