New bill seeks to bridge the wealth gap for America's youth, but at what cost?
News flash: More than three-quarters of households that are led by 18-24 year olds own less than $20,000 in financial assets—a fraction of boomers' average $783,000 per household.
In response, U.S. Senator Bob Casey from Pennsylvania and several other lawmakers have introduced a bill that is designed to give young generations a shot at wealth creation from birth, offering them over $50,000 by the time they are 18 years old, thanks in part to government contributions.
The new bill, dubbed the 401Kids Savings Act, seeks to automatically create savings accounts for newborns and children up to 17 years old using each state’s 529 college savings vehicles overseen by state Treasurers.
Savings accounts would grow through contributions from parents and the government, depending on household income with a lofty goal of “building lifelong wealth and economic self-sufficiency for kids from families with limited resources.”
In theory, a universal savings account sounds like a step in the right direction, especially with the American Dream out of reach for so many families.
But the reality is that many Americans are living paycheck to paycheck, unable to sock away enough money to create an emergency fund, let alone build wealth for themselves or their children.
With sky-high housing costs and inflation, it’s a different world for today’s young generations, some of whom resent hearing money tips from their older counterparts.
“I feel like the older generation is constantly pushing you to do stuff like they did when they were in their 20s, but it’s not even comparable to when they were in their 20s,” stated a young social worker from Indiana cited by The New York Times.
While an automatic $50,000-plus savings fund seems good for low-income households, the reality is that it will not go as far as it seems and worse, could create false illusions about wealth creation.
Youth savings crisis
Young adults often worry about not being able to save money, but many are stuck in this predicament.
Unlike their parents, the youth of today have low starting salaries, limited earnings growth, lingering inflation, and rising student debt for those who can obtain an education. These issues are affecting all Americans, but youth especially.
The result is a stark wealth gap between younger and older generations:
But the youth isn't just falling behind in assets. They are in disproportionally more debt.
As of Q4 2023, Americans had amassed a record $1.13 trillion in credit card debt, a New York Fed report revealed—with the bulk concentrated in Millennials and Gen X's balances.
"Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels. This signals increased financial stress, especially among younger and lower-income households,” stated Wilbert van der Klaauw, economic research adviser at the New York Fed.
While inflation has begun to show signs of cooling, it has left a lasting mark on the minds of young adults, 40% of whom are living with family due to the cost of living crisis, as per CNBC’s latest “Youth & Money in the USA” survey.
They are finding it hard to afford basic items like groceries, driving one in seven Millennials to turn to short-term loans to afford food, according to media platform PYMNTS.
Not surprisingly, most Americans between the ages of 18 and 34 would characterize the state of the U.S. economy as poor, the CNBC survey showed.
While there’s a case to be made that the government has a role to play in helping America’s youth build wealth, it’s not entirely clear if Uncle Sam has the means of doing so.
Are lawmakers sticking their heads in the sand?
The goal of 401Kids is to help young people build lifelong wealth, and the Senators behind the bill would like for the U.S. government to foot the bill for many families.
After all, the top 1% of earners in this country possess more wealth than the whole of the middle class, according to Federal Reserve data from year-end 2023.
Considering the federal debt climbed to over $34 trillion in 2024, where do lawmakers expect the funds would come from?
According to the bill, families can contribute up to $2,500 each year. But with a poverty rate of 11.5% in America as of 2022, not every household would be in a position to pay, let alone max out that amount.
As a result, the program allows for lower and moderate-income families to receive a little help from Uncle Sam in the form of various subsidies.
For example, children from lower and moderate-income households would receive annual federal deposits each year until they are 18 years old.
These include automatic contributions of $500 annually and the possibility of another automatic $250 per year for those who qualify for an earned income tax credit (EITC), whether or not it’s claimed.
Potential state contributions are on the table, too.
In a best-case scenario, a lower-income kid could gain access to roughly $53,000 by the time they turn 18—money the program says they can use toward achieving the American Dream, like homeownership.
Jose Diaz, Ph.D., chief economist with the Constellation Fund, is confident the economic returns make the program worthwhile.
He stated, “Our preliminary estimations indicate that for every dollar invested in 401Kids, society would receive at least $2.61 in benefits associated with increased income, improved health, additional tax revenues, and savings to other government sectors.”
Perhaps, but it is a pricey gamble when the stakes are so high for both sides of the program.