It is called KidSave, and it was devised in the 1990s by then-Sen. Bob Kerrey of

Question

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 Under the initial KidSave proposal, the funds could not be withdrawn until age 65, when, through the miracle of compound interest, they would represent a hefty nest egg.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? Hint: Calculate FV.

Explanation / Answer

Working out arithmetically, $ 1000 deposited at child birth will be 1000(1.094)^65= $ 343658 when the individual attains 65 years of age.

Added is the annual tax -credit or subsidy of $ 500 for the first 5 years - 500*((1.094^5-1)/0.094)= $ 3016 which amount will grow to 3016*( 1.094)^60 = $ 661410 by the age of 65 years.

So, the individual will have a nest egg of a total of (343658+661410)= $ 1005068 under this KIDSAVE proposal

This has to be done for approximately 4000000 new borns .So, $1000*4Mn.=$ 4 billion needs to be pooled by the federal government .The enormity of the sum involved raises doubts about continuous committment .

This is a form of retirement supplement- as the funds cannot be withdrawn anytime before 65 years of age. There is no guarantee that a person who cannot sustain himself will even live to receive it at the ripe age.On this account ,this proposal sounds a little bit out of context. Social security should be evenly spread through one's life-providing basic minimum security required for a given age- ie. supporting at all age or atleast important milestones of his/her age- like education(payment of school/college fees), marriage, medical expenses,etc.

If the individual is allowed to withdraw -as per his specific and genuine requirement - then this scheme may prove to be an equaliser -to some extent - between the haves and have-nots.Social crimes triggered by shortage of money will definetly reduce to a great extent.

Thus with slight modifications and strict administrative controls - which will vaidate the proposal- the same is possible .Initial funds can be obtained from small deductions at- source from the income earning and tax-paying class.

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