How Baby Bonds Grew Up

Type: Think Pieces Written by | Saturday 1 January 2000

Mid-February 2001, and the Prime Minister proposes that we should start an investment account for every child in Britain. A baby bond' that would be invested and would grow. And perhaps even added to over the years in order to give every Brit a useful cash sum at 18. That could help them fund their higher education, or special health needs, or housing costs, or could be rolled into a pension for their retirement. Great new idea, or what?
 

It's what?, actually. Back in 1995, the Adam Smith Institute's report The Fortune Account proposed just that idea as a way of funding our precarious present pay-as-you-go pension and social-insurance system. As the report says:

"Transferring future generations into the new fully funded pensions and social insurance system is straightforward. The account is opened at birth in the name of the child, with the government paying in the first 1000 to start it off. The 1000 will grow, either by interest or capital appreciation, even while the child is growing up. The child's account might well be topped up by payments made into it by other family members, free of tax up to the normal limits."

"A succinct and readable paper from the Adam Smith Institute," Bill Jamieson called it in his article "Welfare: Here is your starter for 1000" in the Sunday Telegraph on 31 December 1995. "The purpose of the ASI's Fortune Account is to build up a nest-egg for retirement. But the account holder will also accumulate savings that can be drawn in periods of unemployment, disability or medical expenses."

Only last year that the left-leaning Institute for Public Policy Research called for a 1000 'baby bond', with the same ideas in mind.

"But wait a minute," commented Bill Jamieson in his column on 20 Feb 2000. "Is this not the same 1000 Fortune Account first advocated by the Adam Smith Institute five years ago? I wrote about it here in December 1995?" Well yes.

Still, as Bismarck said, if you like laws or sausages, you should never watch either being made. The Baby Bond system that is being trumpeted by the government (in this pre-election period) has some of the essence of the Fortune Account/IPPR ideas, but has actually come out as a twisted mess.

What we're left with is another exercise in social engineering. Another means-tested benefit, designed to channel yet more resources from wealthier to poorer families. A system that will not take power out of the hands of politicians, but will give them yet another flow of funds to use to buy votes from favoured groups. A system that will not reform the welfare state, but which will add another programme on to its mind-bogglingly complex and heavy superstructure.

It is all retrograde thinking. Frank Field, the DSS minister sacked earlier on in this administration because his free thinking on deep and difficult issues could not be tolerated, was right in saying that we need to get away from means-testing. Not only is it degrading, but it is ethically corrosive (people are rewarded for making themselves worse off, or for misrepresenting themselves as worse off than they really are) and both complex and expensive to administer.

If you are going to have means-testing in order to redirect resources from rich to poor, then why have more than one means-test? Why not do it, transparently, with a Negative Income Tax system above the line, you pay tax, below the line, you're paid benefit rather than add yet another means test (and no doubt another 40-page application form) to the array of means-tests we have already?

On the cost side, Gordon Brown may well think that, by the time the system is up and running, it will be for some other Chancellor to work out how to pay for it. He might even imagine that the new funds that are being directed to poorer families will enable him to reduce other benefits. But who ever heard of a welfare benefit being taken away?

The thinking behind ASI's 1995 Fortune Account idea was that it would be simple (basically, everyone registering a birth gets a 1000 cheque, no problems) and that it would build into a lifetime pool of savings that would raise people out of dependence on state benefits which is would then, quite obviously, replace. Being properly funded instead of pay-as-you-go, it would be more secure, and therefore more popular. Many state insurance programmes would wither away because everyone had something better. Being individualized accounts, people would feel they had more control over them than they do over their DSS and Council benefits today; and there would be every incentive for them to add to their savings, or to the Fortune Account savings of children and grandchildren.

But when you try to make it an instrument of social engineering, you build in perverse incentives, complexities, and a lack of individual control. Then you don't achieve what the idea was supposed to achieve.

A beautiful conception, but what an ugly brute the Baby Bond could turn out to be.