NCPA - National Center for Policy Analysis


March 28, 2006

There is growing bipartisan recognition that the pathway out of poverty is not through consumption but through saving and accumulation, and that idea has led to a movement for some form of "children's allowance," say Jagadeesh Gokhale and Michael Tanner, of the Cato Institute.

These federally funded grants to children, known as KidSave accounts, could be saved for education and retirement, and address a very real problem: the failure of Americans, especially low-income Americans, to save for their own and their children's futures, say Gokhale and Tanner.

However, there is ample reason to be skeptical of KidSave as an approach for increased savings, say Gokhale and Tanner:

  • The proposal would create a massive new entitlement program, costing as much as $266 billion over the next 75 years (in present value terms).
  • If the program were to be expanded, as some observers have advocated, to all children instead of only newborns, the present-value cost would rise to $414 billion.
  • Additionally, the cost to taxpayers would be even higher if the government were to adopt proposals to match future contributions made to KidSave accounts by low and middle-income parents.
  • KidSave accounts would redistribute resources from families without children to families with children; as a result, adults who face higher taxes and receive no benefit would reduce their labor-market participation.

Moreover, the reduced labor supply would reduce current output -- again, negatively impacting capital accumulation.

We should make every effort to expand savings opportunities and wealth accumulation for low income Americans. The proponents of KidSave have been asking the right questions; however, they have arrived at the wrong answer, say Gokhale and Tanner.

Source: Jagadeesh Gokhale and Michael D. Tanner, "KidSave: Real Problem, Wrong Solution," Policy Analysis (Cato Institute), January 24, 2006.

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