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Nest-Egg Accounts: Key Questions and Policy Options

Report prepared for the Chifley Research Centre - April 2004

Institute for Public Policy Research (IPPR)

Context and the Objectives of a Nest Egg Account

Context

Whilst inequalities in income are the focus of much attention, inequalities in the ownership of assets remain a silent and often misunderstood sibling. There has been recent interest among policy makers around the world in the importance of assets in collective and individual welfare. This has come in the guise of what has been labeled asset-based welfare. So why should government want to get involved in influencing the distribution of assets? A more complete picture of economic inequality would paint the distribution of assets alongside that of income. But there are other reasons for demanding a public policy response.

Firstly, government already plays an important role in determining the distribution of assets. The problem with asset-building policy in western countries over recent years has not been that we haven't had one, nor that it has been devoid of values. It has been quite the opposite. We have had regressive policies based on the wrong set of values. Tax relief on on some asset classes, for example, is often badly designed, with the effect that it can be highly regressive and systematically benefit high-income earners. Alongside this, there are currently disincentives for people on low-incomes to accumulate assets, the most glaring of these being capital limits in the benefits system. Government currently helps those with, to own more, and for those without, it deters from owning anything.

Secondly, there is growing evidence that the ownership of assets can have a powerful effect – even after controlling for income levels – on a range of social outcomes such as health and labour market performance. The role that assets could play in government policy to promote social mobility seems worthy of investigation. In the early 1990s, the work of Michael Sherraden also demonstrated a range of benefits that could accrue from holding assets such as enabling people to look forward to the future with greater confidence and security, allowing them to make long-term plans, and giving them greater autonomy over their lives.

Thirdly, the important role that assets play in enabling individuals to access opportunities needs to be addressed. Many people are still excluded from a number of major life opportunities such as going to university, owning a home or simply having financial security. If we are serious about changing this pattern of opportunity then new tools will be needed. Further emphasis on income-related policy measures seems unlikely to meet the task of creating opportunity for all.

Finally, there is increasing evidence that public policy that helps people with low levels of savings to accumulate assets does work. In the USA, Individual Development Accounts (IDAs), run by local community organisations, now operate in over 30 States and demonstrate that people on low incomes are keen and able to save. Individuals benefit from matched funding – for example for every A$1 saved, A$2 is contributed by the state. Testimonies from individuals with IDAs stress not only the benefits of holding assets but also how the approach has allowed them to take control over their own lives. It is argued that without assets, people will remain both poor and powerless and that ignoring the importance of assets will limit any attempt to tackle social exclusion.

For these reasons and others, different asset-based welfare policies have been developed around the world. In the UK two policies have been announced. The Saving Gateway is a savings policy for people on low incomes, based largely on the IDA model. It is currently being piloted in five different locations in England with an eye to being rolled out nationally in approximately two years time. The second policy that was announced is the Child Trust Fund (CTF). This will provide all newborn children with an endowment and an account in which funds accumulate. They will have access to the money in early adulthood. In this year's April UK Budget it was confirmed that all children born after October 2002 will be eligible for the CTF, but that it would not actually be implemented until 2005. (For full details about the CTF see appendix 2 on sources of further information). The CTF has not, at the time of writing, been implemented, though it has provoked much interest and comment. This paper draws on this debate in addressing the key questions about design of a Nest Egg Account. The two policy proposals are very similar.

Overall objectives of a Nest Egg Account

The CTF and proposed Nest Egg Accounts (NEAs) are a version of that which in the academic literature is labeled a Stakeholder Grant. At their core is the aim of providing young adults with a stake in the wealth of their country and help give people as equal a start in life as possible. The specific type of a Stakeholder Grant represented by the NEA and CTF, because it endows newborn children, also has the key aim of financial and citizenship learning. In broad terms then, four aims for the NEA could be identified:

  • Citizenship

The CTF is universal and stresses that all young adults have a right to a share of the nation's wealth by virtue of being a member of a national community. (We shall return to debates about universalism below.)

  • Wealth equality

One of the overarching concerns of social democrats is for the increasing inequality of wealth, which is high and forecast to worsen in Australia (Kelly, 2002). Policies are needed to address this problem. The purpose of NEA or CTF programs is to increase the equality of the distribution of wealth among young adults.

  • Opportunity

Intuition and evidence suggests that citizens who start their adult life with an asset are more likely to be able to take opportunities and improve their later life outcomes (Bynner, 2001).

  • Changing behaviour

Another argument for a NEA is that it will change people's behaviour. Most obviously as people own an account as they grow up it can be used as a tool to facilitate financial learning and install in people the value of savings. This could be particularly important given wider policy concerns about savings rates and retirement income policy.

There can be tradeoffs between some of these aims. A universal policy which scores highly in terms of citizenship, will inevitably spread resources more thinly across a larger number of people. This could undermine the opportunity aim and especially undermine attempts to extend opportunity to the worst off in society. Universality could also undermine the wealth equality aim or vice versa. Other aims can support each other. For example, the aim of changing behaviour can underpin and support the widening of opportunity. If people think seriously about how to use their money and spend it wisely they are more likely to get a higher return and to open up opportunities for themselves.

The full version of this paper, throughout which we will refer back to these overall aims, will address key design questions for NEAs.

  • Should there be restrictions on what funds can be spent on? If so how should these be enforced?
  • Should children and their families have access to funds before children turn eighteen?
  • How should eligibility at different stages in the account's growth be defined?
  • How generous should the NEA be?
  • How should NEAs be phased in so that children who are already born benefit?