What Good Will Giving Each Baby $500 Accomplish?

November 9, 2009

As if we don’t have enough government programs as it is…

MSN Money posted an article over the weekend titled, Junior’s 1st Paycheck: $500 at Birth.

I wrote about this program, called ASPIRE, in the past. The goal of ASPIRE is to give EVERY newborn baby a $500 savings account to be used for college, buying a home, or retirement. Babies born into lower-income families can receive more than $500. How much more? $500 for a total of $1,000.

Regardless, let’s focus on the $500. How much could $500 be worth by the time the recipient is ready for college? Not a lot, as my math shows:

Assuming a 10% rate of return (7% after inflation)…

$500 × (1.07)18

$500 × 3.38

$1,690

That’s right…$1,690! Yes, this is assuming nothing is added to the account over the years, which is a pretty safe assumption unless the government adds money to the account.

Sure, $1,690 is better than nothing I suppose but what good is it going to do for the recipient? Is it 10% down on a $16,900 house? A semester’s worth of books?

Say the account stays untouched until the recipient retires at age 65. How much will it be worth by then—again assuming nothing is added to the account and we use the same expected returns from the above example?

$500 × (1.07)65

$500 × 81.27

$40,635

The MSN Money article I referred to above mentions the reasoning behind this act:

“Having an asset has the potential to change the way people think and plan for their future, and sometimes those effects can be generated just from small asset holdings,” he says, adding that it’s possible for people to build significant savings over time. The ASPIRE Act also would pair the creation of the accounts with financial literacy programs in schools.

I looked up the ASPIRE Act and this is what it says about financial literacy:

The Secretary of the Treasury, in coordination with the Financial Literacy and Education Commission, shall develop programs to promote the financial literacy of account holders of KIDS Accounts and the legal guardians of such account holders who have the rights with respect to such accounts under section 3(h).

Not a lot of focus on financial literacy!

If we REALLY WANT TO HELP PEOPLE we need to be teaching them financial literacy, not giving them $500 or $1,000.

Not only that, with our country mired in debt that is in the trillions, what good is it to allocate roughly $2.1 billion (4.2 million kids born in 2008 × $500) to savings accounts? Doesn’t make a lot of sense to me.

14 responses to What Good Will Giving Each Baby $500 Accomplish?

  1. Vote buying…..

  2. You know, I used to think that childless people who complained about the tax benefits other people get for having kids were whiners/off-base. Now my mind is starting to change. I’d be a hypocrite to always preach “personal responsibility” yet reap some of these tax benefits, (tho’ we don’t reap all of them b/c of our AGI.)

    And here is yet another load of crap at the expense of the 50% of us (or whatever the % is these days w/all the unemployment surrounding us) who are actual tax-paying citizens. Who is going to administer this? You think illegal immigration is a problem now, just wait and see what dangling this carrot will do. Let me guess…you can’t ask about a person’s citizenship status to obtain the $…blah…blah…blah.

    Is there anyone still in public office who has any financial sense and remembers their oath of office and fiduciary duty to his/her constituency? Things are getting ridiculous and I’m ANGRY about everything being laid at the feet of the “wealthy” to pay via a surtax or other BS smoke and mirror taxing schemes.

    No wonder there’s an underground economy. Time for my own Mustang something or other in the Midwest. Then I could get lots of these $500 credits 😉

  3. For most recipients the 7% will be fanatsy – most of the money will sit in low interest bank accounts and, once the beneficiary starts earning an income, tax issues

    If there is a real benefit, its the possibility that parents and grand parents will be prompted into adding to the child’s future fund.

    I agree with comments that this is nothing short of shameless vote buying. I am happy that I do not live in a full democracy.

  4. I’d rather see the government sponsor financial counseling or financial planning. $500 buys 2-3 hours of one-on-one time with a fee-only financial planner.

  5. At #3…We have something in common as I apparently no longer live in a full democracy…

    At #4 Dylan…I was thinking we should tie a financial literacy test to the ability to get a drivers license. Wouldn’t that be interesting.

  6. Why not just skip the BS, and give everyone in college a freeby: $1,690 (one-time) scholarship.

    I don’t like the roundabout way of giving $500 at birth, which must be invested to maintain value (keep up with inflation), etc. This “stimulus” would have no affect for 18 years — makes no sense to me.

    I’m against government handouts, but using the $2 billion to lower higher education costs is a Good Thing in my opinion. College costs in the US are becoming prohibitively expensive, costs are rising much faster than inflation (and wages). If education of the next generation is our future, then we should invest in that.

    #5) what does “financial literacy” have to do with a driver’s license? I hate those tactics even worse than government handouts. Ideas like that lead to corruption.

  7. How about implementing financial classes that the kids must attend to recieve the money?! That would be of the most help.

  8. #7) or just make “financial literacy” a required high-school lesson (no money for anyone) — make it a required part of one of the math classes (algebra for instance). Show kids that this is one way of applying the math that they are learning.

    But I don’t think this should be done at the federal level — I like leaving curriculum up to individual districts / states, so if anyone cares, they can already push for this class via their local school boards. My high-school had a Home Economy (HomeEc) class that covered budgets, balancing checking accounts, etc, among other things like sewing, cooking…

    Also, students receiving student loans are required to attend a session that teaches the basics for those loans before the money is deposited.

    I’m beginning to believe this is a non-issue, and the money is just a vote-grab like others are mentioning.

  9. I don’t think financial literacy can effectively be forced on anyone. You have to want to learn it. Finance is too easy of a subject to just go through the motions without actually understanding it.

    I have found plenty of people who can accurately explain complex financial topics without actually understanding what they are talking about or why it’s even relevant.

  10. As I remember, the liberals pushing the ASPIRE account claim that “studies” show that if people have some money to start with, they are more likely to add to it and continue to save.

    Hang the studies, though. My financial planning friends tell me that, in their real-life experience with 403b plans, once people put 2 cents together, they look at that money as a stash to be squandered when they’ve spent everything else. Why else would we have other studies that show a substantial number of people spend their 401k money when they change jobs, instead of transferring it to their new job or to a self-directed IRA.

  11. I like how you said, “If we really want to help people.” The truth is, none of these government programs are actually designed to HELP people. It’s just one more way to get people to be dependent on the government – for money, for health care, for education – for everything!

    So, it’s always necessary to point out the errors in the program. But we can’t really debate a program on true merit when that’s not the actually (though hidden) intent of the program in the first place.

    The only way to STOP these kinds of things is to get to the people who are TAKING this money and try to get them to understand why it’s bad for them in the long run.

  12. #11) “The only way to STOP these kinds of things is to get to the people who are TAKING this money and try to get them to understand why it’s bad for them in the long run.”

    That’s the problem — it is good for the people who are taking the money, it is only bad for everyone else. Their gain, is our loss. The rational choice is to figure out how you can get some of the “gain” as well, to offset your losses to others.

    JLP won’t like me saying it, but even the ultra-rich play this game where their “income” (dividends & investments make up the majority of their income) is only taxed at 15%, whereas I’m in the 25% bracket. That is their gain, my loss.

    If the middle-class can’t stop the distribution of wealth from the middle class to the upper and lower classes, then the middle-class needs to figure out a way to get some of the ‘loot’ too — if only to balance things out somewhat.

  13. #12 – The thing is, it doesn’t really HELP them. Short-term, maybe, it gives them extra cash on hand. But when a government starts giving people incentives not to work, that only hurts productivity in the long term. I don’t think that these people are gaining anything by accepting these handouts.

    I disagree that we should figure out how to get in on the ‘loot’. I think that only makes the situation worse – we buy into the mindset that this is the way it is, and nothing we can do will stop it. Once we do that, then that really becomes true.

    For myself and my children, however, I don’t want a hand-out from anyone. I want to be left alone to reach whatever potential I have and am willing to work hard for. I want my children to grow up feeling the same way so they are well-rounded people – even if they don’t wind up with a lot of money.

  14. Two very fundamental questions come into play with this type of program.

    1) Should the government be doing it at all?
    2) If they should, what is the right amount?

    You spent a lot of time focused on #2 while #1 is the critical one. No where in the Constitution does it give permission for Congress to enact such a program. Unfortunately the last 100 years have shown that Congress really doesn’t care what the Constitution says and if they can buy enough votes they will do it.

    So lets assume that a private company offers to do this for the good will it brings them. It could be a single company or a set of companies. Google could offer a bond payable to the child at age 18 if they sign up for Google Finance and complete classes on financial education. They could allow parents/grandparents to get involved and add money in ways similar to uPromise.

    Would $500 be enough to change your mindset about money? Because that is truly the fundamental problem when it comes to personal finance. Most people believe that money should be consumed immediately if not before. That your lifestyle should be upgraded at every turn so your expenses exceed your income.

    Look at the history of lottery winners. The majority of them end up squandering their winnings and returning to their previous lifestyle. The few who succeed with it already had the right mindset about money.

    Look at the Earned Income Tax Credit (I would say most people reading this have no idea what it is). To see if giving people money changes their life. It comes every year and yet still has no impact.

    Money for nothing will never change a person. Change their mindset and money is not the issue any more.