Monday, March 28, 2005

Start Life In Debt and Why It Makes Sense..SS Part II

The best thing we can do for our children right now is to put them in debt from the day they are born.

About two years ago I came up with a method for saving social security & medicare long term; actually abolishing both while still providing economic security and providing for a higher standard of living than current retirees have. I mentioned the idea to a few people, my wife included and they thought it was a great idea. The problem though was that the idea was too great, not to mention extremely costly in the short term. I shrugged the idea off as yet another great idea that would never be implemented by government.

Two years later and the nation is starting to focus again on the problems of social security and a lot of proposals are being floated around Washington. One of the proposals caught my attention because it sounded very similar to my own.

Paul O’Neil, the former Treasury Secretary for President Bush (and former CEO of Alcoa) was being interviewed by a newscaster and low and behold, Mr. O’Neil was talking about a plan very similar to what I had come up with a few years back. A story by the Washington Bureau captured the genesis of his idea:

“To move away from Social Security's chronic funding problems, O'Neill suggests that the government put $2,000 in a special investment account for every newborn American. The government would invest $2,000 more each year until the child reaches 18.
The money would be invested in a conservative index of stocks and bonds and couldn't be touched until retirement. The investment would grow at a compounded rate, meaning that as the value of assets in the account grows, profit would be reinvested so the account would grow even more. Without adding a single cent beyond compounding after the child turns 18, he or she would retire at age 65 with $1,013,326 in the account, O'Neill reckons.

"If you do the arithmetic, the $1 million would provide an annuity of $82,000 a year for 20 years," O'Neill said in an interview.”

My idea was slightly different. I would have the government loan each child born a much higher amount, giving them a lump-sum instead of payments for 18 years. This gives the money more time to compound and grow. The stock market tends to go up more than it goes down, thus a lump-sum of a similar amount, say $36,000 would grow to about $5,000,000 by the time the child retired at 65.

This would provide an inflation adjusted income of about $31,000 in today’s dollars, with the ability to leave money to heirs. The other thing that is different about my plan is that the government is not “giving” the child anything except a government subsidized loan. The child would be required to pay it back once they begin working. Instead of paying into social security, which would amount to 12.4% of their potential income, they would be paying off the loan instead. Even a person at minimum wage could end up paying off the loan during their life very easily and not pay nearly the rate of 12.4%, plus they would have the benefit of an account with a huge growing balance. Imagine having the opportunity to retire with more money than you made during your working years. This plan would benefit low-income workers without subjecting them to welfare.

Are there some flaws with my plan? Sure. It would require a ton of borrowing, the details would be a little more complex, and we would need to figure out a way to take care of the disabled, widowed, and survivors. But these are problems that would be easily overcome. The best thing we can do for our children right now is to put them in debt from the day they are born. The public in America has a love affair with debt, as does the federal government, isn’t it about time that we started using debt in a much more powerful way? Of course an idea like this would never work on capitol hill; it’s too good of an idea and the government usually rejects those. I applaud Paul O’Neil and his idea and hope the congress will see that meaningful reform in the long term will lessen welfare, increase economic security, and grow the economy while empowering people.

Until Next Time......