Senator's Proposal Would Start Savings at Birth

July 13, 2009 ( - U.S. Senator Charles E. Schumer (D- New York) has unveiled a plan designed to help children save money to afford college, purchase a house and retire.

According to a press release, Schumer said that with tuition prices hitting record highs, pension plans becoming less common and financial literacy becoming more important in tough economic times, his plan would provide all children born in the United States with a $500 savings account at birth.  The announcement said the American Saving for Personal Investment, Retirement, and Education Act (ASPIRE) of 2009 will encourage savings, promote personal fiscal responsibility, and expand individual opportunities by automatically creating a lifetime savings account for all newborn children when their Social Security cards are issued. 

Under the proposal, contributions to the account would grow tax free, and annual contributions made by the child, his or her family, or any private source would be matched dollar for dollar, up to $500 a year, for families up to median income.  Up to $2,000 annually can be deposited into the account.  The money in the account can be used to defray the cost of college, for the purchase of a home, or to retire and would promote savings and financial literacy. 

An account holder would not be able to access the funds until his or her 18th birthday, after which the account will be governed by rules similar to Roth Individual Retirement Accounts (Roth IRAs), allowing for tax-free withdrawals without penalty for select pre-retirement uses including post-secondary education and first-time home purchase. When the accountholder is between 18 and 25, account withdrawals can only be used to defray the cost of college.  After the individual turns 25, withdrawals can be used to purchase a home or to supplement other retirement savings.

The ASPIRE Fund would be established within the U.S. Treasury and overseen by a Board of Directors.  After the account has been created, the Secretary of the Treasury will transfer $500, indexed for inflation, into each individual account.  Children born into households making less than the national median income will be eligible for an additional contribution of up to $500 – those that live at 75% of the median income will receive the full $500 bonus, and the bonus phases out evenly until it hits $0 for people who are at the median income or above.  At any time after the account is opened, the family may transfer the account to a private sector financial institution.

Before an individual turns 18, a parent or legal guardian would make investment decisions. At age 18, the account hold may begin to make investment decisions and additional contributions can be made following Roth IRA rules.  Investment options for ASPIRE accounts would be similar to those for Thrift Savings Plans, such as a government securities fund, fixed income investment fund, and common stock funds.