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?