Government-Sponsored Trust Funds

There might be a global savings glut but it's certainly done its best to avoid the United States.

And as politicians debate the best way to handle an impending budget crunch if the costs of medical care and, to a much lesser extent, social security aren't reeled in (or we find oil underneath Capitol Hill), here comes an unusual proposal for helping Americans put away their money.

In a paper titled "The Case for Child Accounts," researchers affiliated with the Aspen Institute say Americans learn how to save way too late in life -- the saving habit should instead be instilled right about the time we pop out of our mothers.

They propose a federal system which would give every child born in the U.S. a $500 certificate to set up a tax-protected investment account.

Here are the details:

• Parents will take these certificates to a participating financial institution to open an account, which will grow tax-free.
• Family, friends, churches, and charities will be able to add up to $2,000 a year in new contributions.
• Low- and moderate-income families will be encouraged to save through a 100% government matching contribution up to $1,000 annually ($2,000 maximum on all account contributions).
• The standard Child Account will be simple and safe, with one basic investment fund structured for an 18-year investment horizon and limits on account fees and expenses.
• Account funds will be locked up until the child reaches age 18. At that time, the assets can be used for any purpose.
• Child Accounts will offer additional incentives for children to use their accounts toward education, home ownership, business startup, or retirement income.

Of course you could always start a custodial account for your child, but these don't enjoy any special tax benefits. There are also 529 tax plans, which let parents put aside pre-tax dollars for future education-related expenses. But with a 529, the account is in the name of the parent not the child.

The Aspen plan would have a significant impact on the welfare of children from low- and middle-income families, the researchers argue, thanks to the government matching scheme. Assuming an annual 8 percent gain, a low-income newborn whose parents contribute $20 per month could have a savings account valued at $8,000 (inflation-adjusted) when he or she turns 18. That figure would be $10,000 inflation-adjusted) for a middle-income newborn whose parents contribute $50 per month.

If the maximum $2,000 is contributed each year, the account would be worth about $33,000 (inflation-adjusted).

The Aspen plan would cost the government $2.1 billion for the first year and $26.6 billion over 10 year. (To put it in perspective, the $2.1 billion figure would be 0.2 percent of total discretionary spending in 2006.)

There is not much research into the effectiveness of early-life savings accounts, however, 1,200 participants in a 6-year pilot project (pdf) started in 2003 have accumulated an average of $1,179 in their accounts at the end of 2006. (The initial grant ranged from $0 to $1,000)

On the state level, California and Illinois are considering similar plans.

The most interesting part of the Aspen plan, if it ever gets implemented, is to see the types of things 18-year-olds buy with $30,000.

But it seems there is one glaring oversight here: If it's largely the parents who put money away for their children, how are kids supposed to learn how to save?