A Bipartisan Children's Savings Account Bill

(Revised July 23 to add a link to the final legislative text.)

This afternoon, Senators Rick Santorum and Jon Corzine, and Representatives Thomas Petri, Phil English, Harold Ford Jr., and Patrick Kennedy will announce the ASPIRE Act -- an innovative new bill to make every American a financial "stakeholder" with a "KIDS" personal savings account.

The bill grants a $500 account to every newborn. Kids born into families with incomes under the national median would get a supplemental grant of up to $500.

Families could voluntarily add as much as $1,000 a year to their kids' accounts, and matching funds up to $500 a year would be available for families under the median income. (Like a Roth IRA, family contributions would be "after tax." But the investment returns would grow tax-free, and distributions would be untaxed as well.)

An account could be tapped when the child reached age 18. It could be used for education, retirement savings, homeownership or for other purposes.

For example, take a child born into a low-income family that voluntarily contributed $250 a year to her account. By age 18, her "stake" would be $14,000 in today's dollars, assuming a "real" (inflation-adjusted) interest rate of 3 percent. If the family contributed $500 a year, the stake would be $26,000. If, by good fortune, the account earned a 5 percent real rate of return, the child's stake at age 18 would total $32,000 in today's dollars, assuming the family kicked in $500 a year.

The real goal of the KIDS accounts is to encourage families to save on an annual basis. The grant at birth is the seed, but the tax savings and matching funds are what really make the account grow.

Reid Cramer, research director for the asset building project at the New America Foundation, pegs the 10-year cost at $37.5 billion, and the 20-year cost at about $85 billion. Compared with recent tax cut and spending bills, that is a relatively small amount. However, like any worthy expenditure, the ASPIRE Act should be "paid for" via spending cuts or tax increases.

This is the sort of big centrist idea that either Senator Kerry or President Bush should be discussing with the American people. It helps low-income families without creating a welfare dependency; it encourages savings and investment.

The KIDS savings accounts should be viewed as a stepping stone toward larger reforms, including Social Security reform and pension simplification.

Here is a summary provided by the sponsors' offices:

The America Saving for Personal Investment, Retirement, and Education Act (“The ASPIRE Act”)

Purpose of the bill
To encourage savings, promote financial literacy, and expand opportunities for young adults by establishing a KIDS Account for every newborn child.

KIDS Accounts
Every child born after December 31, 2005 issued a Social Security number will have a KIDS Account opened for them automatically. Each account will be endowed with a one-time $500 contribution, and children in households earning below national median income will be eligible for a supplement contribution of up to $500. Accounts will be supported by a series of incentives, including tax-free earnings, match savings for eligible families, and financial education.

The KIDS Account Fund
The bill establishes the KIDS Account Fund within Treasury, which will be governed by a Board of Directors similar in structure to the Board overseeing the Thrift Savings Plan (TSP), the retirement program for federal employees. The Director of the Fund will be appointed by the Board and shall have the same powers and responsibilities as the Director of the TSP.

Government Contributions:
Automatic Contribution
After an account has been created, the Secretary of the Treasury shall automatically transfer to the Fund a contribution of $500. All contribution amounts will be indexed for inflation.

Supplemental Government Contribution
A child will qualify for a one-time supplemental contribution if their household income is below the national median income. The maximum supplemental contribution will be $500. The bonus amount will be evenly pro-rated so that a child receives the full amount if their household income is at or below 50% of the national median Adjusted Gross Income (AGI) and a lesser amount as the household income approaches 100% of the national median AGI.

Matching Contributions
Eligible account holders can receive a one-to-one match on private contributions to their accounts of up to $500 on an annual basis until the account holder reaches the age of 18. Account holders with household incomes up to 100% of the national median AGI will receive a dollar for dollar match on private contributions up to $500. Account holders with households incomes between 100% and 105% of national median AGI will have their match rate phased out at the same ratio as their income exceeds 100% of national median AGI.

Private Contributions
Private, voluntary contributions can be made to each account up to $1,000 each year. These contributions will be after-tax and can come from any source.

Repayment
Each account holder will be required to repay the initial automatic contribution at age 30. The Executive Director will develop procedures to govern options for repayment, and will consider community service and hardship forgiveness provisions. The repayment obligation will not be indexed over time; the supplemental contribution does not have to be repaid.

Investment of the KIDS Account Fund
Investment Funds
A range of investment options will be provided similar to those offered by the Thrift Savings Plan, including a government securities fund, a fixed income investment fund, a common stock fund, and other funds that may be created by the Board.

Account Custodians
Parents and legal guardians will serve as account custodians and make investment decisions until the accountholder reaches the age of 18. The account custodian shall elect how money in the KIDS Account is invested. If no election is made, a life cycle investment option will be specified as a default.

Distributions from KIDS Accounts
Account holders can use money from their accounts to pay for post-secondary education at any time; otherwise no withdrawals can be made until the account holder reaches the age of 18. Once accountholders turn 18, withdrawals shall be generally governed by the same compliance and distribution rules which currently apply to the Roth IRAs. These rules permit withdrawals without penalty prior to retirement for first-time home purchase and post-secondary education. Non-qualified distributions will be penalized at a rate of 10% for earning and private contributions and 100% for government contributions. All of the exceptions to the early withdrawal penalties for the Roth IRA will apply. Accountholders can access their private contributions without penalty after age 18.

Account Transfers
When they reach the age of 18, account holders will have the choice to either keep their accounts within the Fund or transfer their accounts to financial service providers of Roth IRAs, Section 529 Education Plans, or privately-managed KIDS Accounts.

Tax Treatment of KIDS Accounts
Qualified distributions from these accounts will be tax-exempt and not included in gross income. Non-qualified distributions will be subject to a 10% tax and a 100% tax on government contributions. Voluntary contributions to each account will be after-tax and will not be tax deductible. Government contributions will not be included in federal income tax calculations.

Assets Test
Account assets will not be considered in determining eligibility for any Federally-funded benefit.

Financial Literacy
The bill explicitly calls for the development of programs to promote financial literacy among persons who contribute to and benefit from these children’s savings accounts.

Links:
Legislative text of the Santorum-Corzine Senate bill.

Questions and Answers about the proposal (from the office of Rep. Harold Ford)

Centrists.Org Issue Summary: Wealth-Building Basics (Including Stakeholder Accounts and Pension Reform)

Centrists.Org Issue Summary: Social Security Reform

Deficits for Stimulus Were OK. But Now?

President Bush and Senator Kerry should mimic Presidents Reagan and Clinton by advocating tax reforms and the reduction of long-term deficits.

Although the economic figures remain a little tentative, it's fair to say that Bush's budget deficits have successfully re-inflated the U.S economy. At this point, the recovering U.S. and world economies are benefiting. Combined with ultra-low interest rates, the deficits helped prevent an extended recession. Fears of deflation -- a worrisome drop in prices accompanied by economic stagnation -- are almost gone, even in the most affected economies, like Japan's.

In fact, strong economic growth, especially in East and South Asia, is causing new inflationary pressures. In the longer term -- assuming trade remains relatively unrestricted -- Asian economic growth will boost global productivity and incomes. But the U.S. shouldn't take low inflation for granted.

The huge swing into budget deficits in the U.S. -- accomplished via short-term tax cuts and spending increases -- deserves some credit for the global economic improvement this year.

Now, the emphasis must shift to structural reforms and re-balanced budgets. Looking forward, continued large deficits will hurt the economic prospects, driving up inflationary expectations and, ultimately, interest rates.

It's time for the Bush Administration to give up on its misguided zeal to make tax cuts permanent. Tax cuts to be implemented in 2006 or 2010 have little to do with current economic growth. Or future economic growth, for that matter. But foregoing some of them could help the budget a lot.

The supply-side theory that small changes in future tax rates will change investor and entrepreneurial behavior is vastly overstated. In fact, the worrisome deficit outlook is probably more likely to retard future growth, now that recession and deflation fears have abated.

President Bush should quit complaining about Senator Kerry and present a coherent, responsible economic policy for the next four years. The right choices would be to reform the over-complicated U.S. tax code and to significantly reduce the federal deficit. That will mean rescinding tax cuts now that they are no longer necessary for economic stimulus.

Under Bush or Kerry, the biggest problem for the next 5 or 6 years will be insufficient revenues. Tax reform would be a way to combine popular simplifications of the tax collection process with unpopular revenue increases.

After 2010, the main problem isn't revenues, it's spending.

With short-term deficits under control, we could re-address entitlement reforms, so that budget problems will not paralyze the government -- and the economy -- once the huge baby-boom generation starts to retire and demand entitlement benefits.

Obviously, it will take leadership from the Democratic side of the aisle -- historically the protectors of entitlements -- to make progress on entitlement reform. Senator Kerry should be open-minded about long-term Social Security and Medicare fixes. At the least, he should instruct his campaign to refrain from the usual "scare" rhetoric on entitlements.

The first priorities of the next president should be tax reform and deficit reduction. Deficit reduction will require rolling back tax cuts -- preferably in the context of tax reform -- and trimming "discretionary" spending.

But scaling back Congressional appropriations won't be nearly enough to bring the budget back into balance in the long run. And raising future taxes is not a viable solution. Taxes would have to keep going up and up to match ever-increasing entitlement costs.

We will need sufficient revenue increases now, and a significant slowdown in entitlement spending later.

Links:
Centrists.Org Summer Economic Update -- Moderate Growth and Slowly Improving Labor Markets (July 9, 2004)

Centrists.Org Where Will the Deficit Go From Here? New Long-Term Budget Projections (June 3, 2004)

Class Action Reform and a Congress That Can't

On Wednesday, the Senate failed to agree on a process to complete work on a compromise bill to reform abuses of class action lawsuits. According to press reports, there will be another vote on Friday, but it's doubtful the bill can pass without a bipartisan agreement on amendments.

Republicans will blame Democrats for being obstructionists, and that's partly true. Democrats want to use the class action bill as a vehicle for a wide range of amendments -- topical and not -- which otherwise would not be considered in a gridlocked, mismanaged Congress.

However, the deeper fault lies with the Republican leadership, which has consistently failed to work in a bipartisan manner on bills that are important to the nation's well-being.

Congress appears destined to slouch out of town this fall with few lasting accomplishments and with the government operating mostly on an ad-hoc basis. An out-of-control autopilot, so to speak.

No budget, no budget process and spending rules, no meaningful tort reforms, no welfare reauthorization, no mid-course corrections on the Medicare drug benefit. No controls on entitlement spending, no long-term plan for taxes, no action on health care, no energy bill, few carefully considered appropriations bills, a "continuing resolution" to fund the government.

Even must-pass trade legislation designed to prevent U.S. producers from facing ever-higher tariffs, which passed both the House and Senate by wide margins, will seemingly be delayed until after the August recess and the political conventions.

Last month, the House botched its handling of a bill to improve the budget process, effectively shutting out from consideration the only bill -- the one sponsored by the conservative Blue Dog Democrats -- which was likely to garner enough votes to pass.

And it's not only Democrats who are complaining about the gridlock. According to an AP news report tonight, Republican Senator Larry Craig was deeply disappointed that his amendment to the class action bill was disallowed.

Because so little legislation is even considered, Senators and Representatives must try to get their pet initiatives "tacked on" to any bill that seems to be moving. This is why the so-called "FSC-ETI" trade bills included hundreds of extraneous provisions, and why Senators from both parties insist on offering amendments to the class action bill.

Even when it succeeds, the "tack on" amendment process is a recipe for poorly considered legislation. Congress is supposed to use the committee process to iron out problems and craft compromises in laws. Last-minute amendments are often badly drafted and ill considered. The political furor of the moment often trumps thoughtful analysis when the committee system is bypassed and legislation is rushed to sudden final votes.

When bills do pass, many of the "yes" votes are bought, not acquired by persuasion that good policy was being made. This Congress has elevated the use of expensive parochial or pork-barrel add-ons to purchase the votes of reluctant legislators.

The larger failure isn't a lack of bipartisanship, although that is a problem. The big problem is a lack of leadership.

First, this Congress and the Bush Administration have succeeded in politicizing everything, thereby fanning the flames of partisan bitterness and ensuring a paucity of bipartisan cooperation. Congressional leaders and the President seem persuaded that every issue should be a political issue, and that no problems can be solved without trying to stick it to the other party.

Second, the Bush Administration is essentially directionless on domestic policy.

This atmosphere is good for neither party, but it is most hurtful to Republicans since they control Congress and the White House.

But it really hurts the American people, who rightly blame hyper-partisanship and leadership failures for the fact that real problems -- like the abuse of class action lawsuits -- continue to go unaddressed.

Links:
Centrists.Org The FSC-ETI Bills Highlight the Need for Tax and Budget Reform (revised July 6, 2004)

Centrist Policy Network Moderate Republicans and Conservative Democrats Urge Tougher Budget Rules (March 31, 2004)

Political Polarization Not Shared By Voters?

In case you missed it during last week's Congressional break, Robert Samuelson's column on June 30 claims that the rise of political extremism in the U.S. is not necessarily a symptom of a increased polarization among voters.

Samuelson argues that while the political class is more polarized than ever, the population as a whole is not, and that real split may be "between the true believers on both sides and everyone else."

Here are excerpts.

Let me raise a red flag about the "red and blue states," which is the reigning theory of U.S. politics. All those blue states (heavily urban and mainly on the East and West coasts) voted for Al Gore. The red states (more rural, Southern and Western) voted for George Bush. Presto, the map defines us. We're a country geographically "polarized" by values and lifestyles. This is a masterful explanation for the increasing nastiness of politics, with only one big drawback. It's wrong.

If the country were more polarized, you'd expect to find it in the polls. You don't. After scouring surveys, sociologist Paul DiMaggio of Princeton University concluded that "the public actually has become more unified in attitudes toward race, gender and crime since the 1970s." One standard poll item asks respondents to react to this statement: "I don't have much in common with people of other races." In 1987, 23 percent agreed; by 2002, only 15 percent did. Of course, strong disagreements (on abortion, for instance) remain. But these disguise large areas of consensus; 80 percent or more of Americans regularly support environmental regulation.

What's even more absurd is the idea that regions have -- after jet travel, interstate highways, air conditioning, TV and mass migration -- become more different. Texas and New York have more in common now than in 1950 or 1960.

What's actually happened is that politics, and not the country, has become more polarized. By politics, I mean elected officials, party activists, advocates, highly engaged voters and commentators (TV talking heads, pundits). In his search for polarization, sociologist DiMaggio examined many subgroups by age, race, sex and education. None exhibited more polarization, with one exception: people who identified as "strong" Republicans or Democrats. That's about 30 percent of adults.

The result is a growing disconnect between politics -- and political commentary -- and ordinary life. Politics is increasingly a world unto itself, inhabited by people convinced of their own moral superiority: conspicuously, the religious right among Republicans; and upscale liberal elites among Democrats. Their agendas are hard to enact because they're minority agendas. So politicians instinctively focus on delivering psychic benefits. Each side strives to make its political "base" feel good about itself. People should be confirmed in their moral superiority.

Politics should reflect and, at its best, conciliate the nation's differences. Increasingly, it does the opposite. It distorts, amplifies and inflames conflicts. It's a turnoff to vast numbers of centrist voters who do not see the world in such uncompromising absolutes. This may be the real polarization: between the true believers on both sides and everyone else.

Link:
Robert J. Samuelson How Polarization Sells Washington Post (June 30, 2004)