The welfare state at the start of the 21st century appears to be in the midst of a transformation. The original consensus was that, if the market economy was sufficiently productive, it could be taxed to support social expenditures. These social expenditures were assumed to be a diversion of capital from production and a drag on economic growth.
Today, the assumed competition between social protection and economic growth is being challenged. There is increasing recognition that social spending for some purposes and/or in some forms can contribute to both economic growth and social development. Reflecting this, the best social policy alternatives will move beyond the idea of consumption-as-well-being, toward what Amartya Sen identifies as capabilities. Building people’s assets is one policy pathway to both increase capabilities and eliminate the trade-off between economic growth and social development in the process.
Consistent with this perspective, social policy in the 21st century may have three major goals:
Social protection goals. To buffer hardship and promote social stability has been the primary – almost exclusive – theme of 20th century welfare states. The focus is on standard of living, coverage, and adequacy and minimum protections at the bottom. This is social welfare defined in terms of income and consumption.
Development goals. Promoting the economic and social development of families and households and their active participation in work, community and civic affairs may become as important as social protection goals.
Macroeconomic goals. Increasingly, social policy will be formulated with macroeconomic considerations in mind, including counter-cyclical spending, fiscal stability, savings and investment, and economic growth.
In other words, social policy appears likely to move beyond consumption support, aiming for greater social and economic development of households, communities, and the society and economy as a whole. An active social policy that promotes engagement is better suited to the post-industrial economy.
Asset-based policy is a major social policy transformation occurring in many countries, but as yet little recognized. Asset holding has many positive effects for individuals and families, including greater long-term thinking and planning for the future, increased participation in the community and investments in self, financial instruments and enterprise for greater returns.
Although sometimes called “privatized,” the state is a major participant in the new asset-based policy. Much of the policy is delivered via accounts such as 401(k), college savings plans and the like. The state is leading the way by defining these policies, regulating them and providing tax benefits as subsidies for asset accumulation. This is very likely a historic transition toward asset accounts as a main social policy instrument – a transition from Social Welfare State to Social Investment State.
But the poor, who do not qualify for the tax benefits, are usually left behind. Asset-based tax benefits are extraordinarily regressive. The well-off get almost all of the benefits. Thus, the state is, perhaps unwittingly, becoming part of the structure of asset inequality. It is important to note that no universal, progressive, asset-based policy exists anywhere today.
Experimentation in the United States
The idea of a progressive asset-based policy in the form of Individual Development Accounts (IDAs) was introduced more than a decade ago and has become more common with each passing year (see Shelterforce #s 89, 110 and 126). IDAs are matched savings for particular purposes, usually homeownership, education or small business capitalization. IDAs were not intended to be small community projects, but rather a universal policy system. We are taking steps in this direction.
At the Center for Social Development, we have been studying the American Dream Demonstration, an IDA demonstration implemented by the Corporation for Enterprise Development and supported by 11 foundations, with the Ford Foundation and Charles Stewart Mott Foundations playing leading roles. We are learning that even the very poor can save when there are a structure and incentives to do so. It is noteworthy that people of very low incomes (under 50 percent of the poverty line), controlling for other factors, save as successfully as people with greater incomes (up to 200 percent of the poverty line). In other words, those with very low incomes save at a higher rate than high-income individuals.
Vision and leadership will be required to include all of the poor in asset accumulation policies and to make asset accumulation life-long. Inclusion of everyone in asset-based policy will reduce social inequality and divisions and increase economic activity and growth. New thinking and new calculations on the part of government will be required. In the Social Investment State, there is not necessarily a trade-off between redistribution and growth. Promoting and subsidizing asset holding by the poor can contribute to growth in the long term.
Focus on Children
Asset holding may make the most sense in the case of children for several reasons. First, asset building is a long-term process. Starting early will result in greater accumulations. Second, asset holding probably changes outlook and attitudes in positive ways. And we know that it is far easier and more effective to change outlook and attitudes earlier in life rather than later. Third, the whole family can be engaged around asset-based policy for children.
Among many possible asset-based policy options, the proposed Child Trust Fund of Prime Minister Tony Blair in the United Kingdom, which would be universal and progressive, offers the greatest opportunity for long-term transition toward an inclusive asset-based policy. IDA research results in the United States helped influence the Blair proposal. Over time, a Child Trust Fund could develop into a system of life-long accounts for the entire population.
Policies similar to the Child Trust Fund have been proposed in the United States for several years, and they are gradually gaining prominence and support within both major political parties. An important demonstration of children and youth accounts is being planned by the Corporation for Enterprise Development. If the United Kingdom were to move ahead with a Child Trust Fund, it could become the final push that creates a similar policy across the Atlantic and could ultimately influence policy in many nations.
Eventually, we may be asking: why not a child saving account for every child on the planet? Although this seems far out of reach today, information technology may one day make this possible. Not only technological but political challenges would be great, but it may be worth the effort. What better way to invest in economic and social development?
Policy Principles
Any asset-based policy system should complement, not replace, existing income-based policies. A mature asset-based policy should be shaped by four core principles: inclusiveness, progressivity, coherence and development.
Perhaps the most important issue is inclusion. The goal should be an asset-based policy that is large scale and fully inclusive, with progressive funding, so that everyone participates and has resources for life investments and social protections. The policy could include everyone beginning at birth, as with the UK Child Trust Fund, which would be the most sensible and desirable approach.
In asset-based policy, solidarity should come up front with progressive deposits into accounts of the poor. Current asset-based policy in every country in the world is regressive. The minimum standard should be equal subsidies in currency units (not percent of income) for everyone. For example, whatever tax benefits a wealthy person receives on a pension account should be equaled by direct deposits into the account of a poor person. A better, but more radical, principle would be progressive deposits in currency units – greater subsidies for the poor, as proposed for the UK Child Trust Fund.
Asset-based policy is not primarily about problem amelioration or fighting poverty. It is about enabling individuals and families to be in control of their lives, develop capabilities, and contribute to society and the economy. While this will involve tackling poverty, we should remember that the central goal of asset-based policies is development in a broader context. It is about building the capacity of people with low incomes and allowing them to seek opportunities.
Design Principles
There are signs that policy makers around the world are beginning to realize the importance of developing inclusive asset-building policies. A number of design issues should be borne in mind if this thinking is to lead to successful policy implementation.
Extension. It is easier to extend current policy than to create new policy. In the United States this could include democratization of existing pension products, such as IRAs and 401(k)s for all workers. Policy extension can occur in other forms as well. In nations with child allowances, including all of Western Europe, a universal children’s savings account could be viewed as an extension of the allowance.
Institutional framework. Institutional arrangements largely determine who accumulates assets. Low-income persons face four barriers: insufficient income tax liability to take advantage of tax benefits for savings and asset accumulation; weak or no attachments to the formal labor market, where most structured asset accumulation occurs; asset limits in public assistance programs, which are disincentives to save; and a greater likelihood of not being part of the financial mainstream, or being “unbanked,” which makes asset accumulation nearly impossible. Asset-based welfare should extend institutional arrangements for asset accumulation to low-income, low-wealth persons.
Infrastructure. In “The Universal Piggy Bank: Designing and Implementing A System of Savings Accounts for Children,” Fred Goldberg and Jodi Cohen have argued that if the government set up accounts for everyone beginning at birth and did nothing else, this would be a major step forward. Goldberg refers to this as “putting the plumbing in place.” If the plumbing (universal asset accounts) were in place for everyone, resource flows, both public and private, would be facilitated.
Simplicity and cost control. The key to cost control is simplicity and will likely mean a policy instrument with centralized administration and one or only a few investment options. One alternative is that individuals own shares of an asset pool invested by government (or an agent of government). A second alternative is limited individual investment choices from low-cost mutual fund (unit trust) companies. This simple, low-cost system can be complemented by financial education and other supports at the community level where necessary, but such costly features should not be part of the basic policy.
Pathway to scale. It may not always be possible to reach everyone at the outset or fully fund a large-scale policy. In these circumstances it may be necessary to start small but with a policy design that can be expanded over time. To end up with a large, low-cost program, it is not a good idea to begin with a small, high-cost program. This is what has occurred with IDAs in the United States. We are now in the process of designing low-cost policy models that will work on a larger scale.
It is enormously challenging to create a universal, progressive asset-based policy. The odds against success are great. However, it is useful to recall that early in the 20th century the odds against creating a universal, progressive social insurance policy were also great. Yet by century’s end social insurance had become, in a fiscal sense, the central characteristic of modern states.
By the end of the 21st century the social policy landscape will again look very different. Asset-based policy is likely to continue growing, possibly replacing social insurance as the dominant form of policy in advanced economies. Various types of asset accounts may be integrated into a single, multipurpose policy system. Everyone might have an account from birth with funds accumulated for education, homeownership, life and health insurance, some aspects of medical care and retirement. In the United States, it seems likely that existing asset accounts – IRAs, Medical Savings Accounts, 401(k)s, Individual Training Accounts, Educational Savings Accounts, IDAs and so on – will merge into one system. It is important to consider how this evolving system can include unbanked persons and provide them with equivalent incentives to participate through direct deposits and refundable tax credits (see Shelterforce #127).
Accounts will also likely be portable, potentially across national boundaries. For example, one can imagine a policy system that is perfectly integrated in the European Community and perhaps in North America. The latter would be the social policy equivalent of NAFTA. Indeed, with the rapid expansion of information technology, one can imagine a worldwide system of asset accounts that is fully portable anywhere on the planet.
Inclusion will be the major challenge. If we stay on the present course, the poor will continue to be excluded from asset accumulation and will not fully participate in the emerging system. If inclusion is to be achieved, it will rest on the widespread recognition that asset building is a sensible public investment because it increases the capabilities, engagement and productivity of the people.
SEEDing the Future
The Corporation for Enterprise Development (CFED) has developed a five-year initiative to explore the potential of Savings for Education, Entrepreneurship and Downpayment (SEED) accounts.
A SEED account is opened for every child at birth with an initial public deposit of $500 to $1000 and cannot be closed out until age 18. The account can only be used for education, training, business development, buying a home or retirement. Family, friends and the account holder can make deposits, as can other public and private sources. Another feature of SEED accounts is a public match for account holders, delivered through a tax deduction or refund credit. To encourage saving, age-appropriate financial education will be offered.
As part of the SEED Policy and Practice Initiative, CFED will select community partners to establish and evaluate 500 to 1000 accounts for mostly low-income children across the country. The initiative is coordinated by CFED, the Center for Social Development of Washington University and the School of Social Welfare of the University of Kansas. The Ford, Charles and Helen Schwab and Edwin Gould foundations, the Jim Casey Youth Opportunity Initiative and others are funding the project. For more information, see https://seed.cfed.org.
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