KidSave: Real Problem, Wrong Solution

Publication Date: January 2006

Publisher: Cato Institute

Author(s): Michael D. Tanner; Jagadeesh Gokhale

Research Area: Banking and finance

Type: Report

Abstract:

There is growing bipartisan recognition that the pathway out of poverty is not through consumption but through saving and accumulation. That idea has led to a number of interesting and innovative experiments by state and local governments and by private charitable organizations and has helped fuel the drive for personal accounts as part of Social Security reform.

It has also, however, spawned a movement for some form of children's allowance, or federally funded grant to children, known generally as KidSave accounts, that would be saved for education and retirement. Such proposals have drawn support from liberals and conservatives, Republicans and Democrats. These schemes are well intentioned and address a very real problem: the failure of Americans, especially low-income Americans, to save for their own and their children's futures. The push for KidSave accounts is also motivated by a perception that low-income Americans have access to fewer tax-favored savings plans than do other Americans.

There is ample reason to be skeptical of KidSave as an approach for increased saving, however. The proposal would create a massive new entitlement program, costing as much as $266 billion over the next 75 years (in presentvalue terms). If the program were to be expanded, as some observers have advocated, to all children instead of only newborns, the present-value cost would rise to $414 billion. And the cost to taxpayers would be even higher if the government were to adopt proposals to match future contributions made to KidSave accounts by lowand middle-income parents. With entitlement spending expected to skyrocket in the future, this is a burden we cannot afford.

We should make every effort to expand savings opportunities and wealth accumulation for lowincome Americans. The proponents of KidSave have been asking the right questions. However, they have arrived at the wrong answer.