Say Anything Blog

Hmm...

WASHINGTON - One new proposal emerging from the national debate on how to overhaul Social Security could make every American a millionaire at age 65.

Paul O'Neill, President Bush's first treasury secretary and a former chief executive officer of aluminum giant Alcoa, proposes having the government stake every American baby at birth to an investment savings account. By the time the child retires, the account would contain $1 million or more. The idea is drawing attention from an unusual coalition of lawmakers from both parties, liberals as well as conservatives.

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.

O'Neill assumes a 6 percent annual return on investment. He calls that figure conservative since it represents the worst performance to date of any 25-year cycle on Wall Street.

If O'Neill's calculations are right it could be a viable program. He estimates that it would cost approximately $144 billion/year to run. But there are some points I'd like to make and questions that need to be answered:

1. This idea shouldn't be looked at as a way to solve the current Social Security problem. If this plan were put into place we wouldn't see the first impact of it until for roughly 65 years, or until the first people receive their benefits. Well before then those of us still on the current Social Security problem would be feeling the crunch of the programs shortfalls, which are predicted to happen anywhere from twenty to fifty years from now. In fact, I would assume that these shortfalls would be made worse by the fact that the younger generations who are on the new program would presumably not be paying into the old program.



2. What sort of economic impact would we feel if everyone over the age of 65 were suddenly a millionaire? I'm no economist, but wouldn't that cause inflation?



3. What impact would all the new investments have on the stock markets? A $2,000 investment for every child born is a significant increase over what's currently being invested. Would this have a positive or negative impact on the stock market?



4. The fact that a simple $2,000 investment can lead to over a million dollar wind-fall speaks volumes about just how poorly our current government-mandated retirement system works.

I'm not against this plan, per se. In fact, I very much hope our legislators take it seriously and have an open and honest debate about its merits. I'd like to hear more about it, but it does sound promising.

(via GOP Bloggers)