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Social Security Reform Thursday: Week Twenty-Four -- KidSave Accounts.

Thursdays are good days for reform, because they fall between Wednesdays and Fridays.

That's why WILLisms.com offers a chart or graph, every Thursday, pertinent to Social Security reform.

This week's topic:

KidSave Accounts.

Time is money, or so they say.

Lots of time, then, is lots of money.

Imagine if some anonymous benefactor had a deposited a modest sum of money into an investment account on your behalf, at birth. Now, imagine you are ready to retire, at age 67.

You get a letter informing you that the modest sum, over your lifetime, matured into quite a significant amount. And it's all yours.

KidSave Accounts take that concept and apply it to Social Security; the accounts would be the ultimate life-long retirement lockbox.

Illinois Congressman Jerry Weller (R) has introduced legislation which would create the ccounts:

At birth every child would receive a $2,000 loan from the Social Security Administration. The initial amount would be linked to inflation, so it would increase slightly every year. The money would be deposited into an account that couldn’t be opened until the owner retires or dies.

The account would be managed by the Thrift Savings Plan, the same plan that federal employees, including Members of Congress, use to manage our retirement funds. The KidSave accounts could reach up to $50,000 at maturity. Parents and grandparents can contribute up to $500 per year into a child’s KidSave account.

“KidSave would allow all children, from all socio-economic backgrounds, to enjoy the benefits of compound interest, to build a retirement nest egg at an early age,” said Weller. “Through KidSave, children will have the opportunity to lay the foundation for a secure retirement future and when they reach their golden years, they will have newfound wealth to spend on themselves or share it with their children and grandchildren.”

Congressman Weller noted that KidSave is a loan from Social Security, not a gift or a new government entitlement -- and it doesn’t cost taxpayers anything. When the account owner reaches age 30 -- an age at which most people are well along in their working lives -- the original loan would be repaid in five annual installments.

Americans for Tax Reform estimates that a child born in 2006 and participating in the default options within the Kidsave program would have over $150,000 after inflation at age 67:

But wait, isn't this just some kind of hairbrained, risky, right-wing scheme?

Not at all.

In recent years, Democrats such as Joe Lieberman (Conn.), along with former Senators Bob Kerrey (Neb.), John Breaux (Lou.), and Senator Moynihan (N.Y.), and signed on to the KidSave concept (.pdf).

Over a lifetime, 2000 dollars, invested in a personal account earning interest, compounded monthly, could yield quite a significant sum over the period of 67 years. Jerry Weller's own estimate of $50,000 at retirement, in fact, is far too modest.

So how would the accounts work?

The basis for the accounts would be the Thrift Savings Plan (TSP), the retirement program available to federal employees, including members of Congress. According to the Congressional Budget Office (CBO), KidSave accounts would give Americans options (.pdf):

Many features of KidSave accounts, including investment choices, would resemble those of the Thrift Savings Plan (TSP) for federal employees. If account holders, or their parents or guardians, failed to express a choice, the government would automatically assign them a default mix: 60 percent in a stock index fund (the TSP’s C fund), 20 percent in a corporate bond fund (the F fund), and 20 percent in Treasury securities (the G fund).

Looking at the TSP's historical rates of return (which a previous Reform Thursday covered extensively), the accounts would provide a strong rate of account growth:

Using the TSP Calculator, you can see for yourself how 2000 dollars (plus 9000 contributed by parents and grandparents), over a lifetime, at the range of interest rates above, could fully fund a robust retirement account.

Try it out. We're talking big money, here.

What is this going to cost me? Won't this bankrupt the government?

The CBO estimates the program's costs thusly (.pdf):

About 4 million children are born each year, so crediting each with $2,000 would mean annual government contributions of about $8 billion. That figure would climb gradually with a growing number of births, the immigration of eligible children, and (after 2013) a rising contribution.

However, because the initial $2,000 investment would be recaptured by the government, the CBO has determined that the accounts would not significantly burden the federal budget over the long run. Frankly, $8 billion year is a drop in the bucket relative to the daunting financial crunch Social Security faces in a future without reform.

Remember, the "transition costs" of reform are just a way of recognizing existing obligations and moving them forward. The KidSave Accounts are similar in that regard.

What, then, are the advantages of KidSave Accounts?

I. They would be available to everyone, introducing millions of Americans to the Ownership Society.

II. They would be a loan, not a gift, meaning the impact on government outlays would be minimal.

III. They would empower lower-income families to accumulate a nest egg with real wealth and real ownership.

IV. They would be inheritable, allowing families and communities to build wealth.

V. They would prevent Congress from diverting the Social Security surplus funds into other pet projects.

Are KidSave Accounts the be-all-end-all for reforming the broken Social Security system?

Definitely not. But they just make sense as one pro-growth way to supplement Social Security benefits; for a relatively small amount today, the KidSave plan would diminish the burden on taxpayer caused by the looming demographic time bomb, preventing the need for painful choices down the road.

Ideas. Not immediate obstruction.
Reform. Not dogmatic ideological adherence to a broken system.
Ownership. Not confiscation and redistribution.

Choices.
Empowerment.

This is what reform is all about.

We're in the beginning stages of a profound Social Security reform movement. Like democratization, reforming a gargantuan government program like Social Security is a process, not an event. It is a journey, not a leap.

Discussing creative, innovative ideas such as KidSave accounts is part of the journey.

Previous Reform Thursday graphics can be seen here:

-Week One (Costs Exceed Revenues).
-Week Two (Social Security Can't Pay Promised Benefits).
-Week Three (Americans Getting Older).
-Week Three, bonus (The Templeton Curve).
-Week Four (Fewer Workers, More Retirees).
-Week Five (History of Payroll Tax Base Increases).
-Week Six (Seniors Living Longer).
-Week Six, bonus (Less Workers, More Beneficiaries).
-Week Seven (History of Payroll Tax Increases).
-Week Seven, bonus (Personal Accounts Do Achieve Solvency).
-Week Eight (Forty Year Trend Of Increasing Mandatory Spending).
-Week Nine (Diminishing Benefits Sans Reform).
-Week Ten (Elderly Dependence On Social Security).
-Week Eleven (Entitlement Spending Eating The Budget).
-Week Twelve (Benefit Comparison, Bush's Plan versus No Plan).
-Week Thirteen (Younger Americans and Lifecycle Funds).
-Week Fourteen (The Thrift Savings Plan).
-Week Fifteen (Understanding Progressive Indexing).
-Week Sixteen (The Graying of America).
-Week Seventeen (Debunking Myths).
-Week Eighteen (Debunking Myths).
-Week Nineteen (Reform Needed Sooner Rather Than Later).
-Week Twenty (Global Success With Personal Accounts).
-Week Twenty-One (GROW Accounts: Stopping The Raid).
-Week Twenty-Two (Millions of Lockboxes).
-Week Twenty-Three (Support for Ryan-DeMint).

Tune into WILLisms.com each Thursday for more important graphical data supporting Social Security reform.

Posted by Will Franklin · 14 July 2005 09:40 AM

Comments

Posted by: Zsa Zsa at July 14, 2005 10:54 AM