Bold Idea #2: Baby Bonds

My second bold idea to change America is: Baby Bonds + Financial Education.

Americans have horrible savings skills and habits. Last year, for the first time since 1993 the nation's personal savings rate went negative (1). That means that Americans spent more than they earned. In 2004, there were over 1.5 million bankruptcies (2). 66% of Americans in a recent poll said they were living paycheck to paycheck (3). The average American carries $8,900 in credit card debt(4). Though this one is not as bad as it seems as the article explains, the median credit card debt is only around $2,000. But if the median is so much lower than the mean, it means that some Americans have huge credit card debt, which probably helps to explain the 1.5 million bankruptcies.

At the government level we aren't doing much better. In 2004, the US federal government had a $412 billion fiscal debt (5). The underfunded liabilities of Social Security have been estimated at $7.2 trillion, and the underfunded liabilities of Medicare are a staggering $35 trillion.

Students going to college are now racking up massive debts. The average debt for students graduating in 2003-2004, the latest data available, was $15,622 for public schools and $22,581 for private - many students rack up even more on their credit cards (6). The amount of debt is so high it affecting the type of careers that graduates are choosing and affecting how long it takes before they can look to own a home.

Americans have a huge amount of debt and poor savings skills which are going to cause huge problems in the future if not corrected. That is where Baby Bonds and Financial Education come in.

The first part of my idea is to issue a Baby Bond to every child that is born. The British do this and it looks something like this:

The idea is that every child born will immediately receive a payment worth anything up to £500, depending on the financial circumstances of the parents. The initial sum will be topped up by anything between £50 and £100 on three times subsequent occasions - when the child starts going to school at the age of five, when the child moves up to secondary education at the age of eleven and then again when the child turns sixteen. During this time relatives can contribute to the fund - which remains tax free and does not affect family entitlements such as housing benefit and working family benefits. Furthermore the government will match pound for pound the maximum sum saved up to a ceiling of £1,800. Handled prudently, the original sum could be worth anywhere between £5,000 and £7,000 by the time the child turns eighteen - enough, it is claimed, to start a small business or fund tertiary education.

There was a proposal in the US called KidSave that called for:

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.

The idea is that the government gives every child some money when they are born that is set aside and invested. This money can not be withdrawn until they are 18. At that time they could use it to pay for college, help them get started in life, help as a down payment on a house or as a good nest egg for retirement. It is a way to force people to save. It is a way to make sure that every child, regardless of how wealthy their parents are, will have money set aside in an account with their name on it. I like this politically because it merges the liberal ideas of income redistribution and equality with the conservative ideas of ownership and personal responsibility.

The second part of my idea is to instigate financial education in schools. I think learning how to invest and manage your money is as difficult to learn as driving a car. If we can teach everyone to drive, we can teach them how to invest their money wisely.

In elementary school students should be taught the basics of savings and compound interest. 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.

High school students should be taught how financial instruments like mutual funds, stocks, bonds and CDs work. Make sure they understand how compound interest can make you rich with investments or how it can get them in trouble with credit cards. Since every kid has their own investment account with real money in it the classes would be that much more powerful. It is their money, so they will have an incentive to really learn. They should also be taught how much money they need to set aside in order to have enough for retirement. Have them see how it is much more effective to set aside a little early in life and have it compound with interest than it is to save a lot late in life. They should learn how to set a budget and save money each money each month so they don't have to live paycheck to paycheck. They should be given the skills to manage a 401k account, understand what happens if you just pay the minimum balance on a credit card, and understand the implication of interest rates on buying a home. I think this could be accomplished in a semester class. Just as a health class is required to graduate, so should a financial health class.

The baby bonds and financial education would go a long way to helping Americans with their finances. It will give them the money to help pay for college, a down payment on a house or begin to finance their retirement. It would help reduce the crushing debt loads that college students now graduate with. It would help Americans to quit living pay check to paycheck, reduce their credit card payments and reduce bankruptcies. It would give them the tools to plan for their retirements. And hopefully these better educated Americans would elect politicians that are more serious about reducing our debt and finding a way to fund or reform Social Security and Medicare so they are sustainable for the long run.