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What if every child started out in life with his or her own personal savings program for college, for first-time home purchases, and for retirement?
A savings program started at birth benefits from more years to earn and accumulate interest, resulting in a bigger nest egg over time. Granting every child such an opportunity would result in broader and more equal ownership of savings and capital for each citizen. Such widespread capital ownership would empower and liberate every American in their personal pursuit of happiness and the American Dream.
Sen. Chuck Schumer, D-NY, has proposed a program along these lines–with a recent bill that would give every American newborn a government account of $500. A variation of the very successful Child Trust Fund plan in the UK, the bill was first introduced by former senators Jon Corzine, D-NJ, Rick Santorum, R-PA.
Santorum saw this as an opportunity to jumpstart retirement savings for a new generation, noting “this is another opportunity for us, in a sense, to eliminate poverty for the next generation of seniors.”
Under Schumer’s version of the plan, parents can invest a maximum of $2,000 a year in these “Lifetime Savings Accounts (LSA),” with a government match of up to $500 a year, for each of their children. The plan offers an additional $500 per child for low income families.
After age 18, the child could legally withdraw from the account–tax-free–to finance college tuition and education-related expenses. After age 25, the child could withdraw additional funds tax-free for a down payment on their first home, while continuing to accumulate funds to supplement retirement savings.
Under Schumer’s plan, the U.S. Department of Treasury would hold and invest LSAs for each child over their lifetime. The estimated cost of the bill is $4 billion per year. While not a small price tag, it is dwarfed by the $617 billion that the government spends on Social Security annually.
Schumer’s bill has enormous potential, but we would set it up differently to avoid past mistakes. A central fund invested and run by the Treasury has the potential to turn into yet another slush fund to line lawmakers’ pockets for pet projects and more entitlement programs. America doesn’t need another unfunded liability collecting IOUs that will eventually need to be paid.
Instead, private, individual savings accounts should be exactly that–private and controlled by the individual. Congress should appropriate funds to a separate, public-private investment fund that would be independent from any government agency.
This will ensure that the lawmakers cannot borrow from that fund for other spending. A government framework for investment could be established empowering workers to choose from a range of alternative private investment funds. This would truly make every American a member of the “investor class.”
More importantly, the Schumer plan should be designed as an alternative to–not a supplement to–government run retirement plans. In adult years, the child should be free to choose to shift some portion of his or her payroll taxes to the accounts as well, in return for the accounts taking responsibility for a proportionate amount of the child’s later Social Security benefits.
With long run market investment returns, working people would enjoy higher retirement benefits as a result. A government safety net could ensure that all workers would continue to receive overall through the accounts at least as much as promised by Social Security under current law.
In this way, the LSAs could eventually replace Social Security and the payroll taxes that finance it. Social Security’s current deficits would be eliminated in the process as well. At death, the accounts would be left to the retiree’s own children (or designee – for those without children), to be combined with their accounts which started at birth. This would further build up the savings and capital of all Americans over the generations.
But to accomplish this goal, and fit with an American, free-market model, we must ensure that the LSAs are not just another entitlement program added on top of all the excessive entitlement obligations we already have. Done right, these accounts would instead be a potentially enormously beneficial solution to America’s long-term entitlement crisis.
Newt Gingrich is a senior fellow at AEI.
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