The dawn of a new era in savings
New approach can help fight poverty and get young people through college
Not since the 1970s, when IRAs and 401(k)s were created to encourage retirement planning, has the issue of savings raised so much interest. Several bills have been filed on Beacon Hill to provide incentives for college savings, and it’s not just in Massachusetts. Across the country, academics, practitioners, and politicians are riding the same college savings wave.
In fact, every New England state except Massachusetts has already adopted a Children’s Savings Account (CSA) program that provides families with extra dollars in their children’s 529 plans at birth, and even more if they save.
CSAs were highlighted in the state treasurer’s race this past fall when Deb Goldberg’s campaign ads touted college savings as one of her key initiatives. Indeed, the horses have already left the barn. Maybe we’ll see them here soon before long.
A Beacon Hill commission recently recommended the creation of five pilot programs in cities around the Commonwealth that would provide low–income families with incentives to save for their children’s higher education. The goal is to illustrate their effectiveness, and hopefully expand the initiative statewide.
Sen. Jamie Eldridge, Democrat of Acton, is already convinced of the benefits of CSAs and filed a bill to create a statewide program immediately. The City of Boston has also petitioned the Legislature for permission to start a pilot CSA program, which would eventually add funds to the accounts of 1,500 Boston children.
The myriad of proposals begs two questions: 1) where will the funding come from? (Massachusetts is facing a yawning deficit, after all); and 2) are CSAs a “nice to have” or a game changer?
Of the three bills on Beacon Hill, Eldridge’s is most expensive, with a $10 million price tag that could double if families’ savings are matched by the state. By contrast, the commission’s proposal to launch five pilot CSAs would be less than $1 million, while Boston’s bill comes free, thanks to generous funding from the Eos Foundation.
Many academics see CSAs as a major tool in poverty reduction. Savings add to families’ assets and, according to Professor Michael Sherraden of Washington University, it is the lack of assets as much as the lack of income that causes poverty. Survey after survey indicates that children with savings accounts are three times more likely to go to college and five times more likely to earn a degree. And the amount saved isn’t the determining factor in being able to get to college. After all, who realistically would be able to save enough to afford the sky high tuitions? Rather, it’s the behavior of saving that builds motivation and fosters knowledge.
Will low–income families save, even with incentives? The answer is yes, according to D2D, which administers prizes to encourage savings. Hundreds of thousands of low– and middle–income people have participated so far, all of them hoping to win large cash prizes. Another bill on Beacon Hill would allow banks and credit unions to run these cash contests.
With all this smoke there has to be a fire. Democrats and Republicans alike can appreciate measures that require low–income residents, perhaps welfare families, to put some meat in the fire by saving. Let’s get something done before Massachusetts is the last state left without a children’s saving plan.
Bob Hildreth is the founder and executive director of FUEL Education, a Boston-based non-profit that helps low-income families learn about and save for college.