The UK Child Trust Fund: Early Results

In recent years, the personal savings rate in the United States has fallen sharply. Compared to the past experience in the US and other industrialised countries, it is now at an historically-low level.

This decline raises concerns about the ability of Americans to finance their long-term needs such as educating their children, buying a home, or enjoying a secure retirement, as well as the long-term economic prosperity of the United States.

One promising initiative for increasing personal savings is now underway in the United Kingdom. Since its beginning in 2005, the U.K. has given every child born on or after September 1, 2002, a Child Trust Fund (CTF). A mechanism for building the savings capacities of families, CTFs give all children a financial asset to fund their transition to adult life.

As well as encouraging saving, the perceived benefit of the policy in the UK goes beyond enabling people to accumulate resources to fund future consumption for particular purposes (eg higher education or income in retirement). By helping individuals to build assets, the CTF will empower and enable them to develop their capacities so that they can be more self-sufficient and participate fully as citizens in a society in which they have a stake.

IFS and other policy advocates have proposed a child savings account policy for the US, following the lead of the U.K. The IFS proposal replicates the UK model but with the additional feature of government matching contributions for children from low-income families. Matching contributions are designed to encourage more private saving on behalf of children most in need of a financial asset at age 18.

Lessons from the UK's experience with CTFs will help inform not only the UK policy but initiatives in the US as well.