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Imagining CSAs as a Tool for Combating Wealth Inequality

Children’s Savings Account (CSA) programs are interventions that seek to build assets for children to use as long-term investments, particularly for postsecondary education. These programs are operating in several jurisdictions around the United States and are proposed in many more. By the end of 2016, there were 42 CSA programs serving 313,000 children in more than 30 states.

However, research from a new report released this week from the Center on Assets, Education, and Inclusion (AEDI) at the University of Michigan finds that CSAs result in family savings rates between 8% to 30% for opt-out CSA programs (i.e., automatically enrolled) and about 40% to 46% for opt-in CSA programs (have to sign-up to participate). What is evident from these findings is that while families are saving in CSAs there does seem to be a limit on how effective they can be at encouraging saving.

Despite the evidence that small-dollar CSAs (initial deposits of $25 to $50 in many cases) produce important effects for children, finding ways to help families save more often and to save larger amounts is still important if CSAs are to reach their full potential as asset building tools. A well know impediment to saving for low-income families is how little money they have after they pay for basic needs. This reality has led some researchers and policy makers to push back against the idea of diverting money from income-based programs such as cash assistance and food stamps to CSAs.

However, a new innovation within the CSA field begins to address this problem. Reward cards provide a rebate up to 4% on all grocery store purchases, for example. At the time of purchase the rebate is ear marked to be deposited into a child’s CSA. By transforming spending into saving, rewards card programs have the potential to allow even the poorest CSA participants to contribute, even when purchasing goods with food stamps. These programs do not require families to take from their limited discretionary funds, but capitalizes on spending they do in their everyday lives. In March of this year, AEDI in partnership with Community Link, a rewards card program developer, is conducting a randomized control trial as part of Promise Indiana’s CSA program.

Despite these efforts to increase saving, family contributions are unlikely to ever be enough to enable families to fully pay for college let alone tackle the problem of wealth inequality. Therefore, it is suggested here that a wealth transfer will also be needed if we are going to make the American dream, that effort and ability determine winners and losers not where one is born, a reality. For instance, researchers from Institute on Assets and Social Policy find that a universal, progressive children’s asset building intervention could close the Latino/White wealth gap by 28% and the Black/White wealth gap by 23%. In their model, $7,500 was given to low-wealth households with incremental declines to $1,250 for the highest wealth households.

What these findings suggest is that initial deposits that are progressive maybe very important for reducing wealth inequality. While we work to produce a Federal response, a strategy for helping pay for these larger initial deposits at the local level can be found in Long Beach, CA. The City of Long Beach negotiated rebates with its vendors so that every time the city makes a purchase using its p-card (i.e., government credit card), a 1.51% rebate goes into a general fund for establishing CSAs. This fund is estimated to gross up to $15,000,000 annually. Another strategy, which could work in conjunction with the p-card, is using grant and scholarship money to fund CSAs. For example, the College Board has recommended putting a portion of Pell Grant funds into savings accounts for children starting as early as age 11 or 12. Using scholarship funds as early commitments that transfer assets early enough to affect not only how children pay for college, but also how they prepare for it has the potential to usher in a new financial aid paradigm, one that moves away from debt dependency in favor of asset empowerment.

If we can dare to dream, we can imagine CSAs that provide low-income children and their families with hope, but not just any old hope, a tangible hope built on the wealth they need to overcome their from-behind start in life.

Dr. William Elliott is a professor at the University of Michigan School of Social Work. He is a member of the Campaign for Every Kid's Future Steering Committee and the founder of the Center on Assets, Education and Inclusion.