The Universal Piggy Bank: Designing and Implementing a System of Savings Accounts for Children

Abstract

Abstract The most challenging design issues relate to funding and distribution rules. With respect to funding, the choices are (a) a universal system funded through a 100-percent refundable tax credit (or direct government outlay) automatically provided to all eligible children, (b) a voluntary system funded through voluntary contributions encouraged by tax incentives, or (c) a hybrid system with both universal and voluntary features. Within the context of a voluntary system, a further fundamental design issue is the type(s) of tax incentives used to encourage contributions, for example, refundable or nonrefundable tax credits, tax deductible contributions, or elimination of taxes on accumulated earnings. In addition, under a voluntary system tax credit, deduction and contribution limits must be determined, and eligibility requirements must be established (e.g., the amount that could be contributed, the amount of credit or deduction associated with contributions, and whether benefits are phased out for upper-income taxpayers).