Child Development Accounts (CDAs) are savings or investment accounts that begin as early as birth. In many cases, public and private matching funds are deposited into these accounts to supplement savings for the child. The goal of CDAs is to promote savings and asset building for lifelong development. Thus, CDAs may be targeted to supplemental education and experiences in childhood, post-secondary education for youth, and home ownership and enterprise development in adulthood.
The vision for CDAs has been for a universal and progressive policy aimed at long-term asset building for all. Bringing CDAs to scale nationwide in a sustainable manner will require a national policy structure, so that all children can build assets. CSD aims to advance universal and progressive CDAs by identifying 10 key design elements that can be implemented and sustained at scale.
How are CDAs structured?
Although CDA programs differ in design and features, most share several common characteristics. Typically, CDAs are:
- Restricted: With few exceptions, savings accumulated in CDAs can only be used for approved purposes. These commonly include post-secondary education (college or vocational school), down payment on a starter home, and seed capital to start a small business, among others.
- Designed to encourage savings: As an incentive to save, most CDAs are “seeded” with an initial deposit of around $500 to $1,000, and deposits made by children and their parents are matched, often at a 1:1 ratio up to a certain annual or lifetime limit.
- Progressive: Recognizing the difficulty of saving for low-income households, the accounts of lower-income children receive additional financial assistance. This assistance may take the form of a larger initial deposit, a higher match, or a grant.
- Universal: Ideally, CDAs are universal—available to all—in the same way that public education is universal. Universality ensures that all children are included, and that all children benefit.
- With public support: As the public now supports saving in 401(k)s and many other types of accounts, the government should support saving in CDAs, particularly for households with low-to-moderate incomes. In this regard, CDAs usually provide an initial deposit and sometimes, matching funds. These funds are usually offered as a grant or subsidy, though a recent proposal in the US would offer the initial deposit and match funds as a long-term, low-interest loan.
- Part of a larger financial education program: CDAs often include mandatory financial education for children and their families that may be offered at school or online. Classes cover topics such as how to create a budget, how to write a check or make a deposit, how to distinguish “needs” from “wants,” and how to read a bank statement. Hands-on management of their accounts appears to provide equally important learning to children, youth, and their parents.
CDAs are particularly attractive for long-term investment in children (and long-term investment in social and economic development) for several reasons:
- Saving in a CDA begins early in a child’s life, offering a large window of time in which to accumulate savings. Most CDA accounts are opened at birth, allowing saving to be accumulated over at least 18 years. This long span of time means that regular deposits of small amounts can make a difference, thus making saving a realistic goal for families of low or modest income.
- Having savings may improve outlook and expectations, and children are in the best position to capitalize on this improved outlook for the long term. For example, research indicates that household savings may increase a child’s expectations of attending college and improve academic achievement.
- Among lower-income families, CDAs may interrupt a cycle of intergenerational poverty. No matter the economic background of a family, a CDA provides an opportunity to obtain an education, buy a house, or establish a small business—opportunities that improve the child’s chances of increasing economic and social well-being over the long term.
Why invest in children?
In a global economy, people require ongoing investment to remain competitive and successful. Research suggests that having savings and other assets (owning a house, for example) may be as important for people’s long-term development as income.
Children in particular require investment for their growth and development, and as they launch themselves into the world as young adults. But data on educational attainment, particularly by race, strongly indicate that we are not investing sufficiently in our children. In the long term, the whole country pays a price for this lack of investment, in the form of reduced productivity and greater social problems.
Child Development Accounts (CDAs) are an innovative approach for making long-term investments in children.
What are examples of CDA policies and programs?
Canada, Singapore, the United Kingdom, Taiwan, and Israel have instituted national CDA policies. Although sharing the common theme of investment in children, the policies and programs differ in design.
Canada provides all children with a tax-deferred savings vehicle to encourage savings for post-secondary education. The first C$2,000 deposited every year by parents or children is eligible for a 20% match, with an additional match for low-income families. A grant program supplements the savings of middle- and low-income households, providing an initial grant of C$500 and an additional C$100 annually, in addition to the match. The funds accumulated in the account must be used for post-secondary education, or the government funds must be returned.
Singapore provides a CDA account to all children 0-6 years of age. Savings accumulated by age 6 are matched at a 1:1 ratio up to a match cap of S$6,000 to S$18,000, depending on the child’s birth order. (Because Singapore’s program is meant to promote population growth as well as child development, larger financial incentives are available to the third and fourth children of a household.) The savings in the CDA account can be used for childcare, education-related expenses, and medical expenses; unused funds can be transferred to a college savings account when the child turns seven.
The United Kingdom provides all children with a tax-advantaged Child Trust Fund at birth seeded with an initial deposit of £250 (or £500 for lower-income children). An additional top-up of £250 (or £500 for lower-income children) is provided at age 7. Unlike Canada’s and Singapore’s programs, the UK’s program does not provide a savings match. Another difference is that the funds in the UK’s CTF funds may be used, after the child reaches 18 years of age, for any purpose.
In the United States, five federal proposals have been proposed for special savings accounts for children; each incorporates some elements of a typical CDA:
- ASPIRE Act (America Saving for Personal Investment, Retirement, and Education Act): Provided to every newborn, each account would be endowed with a one-time $500 contribution, and children in households earning below national median income would be eligible for a supplemental contribution of up to $500. Additional savings incentives include tax-free earnings, matched savings for eligible families, and financial education.
- Young Savers Accounts: “Young Savers Accounts” would serve as Roth IRAs for children. Parents would be allowed to make deposits to Roth IRAs held by their children using their current IRA contribution limits.
- 401Kids Accounts: This proposal would make it possible for a restricted, tax-advantaged savings account to be opened in a child’s name as early as birth, with up to $2,000 of after-tax contributions permitted per year. The funds could be used for K-12 and post-secondary education expenses. Additionally, the accounts could also be used for a first home purchase, or rolled over into a Roth IRA for retirement.
- Baby Bonds: This proposal would provide each child with a $500 bond at birth and at age 10. Funds could be used for college or vocational training, buying a first home, and retirement savings. Families earning below $75,000 a year would have the option of directing their existing child tax credits into the accounts tax-free.
- Plus Accounts (Portable Lifelong Universal Savings Accounts): Granted to every newborn for retirement savings, each PLUS account would be endowed with a one-time $1,000 initial deposit. Contributions would continue as adults, with a mandatory 1% of each paycheck withheld pre-tax and automatically deposited into their account (workers could voluntarily contribute up to 10%). Employers would also be required to contribute at least 1% (and up to 10%) of earnings. No withdrawals from PLUS accounts could be made until an accountholder reaches the age of 65, although there would be a loan program for pre-retirement uses.