Democrats would boost savings with 401(k)s for babies

Every baby born in the U.S. would start out with a 401(k)-like account, if a bill introduced Wednesday by Sen. Bob Casey, D-Pa., becomes law.

The concept would help reduce the wealth gap and benefit the country by improving health, increasing tax revenues and resulting in lower crime rates, proponents of the bill said in an accompanying report.

“A lack of income means you can’t get by, but a lack of wealth means you can’t get ahead,” Casey said in a statement. “As American families grapple with rising costs, they deserve a way to save not just for their future, but for their children’s future. My 401Kids Savings Act would provide every child in this nation with the cushion they need to take risks and pursue opportunities to create generational wealth.”

The idea builds on programs that are already up and running in several states, most of which provide 529 college savings account grants for babies. Oklahoma’s SEED OK program, which started 14 years ago, has had promising results, as have newer initiatives in Pennsylvania, Maine, California, Nevada, Nebraska, Illinois, Rhode Island and Connecticut, supporters of the federal bill said. There are also programs led by nonprofits, foundations and cities. The largest program, CALKids, has had 250,000 children registered since it started in mid-2022.

Data show that even children from low- to medium-income families who have less than $500 in educational savings are three times more likely than their peers with no savings at all to enroll in college and four times more likely to graduate, the bill sponsors said.

By participating in the program, children of single parents who are eligible for the earned income tax credit could have at least $53,000 in their accounts by age 18, according to estimates from the Joint Economic Committee of Congress that were cited in the report. That figure is based on federal contributions of $21,000, family contributions of $8,500 and investment returns of $24,000.

Casey’s bill would extend that to the federal level, with the accounts eligible for use by age 18 for educational expenses, home purchases or starting a small business. Money could be rolled over to Roth IRAs or ABLE accounts.

The 401Kids Savings Act, as a pair of companion bills, is cosponsored by five other Democrats: Oregon Sen. Ron Wyden, New York Sen. Chuck Schumer, Virginia Rep. Don Beyer, Ohio Rep. Joyce Beatty and Washington Rep. Suzan DelBene.

The government would provide contributions of $500 per year for families with adjusted gross incomes under $75,000, or $150,000 for couples, phasing out the amounts of contributions for higher incomes. Families that are eligible for the earned income tax credit would get an additional $250 as well as matching contributions for up to $250 per year. Families and friends could also put money into the accounts, which would be capped at $2,500 annually, not including additional contributions provided by states.

The idea could be quite effective in addressing growing levels of wealth inequality, financial planner Madison Sharick of Madi Manages Money said in an email.

“Saving and investing used to be something you did to get ahead. Today, you do it to keep up,” she said. “Gaining financial literacy early in life and investing sooner will be one of the biggest determinants of the haves and have-nots for the next two generations. 401Kids Savings Accounts can help safeguard against this inequality.”

But the effectiveness of such a program could come down to financial education, said Carla Adams, founder of Ametrine Wealth. Without improving the financial education provided to young students, people could be tempted to empty their accounts as soon as they 're eligible for withdrawals, Adams said in an email. Requiring personal finance classes in high school would help, she said.

“These beneficiaries of these accounts may make rash decisions to invest in a poorly thought-out business or to buy a house that they can’t actually afford because they do not understand all of the costs that go into owning a home,” Adams said. “In fact, I believe that this bill will disproportionately benefit the children of the wealthy, whose parents will contribute the maximum $2,500 a year in this tax-advantaged account. The parents will likely have far more resources and financial education to better help guide their kids into making smart decisions with this money when they come of age.”