Wednesday, September 21, 2005


I really like this idea that David Brooks is floating in this column.

Under one version of KidSave, the government would open tax-deferred savings accounts for each American child, making a $1,000 deposit at birth, and $500 deposits in each of the next five years. That money could be invested in a limited number of mutual funds, but it couldn't be withdrawn until retirement.

Over decades, it would grow and grow, thanks to the wonders of compound interest, so that by the time workers retired, they would each have a substantial nest egg, over $100,000, waiting for them.
I have seen variations of this idea before (and Mr. Brooks doesn't claim it is original) and I have always like them. And the reason why I like it are basically the same as Brooks:
But people in the bottom half of the income scale don't get to join in to take advantage of compound interest. They don't get a share of the growing national economy. They don't get the psychological benefits of ownership.
One thing that I would add to Brook's proposal is a mandatory saving and investment class in high school. Compound interest is such a magical concept. Albert Einstein is said to have called compound interest "the greatest mathematical discovery of all time". But, it is not an intuitive concept. People don't understand compound interest without working with it and seeing it. Right now compound interest is working against most working class people in the form of credit cards. With a class in high school where people can see how credit card debt piles up due to compound interest I think this would be lessened. And if they had their own investment account with real money it in the classes would be that much more powerful.

I have heard people say that we shouldn't privatize social security because the average individual does not have the financial savvy to manage their own accounts. I say that is exactly why we should privatize. Learning how to invest isn't brain surgery, but it doesn't come without learning. I would say that learning how to invest is as hard as learning how to drive a car. We expect that every 16 year old American will learn how to drive a car, why can't we expect that they also learn how to manage their own money?
And let me commit an act of heresy: it would be smart for Republicans to forgo making the Bush tax cuts permanent in exchange for these kinds of accounts. The Bush cuts are going to be repealed by the next Democratic president anyway, but these accounts, once created, would be forever.
Every time I think about Bush's privatization plan I can't see how it doesn't lead to higher taxes in the next 5 years to pay for the transactions costs. I would go farther than Brooks, even if a Republican president is elected next we are going to raise taxes, and if the pirvatization goes through the tax raise will be even higher.

I found another article that gives more details and an example of where it is being tried.
Living with his parents and older brother in a trailer park near Pontiac, Mich., he is part of an experiment called the SEED Initiative that is opening investment accounts for children, in an effort to ensure them a college education and teach their families the habit of putting aside money for the future.

The $800 deposited in his name places the rambunctious 5-year-old at the leading edge of a new wave of thought about how to create wealth, curb poverty and improve the abysmal savings rate among Americans, particularly those who are poor.

In today's economy, a savings account "is as fundamental as land was back in the 18th and 19th century," said Ray Boshara, of the New America Foundation, a centrist think tank that is a main advocate of children's accounts.

Legislation has been introduced in Congress that calls for the government to open a KIDS Account of at least $500 for every baby born in the United States. And President Bush's first Treasury secretary, Paul O'Neill, has been promoting a plan he has devised for children's accounts that he says would guarantee every American at least $1 million by age 65, eventually eliminating the need for Social Security. O'Neill said his plan, which he estimates would cost $144 billion, would create "a fundamentally different society than any one on Earth."
The other thing I like about this proposal is that in cuts through ideologies. As the article says:
Children's accounts are gaining proponents across the ideological spectrum. Conservative Republicans construe them as a form of the market-oriented "ownership society" that Bush touts. Liberal Democrats view them as an extension of the Great Society of the 1960s that created government programs to lift people from poverty.
Both the left and the right should like it. Now, lets see if they can get it done.

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