Everyone seems to be talking about the faltering middle class these days, from Robert Reich’s documentary Inequality for All to President Obama’s 2014 State of the Union Address. Economic mobility has declined, wages are stagnant, and home ownership and higher education are moving ever further out of reach for many nominally middle-income families. We need either to redefine what “middle class” means, or to reduce the expectations of those we suppose are middle class. If that were not enough, those households still worthy of the label now often find themselves needing two adults to work full time, or take second and third jobs, and still max out their credit card and home equity lines just to keep up with the presumed middle-class Joneses. Not exactly part of the American Dream script most people imagined three or four decades ago.Yet it is easy simply to moan about the middle class while proposing political action regarding only the poor and the wealthy. There is ample public support for expanding the safety net, increasing cash transfers or food stamps, and means testing an array of welfare programs to better ensure that limited benefits go to the right people. The most popular proposed cure for income inequality is to increase taxes on the wealthy to increase resources available to help the poor and otherwise needy. But none of these proposals directly affects the middle class or alleviates the growing press of circumstances threatening to make them downwardly mobile.It is odd that nothing is being done when we have a proven model of how to create and sustain a middle class. The GI Bill did so by providing vouchers for education and affordable loans for home purchases. The middle class of the 1950s through the early 1980s was a consuming class that expanded the economy and paved the way for its own upward mobility. The GI Bill provided veterans with health care benefits as well as education and housing. An estimated 7.8 million World War II veterans enrolled in some sort of educational or training program. Enrollment in colleges and universities increased from nearly 1.7 million in 1945, of which 5 percent (88,000) were veterans, to 2 million in 1946, of which nearly half were veterans. Veteran enrollment peaked in 1947 at 65 percent (1.5 million out of a total of 2.3 million enrollees).GI Bill housing benefits were not the only policy behind the construction of Main Street, but Veterans Administration loans were certainly a major catalyst. Of the 324,000 homes constructed in the United States in 1945, only 43,000 were sold on VA mortgages. The following year, housing starts jumped to slightly more than 1 million, of which 412,000 were financed by VA mortgages. There were more VA mortgage-backed new housing starts in 1947, and many hundreds of thousands of existing homes were purchased with VA mortgages. All told, nearly 5 million veterans bought homes with GI benefits in the late 1940s and early 1950s.These home purchases represented a true “supply side” event in that it stimulated other economic growth. Housing developments, such as Bill Levitt’s “Levittowns”, helped create suburbia. Building materials were needed and created by entrepreneurial corporations. Appliances were manufactured and bought, and new appliances were developed, such as television sets. The housing boom was so robust that it helped create an economy in which a single wage-earner could support a family, and that economy lasted through much of the 1950s. By then, a broad segment of the American population perceived home ownership as a goal and even as a right.Can we help expand the middle class and re-open the doors for upward mobility in 2014? Absolutely. The method would model the GI Bill, but use the form of what are called “Baby Bonds” or “child allowances.” In September 2007, addressing the Congressional Black Caucus, then-presidential candidate Hillary Clinton floated the idea of a $5,000 Baby Bond:
I like the idea of giving every baby born in America a $5,000 account that will grow over time, so when [young people turn] eighteen, if they have finished high school they will be able to access it to go to college or maybe they will be able to put that down payment on their first home, or go into business.
Prior to Clinton’s speech, several academics had weighed in with their own ideas about Baby Bonds or child allowances. In 1986, social policy scholars Irwin Garfinkel and Sara McLanahan proposed doing away with the dependent child exemption in the Internal Revenue Code (which was $1,080 in 1984) and replacing it with a universal $300–400 yearly child allowance payment to all parents of dependent children.1 Social welfare scholar Duncan Lindsey also saw merit in providing a form of universal support for children. Lindsey proposed a program for children consisting of a “child’s future security account” into which the Federal government would deposit $1,000 at birth and $500 in subsequent years until the child turned 18.2Yale Law School professors Bruce Ackermann and Anne Alstott proposed a more aggressive approach: a one-time grant of $80,000 for each child when he or she turned 18.3 The young adult could access no more than $20,000 per year and would have to pay the grant back. The expectation was that the grant would be paid back, with interest, at the time of death—a form of estate tax that would amount to about $250,000. Still others have advocated a Baby Bond concept joined to some form of volunteer national service. These proposals also explicitly cited the GI Bill, as well as the Homestead Act and the Civilian Conservation Corps, as positive historical models for spreading equity among the young.4Other nations have enacted child and family allowances. Belgium, for example, instituted its children’s allowance in 1944 and today provides parents with an annual benefit of $933 for the first child and $793 for the second. The program is not means-tested, and the allowance is given to all parents. Norway’s program is the most generous children’s allowance benefit in the world, with a non-means-tested allowance of $3,536 for each child. In some countries, such as Canada, the government taxes the allowance. Britain, too, experimented with a Baby Bond program a few years ago.The idea has finally gotten the attention of some U.S. legislators. Members of Congress have introduced a type of Baby Bond legislation: the America Saving for Personal Investment, Retirement, and Education Act (ASPIRE), initially sponsored by former Senator and former Governor of New Jersey John Corzine, a Democrat, and former Pennsylvania Senator Rick Santorum, a Republican. The bill was first proposed in the 108th Congress (2003–04) and was introduced in each of the next three. ASPIRE legislation called for a deposit of $500 for every newborn in the United States. The funds would compound over time, and when the child reached age 18 the money could be used for education, home ownership, or later for retirement. Additional funds of up to $500 would be deposited each year by the Federal government to match funds in the account by parents, states, foundations, or other entities. For children in families below the national median income ($50,000), an additional $500 would be deposited at the time of the child’s birth. ASPIRE was not proposed in either the 111th or the current congressional session. Of course, it got nowhere in its earlier incarnations.Indeed, none of the Baby Bond or child allowance proposals raised in the United States have achieved any real traction. By and large, they were either trial balloons or sidebar solutions tacked on to academic books that examined social problems. ASPIRE came closest to crafting a supportive social policy, but the meager investment of $500 per child would not have been sufficient to make a real difference, especially if the goal is to reinvigorate the American middle class. My “Futures Account” proposal offers the American working class a pathway to the middle class and secures the existing middle class in its status. It is based on four principles:
- The policy must be universal, with no means testing; everyone is eligible.
- The policy must be fair; no one is left out.
- The policy must be fundable; there must be a realistic method of consistently financing the program.
- The policy has to be consistent with the values and principles of a market economy.
First, the Futures Account would be universal, available to every child born in the United States or whose parents are legal residents of the United States. The account would be opened with the application and receipt of the child’s Social Security number. Access to the account is guaranteed when the child turns 18. There would be no disqualifying factors. Even people incarcerated at the time they turn 18 would be eligible to access the account for education or housing (obviously, at a later date). People who are not mentally capable of making decisions would have a guardian appointed to allocate the funds from the account.Second, the actual amount of the Futures Account must be meaningful as an asset. The amount I propose is based on the assumption that $3,000 would be deposited into the account each year for 18 years. The account would not generate interest; thus, a child would have accumulated $54,000 by the time he or she turned 18.In reality, however, there would be no yearly accounting. The Futures Account would make the full amount available at age 18, and unless an incentivizing formula is added to the account (see below) there would be no need for yearly accrual or accounting. That would save on transactional costs. The $54,000 would be enough to pay for one year of tuition and fees at an Ivy League or private university, or all four years at the University of California, Los Angeles (at the 2010 cost of tuition). It would be enough for a 20 percent down payment on a $270,000 home. Moreover, there would be no survival rights for asset accounts. If an account-holder died prior to his or her 18th birthday, the assets would be returned to the U.S. Treasury. If the account-holder died after the age of 18, with an unspent, unobligated balance in the account, the remaining funds would be returned to the Treasury.Third, the Futures Account would begin with a full payment to the first cohort of those turning 18 years of age. In the first year of implementation, the cost of providing the asset of $54,000 to 4.4 million children who turn 18 would be $237 billion. Unlike the Social Security Trust Fund, the Futures Account is a real account with an annual defined obligation. Also unlike Social Security, the account has to be in a “lock box” because there is a possibility of a $237 billion payout each year. Once a person turns 18, he or she will receive an annual statement regarding the payments and balance in the account. The fund is a real obligation: Monies raised through taxes in a single year would have to be available to pay the amount due recipients each year. However, unlike Social Security, there would be no continuing obligation for annual payments, nor would one generation of workers pay for the benefits of a later generation.Fourth, the Futures Account could also include incentivizing provisions based on a child’s specific accomplishments before the age of 18. The most significant incentive would be a high-school graduation incentive payment of $5,000. In 2009, 87 percent of adults 25 years of age or older in the United States had completed high school. While this is an impressive overall statistic, it still leaves 14 percent without a high school degree. This is a population exposed to numerous risks, including poverty, because it lacks a key credential for entry into the skilled workforce. Without unusual talents or accomplishments, those without a high school diploma are substantially blocked from a Main Street lifestyle and Main Street security.Another plausible incentive is public service, as noted above. Over the past two decades, high schools, colleges, and universities have increasingly required students to engage in public service. Of course, some of the volunteerism is motivated more by resume-building than by altruism. The problem with encouraging public service, however, is not motivation but elitism. Those who “volunteer” are usually young men and women who can afford to do so. Even programs that provide compensation, such as AmeriCorps or Teach for America, offer wages so modest as to exclude many eligible and willing applicants. Many fine students who could volunteer or join low-wage programs cannot do so because they must earn money.So to level the playing field a bit, the Futures Account could incentivize public service activities with government organizations or registered human service nonprofits. The incentive should be based on an accumulation of hours (along the lines of banking frequent flyer miles with commercial airlines) or a year of public service. Proposals to incentivize public service are already out there. During the 2008 presidential campaign, both major party candidates discussed incentives for public service. Barack Obama endorsed a payment of $4,000 per year, while Republican candidate John McCain worried that a large payment might be considered a “bribe.” In fact, a $4,000 incentive would be a marginal addition to an existing Futures Account and is probably not a large enough proportion of the account to be thought of as a bribe.Finally, for the Futures Account to become a reality, immediate tax offsets would have to be applied to the Federal budget.5 One could argue forever about the potential long-term cost savings and economic advantages of the Futures Account, and most of the arguments might be manifestly true. But that still will not pay one cent of the first-year up-front costs, so a proposal must be as revenue neutral as possible.The obvious offsets are to eliminate the child exemption from the tax code; reduce Federal funding for college aid; eliminate Federal earmarks designed to help children for which there is no evidence of efficiency or effectiveness; and institute a value-added tax.An inexhaustible number of criticisms could probably be leveled against the proposed Futures Account and the specific details of such a policy. What about fraud? Yes, there could be fraud, and there are steps that could limit but not eliminate it. Isn’t this another way of expanding government? No; in fact, the Futures Account, as noted in the offsets, would shrink programs, such as higher education loans. And so on and so on.This is the moment to stop bemoaning the plight of the middle class and actually do something about it. We have the opportunity to create and fund a policy that will provide a better future for all American children and to invest in sustaining and expanding the American middle class. A strong middle class that can afford a middle-class lifestyle without credit card and mortgage debt is the backbone of a great society. We should not allow this opportunity to pass us by.
1Garfinkel and McLanahan, Single Mothers and Their Children: A New American Dilemma (Urban Institute Press, 1986).2Lindsey, The Welfare of Children, 2nd edition (Oxford University Press, 2003).3Ackermann and Alstott, The Stakeholder Society (Yale University Press, 1999).4See “A Call to National Service”, The American Interest (January/February 2008) and Adam Garfinkle, Broken: American Political Dysfunction and What to Do About It (The American Interest eBooks, 2013), ch. 14.5For a complete discussion of the offsets see my book The Third Lie: Why Government Programs Don’t Work and a Blueprint for Change (Left Coast Press, 2011).