Should We Give $500 – $1,000 to EVERY Newborn?

The November 2007 issue of Money has an interview (for some reason Money has decided not to publish this interview on the web) with Michael Sherraden, founder of Washington University’s Center for Social Development and the man behind the idea of giving every newborn baby $500 (or $1,000 for newborns of poor families) to be invested for education, a first home, or retirement. According to Sherraden’s plan, parents would be able to make additional tax-deductible deposits. For low- and middle-income kids, the deposits might be matched.

Is this a good idea?

I did some quick math to see how much these accounts could be worth and here’s what I came up with:

$500 given at birth, never added to, value at age 18: $1,998 (assuming 8% return) or $2,780 (assuming 10% return)

$500 given at birth, $500 added yearly, value at age 18: $20,723 (assuming 8% return) or $25,580 (assuming 10% return)

What if they don’t touch it until age 65?

$500 given at birth, never added to, value at age 65: $148,780 (assuming 8% return) or $245,185 (assuming 10% return)

$500 given at birth, $500 added yearly, value at age 65: $1,072,404 (assuming 8% return) or $2,692,039 (assuming 10% return)

Lots of people will look at that and say, “WOW! $2.6 million. That’s a lot of money!” Unfortunately NONE of these numbers consider inflation, which will significantly reduce the purchasing power of these accounts.

How will we pay for this plan?

From the interview:

Q: Handing $1,000 to 4 million newborns would cost $4 billion a year. Where would the money come from?

A: If I were making policy, I’d say it’s not the role of the government to support people with luxury houses or those with $1 million retirement accounts. So I’d limit tax deductions on mortgage interest and on retirement accounts exceeding that amount. That may not be realistic, but it’s how I’d come up with the money.

He’s right – it isn’t realistic. A $1 million retirement account is hardly what I would consider wealthy. I don’t think we should penalize those who have been able to sock away $1 million in a retirement account. I say if we want to start taking away deductions, then it is time to get rid of our tax system altogether and go a with a flat tax with NO DEDUCTIONS. Those who make above average incomes get screwed enough as it is under our current system that I don’t think it is right to take away current deductions.

Now, if he wanted to do this in place of Social Security and not let people touch the money until they retired, I’d be all for it. Unfortunately, I don’t see it happening.

What’s your opinion?

20 thoughts on “Should We Give $500 – $1,000 to EVERY Newborn?”

  1. How about giving new parents the option to take as a lump sum the value of the tax break (for 18 years) they get for the child, and putting it in a lock box which can’t be touched (without penalty). Since we don’t know what tax bracket they will be in for the next 18 years, you’d have to use the lowest rate. (Obviously this is cleaner under a flat tax.) The parents, opting to take the advance payment, would then lose the tax breaks specific to the child (personal exemption and child tax credit). This is certainly possible for the number crunchers to work out in a revenue-neutral fashion. The child gets a head start in life but in exchange the parents would pay higher taxes. It would serve as an optional form of forced savings with a net cost of zero.

  2. I believe it is also not the job of government to redistribute wealth. This is an offensive idea by one who attempts to gain acceptance by pitting the rich against the poor. Recent studies have shown that the poor are moving up very quickly in the net worth category – the major changes occured at the lowest levels. This is how it should be in a dynamic society.

  3. I think that your “never added to” statistics would be by far the most common outcome. Families with the money and financial knowledge to make additional $500 annual deposits and invest at 8-10% don’t need the extra head start.

    Families without that money and knowledge can’t add more and won’t be able to invest well anyway.

    The real key to helping disadvantaged children to succeed is education, particularly in personal finance. Instead of $4 billion in annual handouts, try a $4 billion education program in basic financial and entrepreneurial skills for kids. Start in 3rd grade or so, and show them how to make, save, manage and invest money. The payoff would be far more than $500 or $1,000 plus interest

  4. This could be an awesome deal – but you would still have the people that would not know what to do with it. So it wouldn’t really do good. Now if it came with some required financial education then it might be a different story.

  5. In the following issue of Money, there was a letter from a reader saying parents should demonstrate, by personal example, to their kids how to be fiscally responsible, by adjusting their life style down and putting $500 every year in an account for the kid. I agree with that. We should make it a condition for claiming the personal exemption on the tax return for the kid. That way the kids will get funded without costing the taxpayers a penny.

  6. This is a silly idea.

    And I’d much rather be “screwed” earning a larger amount of money than earning less and paying

  7. I have a great idea! Let’s give the money out as FEMA debit cards so people can pay for more alcohol and strippers.

    This plan is a joke. Giving $1000 to a poor child will not turn their life around or give them any kind of advantage. Most of the money will be pissed away by the child or their parents. This program would be a huge waste of tax dollars. Period.

    Ship this guy somewhere that embraces this socialist crap *cough*France*cough*.

  8. Every comment here is great!

    Personal responsibility is the backbone of our country. If we really want to help our youth, we need to teach them two things: personal finance and a belief that they can improve their status in life if they believe in themselves and work hard.

  9. Terrible idea. We are about to have the largest ever population of retired people. So we would be asking the working aged people to be supporting the elderly with social security and then asking them to support everyone elses children. And why would we be doing this? Free college education is available to everyone who is poor enough or smart enough anyway. So what is the money for, to get kids addicted to the government dole right out of high school?

  10. A better idea is to do the personal accounts approach for Social Security so the accounts can be inherited, instead of having SS disappear into the general fund to be spent by Congress on museums run by their relatives. But that’s “privatizing Social Security”, which is held to be a bad thing for some reason by the usual suspects…

  11. It looks like another dumb idea to redistribute wealth as a cynical ploy to pander for votes. Rather than taking people’s money away from them and then giving it back again, how about just lowering taxes? If people having more money is a good thing, then the government should take less. What am I missing here?

  12. Spokane Al said:

    I believe it is also not the job of government to redistribute wealth.

    Too late, government already redistributes wealth. What do you think zoning laws do? Read Thomas Sowell, the brilliant conservative economist who demonstrated the upward redistribution of zoning.

  13. I think rewards are good but they need to be tied to demonstrable performance goals. For instance, poor kids are often behind on health and education. So… make it $500 per year, contingent on the child seeing a doctor for a checkup AND following advice resulting from the checkup; then another $500 for maintaining a B average or greater in school. This is the way to get parents involved, which is the biggest factor in determining the success of a child.

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