Long-term savings accounts for children
June 26, 2016
A new Policy Brief by the Taub Center for Social Policy Studies in Israel examines various alternatives for long-term investment accounts for children, ahead of a program that will be implemented in January 2017. The program seeks to ensure that every young person entering adulthood will have assets available to integrate successfully into Israeli society.
Click here to read the full policy brief on long-term savings accounts for children.
In today’s Israel, with particularly high poverty rates and inequality, tens of thousands of young people complete their high school education or their military/national service and must begin their adult life without the resources to fulfill their potential. The implementation of a child development accounts program will allow these same young people to enter adulthood with a lump sum of money to help them start the journey.
Globally, there is a trend toward child development accounts. In Israel, the legal infrastructure for such a program was established through the Economic Arrangements Law. A few days ago, the Finance Minister signed regulation that establishes a mechanism for savings for each child and discussions are currently underway ahead of final approval of the program. This new Policy Brief authored by the Chair of the Taub Center’s Welfare Policy Program, Prof. John Gal, and Taub Center researcher Shavit Madhala-Brik, in conjunction with Prof. Michal Grinstein-Weiss and Meredith Covington from Washington University’s Center for Social Development presents various options for savings programs and examines the social and budgetary implications of each.
The importance of child development accounts and the situation in Israel
In the last twenty years, the use of asset building tools has grown as a means of combating poverty and inequality. Underlying this concept is the assumption that families and individuals who want to advance and improve their situation need resources to invest in education, housing and the labor market. This assumption is further strengthened by the fact that lower income families tend to have a greater number of children, and so the likelihood that these children will lack essential resources to fully develop their abilities is even higher.
Over the past several decades, various programs have been developed in Israel, with the aim of providing a foundation of assets for young people beginning their adult lives. This includes, for example, programs giving scholarships for higher education to residents of the periphery and other specific target populations such as Haredim (ultra-Orthodox), as well as grants and savings deposits for soldiers completing their military service and individuals completing national civil service. However, the size of these programs is relatively small, and the target audience does not reflect the entire population. The Taub Center study presents an array of options, including some that offer asset-building programs to the entire population and some that are designed for specific population segments. A detailed description of the differences among these programs and their implications is presented in the study.
Investment program options
The study presents four child development account options:
Option 1 (Economic Arrangements Law)
This alternative is based on the proposal approved in the framework of the Economic Arrangements Law of 2015. The program would be for all new children born, wherein the state would budget NIS 50 per month for each account, as well as a variable lump sum at withdrawal (NIS 500 for redemption at age 18 and NIS 1,000 if redeemed at age 21). Parents who can afford to do so may add NIS 50 per month to the savings account for their child.
The savings account can be used at age 18 toward education, opening a business, marriage or purchasing a home. At age 21, the savings can be used for any purposes (in accordance with Government Decision Number 362).
- At the end of the savings period, each child will have at his disposal NIS 12,200 (NIS 13,000 if withdrawn at age 21), and NIS 23,930 if the child’s parents were able to add the additional monthly savings (NIS 25,000 at age 21).
- Cost to the state for the first year is estimated at about NIS 110 million, and the annual cost after the program is fully operational is estimated at about NIS 2.4 billion.
Option 2 (The Committee for War on Poverty)
This option presents a program based on the recommendation of giving an “Empowerment Grant,” as presented in the Report of the Committee for the War Against Poverty. According to the proposal, the grant will be given to those children who are economically disadvantaged and whose parents do not receive income tax credit on savings programs (pensions, advanced study funds (keren hishtalmut), provident funds, etc.). In this framework, after a child is born, mothers are given the option of investing their maternity grant on behalf of their newborn. In addition, a minimum monthly investment of NIS 50, for example, would be taken out of the child allowance, with the government investing a matching sum (1:1 matching ratio). The family has the option to opt out of the program and continue to receive the full child allowance amount. This option proposes a real interest rate of 5%, which will be subsidized by the Ministry of Finance (in contrast to the other options, which offer the market interest rate).
- At the end of the investment period, when the child reaches age 18, savings will amount to about NIS 37,370. The savings account can be used toward education or vocational training, opening a business or other long-term investments.
- The costs of this option in the first year are about NIS 12 million, assuming one-third of eligible families choose to participate and save until a child turns 18. Once fully implemented, the annual costs are expected to be about NIS 580 million.
Option 3 (Center for Social Development, 2010)
This option is based on a preliminary program designed especially for Israel by the research team at the Center for Social Development, at Washington University in St. Louis in 2010. At the time, the proposal served as a basis for early discussions in Israel about the idea of child development accounts. The program proposes opening a long-term savings account for all children at birth as the default option, but allows parents to opt out should they so choose. Instead of receiving a maternity grant, the amount of the grant will be invested in an account and NIS 50 monthly from the child allowance will be directly deposited into the account and matched by the government (1:1 matching ratio) for the child’s first five years. For low-income families who choose to participate, the state will put in an additional NIS 100 monthly (2:1 matching ratio) for the first five years. In addition, the state will deposit NIS 1,000 at two points during the program: when the child enters first grade and when the child enters middle school.
- The accumulated savings is expected to reach about NIS 22,120 for children from low-income families and NIS 16,500 for all other children. The savings are intended to be used for higher education, vocational training, renovation or purchase of an apartment, purchase of a car, or opening a business.
- Assuming that one-third of families participate and invest NIS 50 per month, the annual cost to the state upon full implementation is about NIS 355 million
Option 4 (The Combined Program)
This alternative proposes a long-term savings grant for each child, with a higher savings amount for children from economically disadvantaged backgrounds. Similar to the proposal from the Committee for the War Against Poverty (Option 2) and that proposed by the Center for Social Development (Option 3), this program also gives new mothers the option of depositing their maternity grant into an account in the child’s name. In addition to this first deposit, the state will deposit NIS 50 monthly until age 18 for all children. For those children living in poverty, there will be an option to save an additional sum of money – either NIS 10 or NIS 50 monthly – out of the child allowance, with a matching amount contributed by the government (1:1 matching ratio). Identifying the children entitled to additional savings will be done based on the family’s entitlement to allowances and other welfare services: disability allowances, income supplements, work grants, or children in rehabilitation boarding schools or rehabilitation-therapeutic settings for a year or more.
- At the end of the savings period, each child will have accumulated NIS 13,060. Children eligible for higher savings whose parents took advantage of the full benefit and deposited NIS 50 per month will have accumulated about NIS 36,500. This amount can be used for higher education, vocational training, opening a business or purchasing an apartment.
- Assuming that one-third of families eligible for the additional savings participate and choose to deposit NIS 50 a month, the program is expected to have an annual cost of NIS 2.5 billion upon full implementation.
As can be seen in the figure, there are substantial differences between the options. In order to select among the alternatives, policymakers must weigh in on several issues. One central issue is the target amount of money that those participating in the program should ultimately receive when they are of age to withdraw the money. An additional important question is the target population: is the program intended for all young people, specifically for low income populations, or for some combination of the two? That is, will this program be available to everyone, with additional special terms for children from families of limited means? Another central question in selecting among the alternatives is the desires of the participants. In some of the options, the basic savings is not dependent upon whether the parents choose to participate in the program or contribute to the account, while other options rely on parents’ decision to participate and allocate monthly savings. As the research indicates, there are large differences between the options in the budgetary cost of implementation. The costs to the state upon full implementation of the programs range from NIS 355 million and NIS 2.48 billion per year. In addition, the matching mechanisms required in all but Option 1 are not simple, and there would be challenges in their implementation.
Child development accounts rest on the assumption that there is a need to confront poverty and inequality with a variety of tools. This includes both allocating resources to target populations today in order to ensure that they are able to live with dignity and have access to essential social services, while at the same time enabling savings so that when these youth reach adulthood, they have sufficient assets to integrate successfully into society. Many countries over the past decade have adopted social policies to assist in asset-building and this approach is proposed here for Israel. In light of the findings of the Taub Center, there is room for an asset building program in Israel. As Prof. Gal of the Taub Center says, “So long as the adoption of such a program is in addition to transfer allowances and reasonable access to services, and does not come in place of these services, it is likely to make a real contribution to the group of programs that attempt to deal with the high levels of poverty and inequality in Israeli society.”
As mentioned, a few days ago the government approved regulation that deals primarily with aspects related to the financial management of the savings account for each child, and currently discussions are underway on the final structure of the program. As research from various countries shows, it seems that programs aimed at asset building for the entire population, while also providing for a greater level of assistance to young people from poor families (progressive programs), have the best chances of succeeding in reducing poverty and enjoy more public support and stability. Findings from the current analysis indicate that although this approach requires a large amount of resources and is complex to administer, it gives young people considerable assets at the end of the program and will help confront inequality.
The Taub Center for Social Policy Studies in Israel, headed by Prof. Avi Weiss, is an independent, non-partisan institution for socioeconomic research based in Jerusalem. The Center provides decision makers, as well as the public in general, with a big picture perspective on economic and social areas. The Center’s interdisciplinary Policy Programs – comprising leading academic and policy making experts – as well as the Center’s professional staff conduct research and provide policy recommendations in the key socioeconomic issues confronting the State.
For details, or to arrange an interview, please contact Itay Matityahu, Director of Marketing and Communications at the Taub Center for Social Policy Studies in Israel: 052-290-4678.