To the extent bipartisan policy reform is possible, ideas must appeal to the instincts of both conservatives and liberal progressives.
In that tradition, Sen. Cory Booker’s proposal for ‘baby bonds’ may be a stroke of political genius. Founding special accounts for newborn children with a taxpayer-funded deposit, and means-tested government additions through childhood, has obvious appeal to liberals. It redistributes money and reduces measured wealth inequality.
But Booker is no doubt hoping it can pique conservative interest too. The so-called American Opportunity Accounts, on the face of it, introduce children to the concept of saving and support families, while providing young people with a nest egg to become more self-sufficient in achieving major life goals.
Booker’s idea is this: When an eligible child is born, an account would be opened with a $1,000 deposit from the taxpayer. Each year until the child turns 18, the government would deposit a means-tested sum rising to a maximum $2,000 contribution. The funds in these accounts would generate returns free of tax but could not be withdrawn until the child turns 18. After that point, the money could be accessed but only be used for specified investments, such as down payments on a house, college tuition, professional training, or retirement savings. The eventual sums could be significant, with a maximum of nearly $50,000 for someone in receipt of the highest annual contribution and returns of 3 percent per year.
There’s a crucial difference though between this proposal and child trust funds that have been previously tried in countries such as the United Kingdom. Under Booker’s plan, families would be prohibited from adding to government contributions with their own private funds. In the U.K., the government merely opened the accounts and administered two small payments at birth and at age 7. But the bigger idea was that parents and grandparents would scurry up to $1,000 more away each year, on top of the government deposits, valuing the tax advantages and the self-discipline of being unable to draw down the funds.
Booker’s proposal is entirely different. Being solely a public scheme, it amounts to pure redistribution — transfers from taxpayers to those on low incomes. As such, it has little to offer conservatives. The argument it will encourage saving or show children the power of investment is bogus. Saving is about deferring consumption — sacrificing today to fulfill other goals tomorrow. But this is pure taxpayer support: taxing or borrowing to take from Peter to pay Paul, with no sacrifice on the part of those enjoying the rewards.
It’s actually worse than that. Precisely because it amounts to pure redistribution, Booker would naturally impose conditions on what the funds could be used for. He recognizes, correctly, that taxpayers would be loath to grant young adults a huge lump sum at age 18 to blow on a fast car or an around-the-world travel excursion. Yet by restricting what the “savings” from the accounts can be used for, the program really amounts to just a backdoor subsidy for home-buying, college tuition, or retirement.
It would be one thing if such a one-time coming of age transfer replaced existing means-testing federal support elsewhere. But that is not what this is about. It is really just a whole new entitlement — an elaborate scheme, with a raft of new bureaucracy, which masks its effect: pumping $100 billion per year toward the same old usual liberal ambitions.
As my colleague Chris Edwards and I documented in a report last year, low-income people really do often have little to no savings. Conservatives should care about their financial security. But rather than support Booker’s phony savings scheme, which will do nothing to change behaviors, conservatives should instead push for Universal Savings Accounts — innovations that have been extraordinarily successful in encouraging modest savings for those on low incomes in Britain and Canada.
These accounts allow people to deposit after-tax income, which then grows tax-free, much like supercharged Roth IRAs. Crucially, they can be used for any purpose and funds withdrawn at any time. That flexibility overcomes one of the main reasons that poorer families do not save in tax-advantaged schemes: the fear they will not be able to access funds for unforeseen contingencies.
The best way to give people experience of savings and investment is to remove risk barriers that currently prevent them from saving formally. Booker’s scheme operates under the veneer of encouraging frugality. But it really just amounts to expanding federal government subsidies through the back-door.