How Giving $1,000 to Every Baby in America Could Reduce Income Inequality, it is

Question

How Giving $1,000 to Every Baby in America Could Reduce Income Inequality, it is called KidSave, and it was devised in the 1990s by then-Sen. Bob Kerrey of Nebraska, with then-Sen. Joe Lieberman as cosponsor. The first iteration of KidSave, in simple terms, was this: Each year, for every one of the 4 million newborns in America, the federal government would put $1,000 in a designated savings account. The payment would be financed by using 1 percent of annual payroll-tax revenues. Then, for the first five years of a child's life, the $500 child tax credit would be added to that account, with a subsidy for poor people. The accounts would be administered the same way as the federal employees' Thrift Savings Plan, with three options—low-, medium-, and high-risk—using broad-based stock and bond funds. Under the initial KidSave proposal, the funds could not be withdrawn until age 65, when, through the miracle of compound interest, they would represent a hefty nest egg. At 9.4 percent annual growth, an individual would have more than 1 million dollars. The initial idea of KidSave was to provide a retirement supplement to Social Security, making it easier in some ways to reform Social Security to achieve fiscal solvency. But the concept can serve multiple purposes at a very small cost. More than 65 percent of Americans have a net worth of less than $100,000. About 90% of the total social security collections of more than $300 billion dollars is used to pay current beneficiaries and in some years the payout exceeded the collection. Is this a valid proposal? Is it even possible?

Explanation / Answer

$1000 put in a savings account for 65 years @ 9.4% compounded yearly will give

= 1000 * (1+9.4%)^65

= $343658

$500 put added to the same account for the first five years will give

= 500*(1+9.4%)^65+500*(1+9.4%)^64+500*(1+9.4%)^63+500*(1+9.4%)^62+500*(1+9.4%)^61

= $723653

So at the end of the 65 years the total amount that would be accumulated in the fund designated for the social security of each of the 4 million newborns in America will be = 343658 + 723653 = $1067311, which is much greatewr than the target $1 million to provide retirement supplement to social security for the 4 million new borns when they will attain the age of 65 years.

If 4 million of such accounts are opened then at the end of the 65 years the total amount that wil be accumulated in the fund

= 4000000 x $1.067311 million [ 1 million $ = $1000000]

= $ 4000000 x 1.067311 x 0.0001 billion [ $ 1000 million = $1 billion]

= $ 426.9244 billion, which is muxh greater than the security collections of $300 billions.

So this is a valid proposal so far as the amount of money is concerned. However, the plan does not take into account the inflation factor which is also very important parameter in deciding such social security plans. The real purchasing power of dollars will reduce considerably considering the persistent inflation in the economy. However, as at present the net worth of 65% Americans are less than $100000, a sum of more that a million dollars even after 65 years from now is expected to provide a good retirement security to the children born today.

The proposal is valid and possible.

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