View Full Version : A Replacement for Social Security (for the unborn)

02-27-2005, 04:59 AM
Every retiree a millionaire?http://www.twincities.com/images/common/spacer.gif
Ex-treasury chief's fix for Social Security is gaining steam among both parties
Washington Bureau

WASHINGTON — One new proposal emerging from the national debate about how to overhaul Social Security could make every American a millionaire at age 65.

Paul O'Neill, President Bush's first treasury secretary and a former chief executive officer of aluminum giant Alcoa, proposes having the government stake every American baby at birth to an investment savings account. By the time the child retires, the account would contain $1 million or more. The idea is drawing attention from an unusual coalition of lawmakers from both parties, liberals as well as conservatives.

To move away from Social Security's chronic funding problems, O'Neill suggests that the government put $2,000 in a special investment account for every newborn American. The government would invest $2,000 more each year until the child reaches 18.

The money would be invested in a conservative index of stocks and bonds and couldn't be touched until retirement. The investment would grow at a compounded rate, meaning that as the value of assets in the account grows, profit would be reinvested so the account would grow even more. Without adding a single cent beyond compounding after the child turns 18, he or she would retire at age 65 with $1,013,326 in the account, O'Neill reckons.

"If you do the arithmetic, the $1 million would provide an annuity of $82,000 a year for 20 years," O'Neill said in an interview.

O'Neill assumes a 6 percent annual return on investment. He calls that figure conservative since it represents the worst performance to date of any 25-year cycle on Wall Street.

His example is in current-value dollars. Over time, the value of any assets in the personal accounts would increase to offset inflation, so that assets worth a million dollars today would have equivalent value in 65 years.

His program would cost $8 billion in the first year: $2,000 times the roughly 4 million children born annually in the United States. Each year thereafter, another $2,000 would be deposited into each account until the child reaches age 18. Each year's crop of children ultimately would cost the government about $144 billion, he estimates.

O'Neill says his approach would eliminate the need for Social Security and Medicare — which together will cost about $815 billion this fiscal year — but not until 2069 if the program were to begin this year, at which point all Americans would be millionaires upon turning 65.

"It's a way to think about creating financial security for the entire population and growing into it," O'Neill said. "It hastens the pace to convert the whole society into what I think is a hell of a lot more equitable system."

Some lawmakers in Washington are listening to him.

"I like the concept a lot, because it really takes the power of compounding and gets you a longer run at it. And for financial people, that's the real power of compounding, that you stretch it out over a more extended period," said Sen. Kent Conrad, D-N.D., the ranking Democrat on the Senate Budget Committee.

Fired by President Bush in 2003 after publicly disagreeing with him on policy matters, O'Neill thinks the president's Social Security ideas lack boldness.

Bush wants to allow Americans 55 and younger to divert a portion of the tax they pay to fund Social Security into new private retirement accounts. He'd borrow trillions for decades to make up for the diverted revenue that Social Security still would need to pay retirement benefits for older Americans. White House officials acknowledge that the president's plan would do nothing to solve Social Security's long-term solvency problem.

"I hate the kind of lukewarm, timid things being discussed," O'Neill said. "The notion of proposing private accounts and kind of reluctantly admitting it doesn't do anything to solve the Social Security problem — I don't know why people aren't objecting to this kind of sleight of hand."

White House spokesman Trent Duffy responded that "the president has been quite clear: Personal accounts have to be one component of any solution." Bush has said all options to fix Social Security's long-term problems are "on the table" for negotiation with Congress, except raising the wage tax.

Neither Bush nor O'Neill has offered a solution for Social Security's projected funding shortfall of $3.7 trillion over the next 75 years. System actuaries think Social Security will start paying out more than it takes in by 2018. By 2042, they say, it will have cashed out all the bonds in its reserves and be unable to pay full benefits.

David John, a Social Security expert for the Heritage Foundation, a conservative research center, said O'Neill's idea sounded deceptively attractive.

"The problem is that doesn't start to change things until 2060 or 2070, and the real crunch with Social Security is long before that," John said. The O'Neill plan also "sends a signal that your own efforts don't count in life, that people give you money and you can depend on the kindness of strangers."


Former Treasury Secretary Paul O'Neill believes future generations of Americans all could retire as millionaires if the federal government followed this plan:

Upon each child's birth, the government opens an investment savings account in his or her name and puts $2,000 into it. Every year afterward until the child turns 18 the government puts another $2,000 into the account. The money then would be left to grow at a compounded rate until the individual reaches the retirement age of 65.

Assuming a 6 percent continuously compounding rate of return over 65 years, money in the account would exceed $1 million. There'd be no lump-sum payment; the money would be put into a 20-year annuity paying about $82,000 a year.

Assuming 4 million births annually, O'Neill estimates it would cost about $144 billion to fund accounts for each year's babies for 18 years.

After 65 years, this would eliminate any need for Social Security since all Americans would retire rich. His plan doesn't address funding the system's current projected shortfalls.


This was a story posted on the pioneer press' website (twincities.com).