Anna: Welcome back to the Noyack Expert Series. My name is Anna. I am your production lead and producer and host. Today on this episode, we are here with Madeline Brown. She works over at Urban Institute and is a senior policy associate. And Madeline, it’s been a crazy week, hasn’t it?
Madeline: It has. It’s been busy.
Anna: So, what got you into working with policy in the first place?
Madeline: Yeah. First of all, thanks so much for having me. I got into policy really early on when I was in high school. I just really was interested in US policy and our political system and democracy. I used to work a lot in voting rights and then I moved to DC after college. Ultimately came over to the urban institute and have been fortunate to work on a range of policy issues from workforce development to certification and housing and then in the last five years have been focused on financial well-being and I just think that there is so much that we can do to improve the financial lives of so many Americans.
And I think one of the things that I really like about this space is that it really requires a sort of cross-sector collaboration. You know, we need even though the government is often passing policies, we need our financial institution partners to come to the table to help us build the products and actually reach consumers. And so I really like that sort of the relational piece of this policy area.
Anna: That’s really great. We here at NOYACK are really big on financial education, financial well-being for all. If you want to, you can go check out our website, www.wearenoyack.com and subscribe to our newsletter where every week we dive into a different policy or topic or piece of advice that really will make your personal financial well-being much better.
This week we are focused on the Trump accounts which is a part of the one big beautiful bill act that has just recently passed last week is when that went ahead and went through. So Meline could you just give us a brief explanation what exactly are these accounts?
Madeline: Absolutely. Trump accounts in the version that got passed last week sort of resemble an IRA for kids. They come from a field we call early life wealth building which has existed for decades now. There’s lots of research on it – universal savings accounts, child development accounts, baby bonds, these programs that really open up accounts for babies for every baby in a specific jurisdiction or region, seed them, and then invest them so that you get to take advantage of 18 years of market returns for those kids.
This product in particular resembles an IRA pretty closely with a couple exceptions. One is that there’s no earned income requirement, right? So for a typical IRA, parents can open them for their children as soon as they start earning money. That’s not true here. You can open up an account as soon as the child is born and seed it. And then the goal is that you know these essentially turn into accounts that these kids can use throughout their adult life.
I’ll say one interesting thing, which is that typically in this space, what we see is this really strong emphasis on 18 to 30 as sort of the target age range that these accounts are sort of accumulating for, if you will. The reason for that being that there are large disparities in people’s access to capital and therefore their ability to go to college or purchase a home or invest in a business. So, the idea is let’s take advantage of the markets to allow more children to be able to do that.
Because they went with this product, it feels more like a retirement product that you can just start earlier governed by very similar rules to IRAs with sort of taxes, withdrawals on taxes and happy to get into those details later. But just an interesting shift to sort of where this legislation landed versus where it started is that typically we see these things really focused on young adults and I think this is maybe a new kind of retirement product is a good way to think about it.
Anna: To your knowledge, has there ever been a type of retirement product or policy like this that’s been passed on the federal government level or is this one of the first times it’s happening?
Madeline: There have been what I would call a couple pilots and then a number of pieces of legislation. The assets for independence act was a type of matched savings account that the federal government was running. That was the goal was to really try to open up retirement savings. Secure 2.0 and 3.0 had sort of auto-IRA pieces and then there have been a number of pieces of legislation that haven’t passed for either universal savings accounts or we saw a 401 kids act last year, a baby bonds act the year before that. So different models.
But this is, you know, at least in the last 5 to 10 years, the sort of first piece of federal legislation that we’ve seen passed targeting, you know, what are essentially savings accounts for babies. But I would say a huge set of research exists on the state programs that do exist. There are at least seven states with universal programs, many cities that run programs. So lots of places that we’ve learned lessons in terms of design and implementation from.
Anna: Okay. So, it’s happened in other like smaller situations on the state level or with a piece of legislation, but it’s a little bit bigger this time around with the scale it’s at.
Madeline: That’s right. It’s bigger. I would say, you know, one of the interesting things about where this program landed is that these programs are universal and automatic. So, in any given jurisdiction, the most efficient way to have one of these programs run is that every kid gets an account and that their parents don’t have to opt in. Because what we’ve seen from the research with things like 529s is a small percentage of American families actually access those programs if it’s left up to them to open up. So if we really want to bring in new families into the stock market, new families into the investing space, we have to open them up sort of automatically for families.
And this program, you know, sees these accounts for these four for this four-year cohort, but I would say is sort of missing that general universal and automatic component. So when we think about federal programs, right, like we want to make sure that every dollar we’re spending, especially at the federal level, is meeting a need that’s not met. And I think that’s one of the maybe pieces of this program that sort of veers from the evidence a little bit, which is it’s a little odd to have just this one cohort have this sort of universality component to it because it’s not going to benefit everybody.
And so, you know, that means that every dollar that they spend on sort of outreach and education and helping people understand these accounts is only going to be relevant for this four-year cohort and not necessarily for every American family. Whereas when you look at programs like California, Pennsylvania, Maine, you know, they’re opening up accounts either for every baby or every kindergartener in public school. So much larger reach.
There’s no sort of like usually the cutoff the age cutoff if you will is just whatever is the day after the legislation is passed is when you start enrolling kids. So just a couple interesting distinctions at the federal level but yeah certainly we see some design components that are similar from what we see at the state level and then some that are different with this program.
Anna: Okay that makes a lot of sense and it makes sense that it would be a little bit different on the federal level than at the state level. I think it’s interesting that they are veering from the research in a couple of different areas. Do you have any thoughts as to why that might be?
Madeline: I’m not sure honestly. What we’ve tried to do in the research space is be really clear about again kind of what those principles are and again a lot of them just have to do with administrative efficiency when you’re trying to run a program like this at scale. One of the things that we really learned from the states which are also serving you know millions of kids is you have to be really mindful of the money that it takes to implement a program like this. And so when you can take advantage of sort of efficiencies of scale you’re better off.
So again things that I’ve already talked about like ensuring sort of universality automatic enrollment starting at the beginning making sure you’re starting at birth which they are doing. Things like structure and scale. So one other interesting thing a lot of the state programs have are run essentially you can think of the money as being stored in like a single omnibus account. So even though every kid has their own account just like an insurance account or a retirement account your money is all pooled and then it’s accounted for on the back end. So you still have a certain amount of dollars to your name, but they’re all sitting together and that way the fees to administer that total program are much lower for whatever the financial institution is that’s administering it.
So this type of model where you’re essentially going to have millions of individual accounts and many that have, you know, about $1,000 balances in them. The best practice that we’ve heard from the financial institutions is that that’s a very expensive thing to administer because again administering lots of small dollar accounts is often not something that financial institutions can make pencil out. And so these pieces of sort of like it’s the research shows this but it’s also just what we hear from practitioners implementing these things. It’s just sort of interesting that there are these divergences and I think from a research perspective it’s a little bit concerning because a lot of these best practices are really so that these programs are like most effective can reach everybody and can be used and sort of built culture around.
You think of something like social security that now is sort of like broadly accepted. We all buy into it like we all understand how it works. Whenever you have a federal program you want that to be the case. You want it to be something that everybody in the country understands, knows, knows how it impacts them and how they can use it. And so when you do these things like individualizing and privatizing and not storing the money centrally and only having these pilot years, you run the risk that you’re not going to build the kind of support or engagement with this program that’s really going to bring people in who are not in right now.
Anna: That was one of the things that I was when I was like myself looking through as much of this really big bill that I could get in. One of the things that did pop into my mind was like, yes, this seems like it’s a great program, but like what’s going to happen after 4 years? Is it something that’s sustainable? Is it something that’s going to stay? Is there incentive to keep it going? And I don’t know. Are we really sure about any of that quite yet?
Madeline: I don’t think we are. You know I would say again a lot of the best practices from the research are designed to bring people in who are not currently taking advantage of these programs to build the kind of public support that sort of creates the durability of any of these programs. You know, I do a lot of work in wealth equity and one of the things that’s really hard from a policy level perspective is anytime you have a program where the benefits are really going to be reaped 20 years from now, those are the kinds of things that are often on the chopping block. Because politicians don’t serve for 20 years most of the time, right? You don’t see that kind of longevity in the folks writing and implementing legislation. And so unless you have real public support for a program, it’s really hard to build durability in. And so I think the kinds of limitations that this program has, I think will sort of jeopardize the overall national sort of support and understanding of a program like this.
It’s hard to say what’s going to happen in four years, right? I don’t think any of us knows. Yeah. But I do think that so far what I’ve seen, you know, from the administration is that this is a goal, the goal of this program is to bring families in to the investment space who are not currently in it. And there are pieces of this design like the fact that it’s limited, like the fact that there’s no progressivity in it. So that so wealthy families are receiving the exact same amount of money as low-income families. You know, like the fact that it’s not clear what kind of outreach is going to be done at all for this program. That I think from the research suggests that the durability is going to be challenging for this kind of program.
Anna: Okay. One of the other questions that I think a lot of people are maybe thinking in their heads, especially because this is one of the pieces of this bill that hasn’t really been in the news cycle very much. Because there’s a lot of other things in it. 529s do exist. There’s other kinds of accounts for kids that do exist already. What is there a need for an account like this in actuality for an account like the Trump accounts or like what makes it different than some of these other things that already exist?
Madeline: Yeah, it is one of the reasons why I think those of us who study financial security and wealth equity and income equity are interested and maybe a little bit perplexed by the sort of landing spot of this program. Typically when we talk about like the goals of these types of programs and when you you know refer to sort of what is the need of this kind of program, right, we look at issues of overall wealth disparity, right? That in 2022 the wealthiest families had 71 times the wealth of families in the middle. We look at that extreme disparity and what it means in terms of college enrollment and earnings potential over a life course, retirement savings over a life course, right? Things that are good for the economy if people are doing right. And often you introduce a program like this to try to bring that gap closer or at least bring the bottom up, right?
And especially when you’re talking about very valuable and also in some ways scarce federal resources that like you really want to align any dollars that we’re spending in a moment when we have this huge deficit. With a sort of targeted goal of meeting a need that’s not met. And I think right now where we landed is a sort of IRA that certainly has some benefits and for the, you know, roughly 14 million kids who are supposed to get this thousand investment. That’s a big deal for them and families, you know, hopefully will engage with that and build those balances to the extent that they can.
I think to be clear, it will help higher earners. If you’ve maxed out every other program, you might as well open this one, right? But I think it’s really important to think about it in the context of this overall spending bill that you know is really regressive. It’s an expensive bill and in it we’re doing things like cutting Medicaid, cutting student loan programs, you know, potential cuts to jobs clean energy investments, all these things that are likely going to make the financial lives of most Americans a little worse or marginally better compared to the benefits that our sort of wealthiest and highest income earners are going to see.
So I think when we compare this type of account, it’s like first of all about two-thirds of families in this country don’t have $2,000 in emergency savings. So this $5,000 contribution limit, like that’s out of reach for a lot of families. And I think that’s also even true for some of the higher earners out there who don’t know how to invest. They don’t know how to manage their money. So people in that bracket too, they might not have an emergency savings fund because they don’t know it’s something that they have to have. So it’s going to take them a couple years to be able to use a program like this and by then it might be gone, right?
And I think the other thing, you know, one of the other things that we often talk about in the design of this kind of program, but any kind of long-term savings vehicle is this emergency savings question, right? In a lot of employer sponsored 401ks and in secure 3.0, I know they just passed this too. You can withdraw to $1,000 out of your retirement account penalty-free for an emergency expense and you can pay it back within 3 years. Right? There are these considerations of like we want to encourage people to save, but we understand that not everybody is going to be able to lock up their money for 60 years.
And if you are a high income family and you do want to save for your kid, you know, I’m not a financial adviser, but I’ve studied the tax bill and you know, 529s have more tax benefits than this kind of program does. And so if you have extra resources to spend, something like a 529 is going to give you a greater tax benefit than this kind of program would.
You know, I guess with the IRA rules, you have the I think it’s a $10,000 home purchase allowance. Which could be appealing, but it feels like it’s sort of adding an additional retirement product without really solving the issue that is a lot of families aren’t in the stock market because they don’t have money to invest, right? Like they don’t have additional savings. They have to hold on to whatever emergency savings they might have to deal with any of life’s, you know, number of consequences.
But all these considerations around we can actually build vehicles that work for people, right? We can build vehicles that allow for emergencies and still ask you to pay the money back. We can build vehicles that encourage certain kinds of spending at certain age groups, right? Create tax free withdrawals for education, for home purchase, for your own child. And still really encourage that sort of long-term view. And so far what we’ve seen in the text that passed doesn’t have some of those sort of nuanced features that really make it like an appealing vehicle for sort of your typical consumer.
Anna: So, it seems to kind of be in this weird middle ground where the people that might be able to benefit it from the most might not be able to use it in the time that it’ll exist and the people who have the money to be able to use it right now, there might be better options out there for them. So, it’s kind of murky as to who this program actually is for. Is it so this program has often been from the bit that I’ve heard in the news for people that are for this program a lot of it is being marketed as this is a head start for kids. Do you think that’s enough of a head start?
Madeline: So one of our sort of principles that I was talking about earlier is make substantial initial investments and make them progressively right give everybody some amount of seed money give more to the kids who need more of a head start whose families aren’t going to be able to do it. So, I think a lot of these projections of what this account is going to be worth that I have seen assume some standard rate of family contribution, right? So, I saw one today that was like $200 a month from family every month until the kid is 18. I don’t think that meets realistically where most American families are.
And to be really clear, I think they would love to be there. The reality again is that most families don’t even have emergency savings, let alone the ability to put $200 a month in their child savings account. So, do I think that $1,000 for the families that are going to get it is going to be good for their kids? Absolutely. Take the money, you know, engage with these accounts. But one of the things that we talk about a lot in this space is again if we’re looking at 18 to 25 year olds and we’re looking at okay what are the things that they are doing when they enter young adulthood right a lot of them are going to school some of them might be investing in a business some of them might be purchasing a home by the time they’re 30. Those are knowable numbers.
We know how much it costs to go to in-state school. We know how much it costs to go to community college. We know how much it costs to go to a 4-year private university. We can track the median home price in any zip code. We know what the typical Small Business Administration loan is. These are all knowable numbers. And so, it’s actually possible to index the initial sum times whatever market rate return assuming no family contribution and you would get an initial investment that’s a lot more than $1,000, you know.
So, I think it’s important to be really realistic about aligning the investment that we’re making on the front end with what we hope these kids are going to be able to use this money for on the back end and also make those calculations in a way that’s reflective of the financial reality of most American families.
Anna: What are I know a lot of this is still very new like it just got finalized a week ago and it’s been through so many changes over the past couple of months. What are some of the big questions that researchers and people in your field sort of have surrounding this policy?
Madeline: Yeah. It’s a great question. I think I would name a couple. I think there are questions around earlier versions of this had provisions by which businesses philanthropy could invest in a group of kids accounts by geography. So if you run a community foundation, you could invest in, you know, every account in your zip code essentially and say, “We want to sponsor the kids who live in our place because we believe in their futures.” Though it is true that in this sort of IRA style, there’s still language around philanthropic contributions, employer contributions, it’s not totally clear what the vehicles are, like how that’s going to happen, what the mechanics of that are.
And I think that is going to be one of the primary ways that we can actually support the lowest income families in this is thinking about how we organize philanthropy and employers to essentially build those kind of contributions in. But the mechanics of that are not clear. So I think how that happens, what the tax treatment of those contributions are, is going to be a big question and really important.
Whether or not we’ll see some kind of emergency access provision in I think in general what kind of outreach strategy is going to happen alongside this. You know what we’ve seen at the state level and at the local level is that engagement happens because you go out and you talk to families and you connect with other programs that they’re already connected with and you say do you know you’re eligible for this? Do you know your child has this account waiting for them?
Anna: It seems like there’s some good intent behind this, but a lot of the technicalities, we’ll see if it actually does that good intent does follow through. And I think what you said about having access to it is also super important. And I know this impacts lower income families far more proportionately than higher income families. But regardless of your tax bracket, if you’re not financially literate, if you don’t understand the law, if you don’t know how to get access to it, it’s not going to do you any good that it exists if you don’t know how to use it. So, how it’s going to be spread, I think, is super important because like, yes, your kid could get $1,000, but if you don’t know the technicalities of how you yourself and you, your family and your situation can access that, then is it really any good?
Madeline: I think that’s right. And I think what’s interesting about all the details that I just sort of talked about is, you know, again, a lot of them have been sorted out already in other state programs. And so the fact that some of that scaling and lessons learned didn’t necessarily transfer to this program. To me, it’s just it’s unfortunate. It’s inefficient, right? We’ve learned some of these best practices to really reach these families and we’re spending federal dollars in a year where we’re not, you know, we’re trying to save money in this bill.
And I don’t think that we’re taking advantage of the research in this space to the extent that we could be. Even if you know the treasurer is able to figure out the IRA that you know the sort of tax return rules to sort of enroll eligible children automatically. It’s not clear that it’s going to be obvious how they access those accounts, what they can do with to engage with them. So all of those sort of nitty-gritty around how do you actually how do families look at these accounts on their phones, engage with them, get family members to contribute, employers, philanthropy, whatever it is. Those details are incredibly important and I think not necessarily spelled out yet. So I think as researchers, we’re all sort of waiting to see what that looks like.
And then I think this last piece that I mentioned already around the cost to the financial institutions you know I’ll be interested to see how that pans out. I think that again what we’ve seen so far from retirement space from child development account space is that it is most cost effective financial institutions to host many accounts. The way this is written is that any financial institution who has a sort of eligible index fund you know as defined in the legislation could host these accounts.
And if they have to charge large fees to pencil that out, might that cancel out whatever earnings the families receive? It’s hard to say.
Anna: Before we wrap up for the day, is there any other pieces of information you want people to know or anything that we haven’t touched on already about the Trump accounts, about the One Big Beautiful Bill Act that you’d like people to know?
Madeline: I hope that people learn about these Trump accounts. I hope that the families who are eligible receive the information that they need. I think as a field of folks who work in, you know, financial well-being, we still have a lot of work to do to make sure that the research that we’ve been doing for the last couple of decades, is put in the hands of those families and so that people can the folks who do get the $1,000 are able to take advantage of it and not be afraid of the rules and not be afraid of getting penalized and all these things. So I hope that we all sort of continue to engage and I hope that we continue to engage.
I spend a lot of time looking at wealth disparity. I spend a lot of time looking at income disparity and I think those numbers really speak for themselves. And for me, I think anybody who’s concerned about government efficiency, anybody who’s concerned about the dollars we spend should be trying to track every dollar that we spend to making sure that it’s meeting a real need. And I think this program, as we’ve talked about, is not necessarily meeting the most pressing need right now, but I think that there’s a lot that we can do in the implementation of it.
Anna: Yeah. Thank you again. For anyone listening or watching this out there, if you want more information like this, content like this, go ahead and subscribe to our channel and go to our website, www.wearenoyack.com. And you’ll be able to subscribe to our newsletter to get all this information straight in your inbox every week. And Madeline, do you have anything that you want to share? Any links, any projects that you want to send people to?
Madeline: Thanks so much for having me. I would encourage people at the we’re at the Urban Institute, urban.org. We have lots of research around Trump accounts and other type of savings accounts and you know child development accounts and things like that. We’ve got a whole page devoted to it. So folks should feel free to look at the research. We’ve done some modeling around you know what these types of accounts might do for us in 20 and 40 years. So if folks want to take a look at the research, I’m also happy to speak to anybody interested. But really appreciate you having me on today.
