Thoughts on the proposed "Kidsave" idea

[kcjenkins]

From Best of the Web:

A Further Deflation

In Friday's column we took a critical look at a proposal called KidSave, originally advanced in the 1990s and revived recently by National Journal's Norm Ornstein. In brief, the idea is for the government to give every baby born in America $1,000 in a savings account, to which $500 a year would be added for five years. "At 5 percent annual growth, an individual would have almost $700,000" at age 65, Ornstein claimed.

As we noted, the actual figure would be a bit more than $75,000, so that Ornstein was off by an order of magnitude. But we too might have been off by an order of magnitude--which would mean not that Ornstein was right but that he was off by two orders of magnitude.

The trouble is that Ornstein doesn't stipulate whether his hypothetical 5% rate of return is real (i.e., adjusted for inflation) or nominal. It makes a huge difference. According to the Bureau of Labor Statistics' inflation calculator, $75,000 in 2013 dollars was worth the equivalent of $7,758.94 in 1948 dollars. Thus if you had been promised in 1948 that 65 years later you'd receive a sum of that magnitude--$7,500 or $8,000--the payout would be roughly 90% less valuable if not adjusted for inflation.

Of course the 1948-2013 period included the high-inflation 1970s and early '80s, and there's no way to know what inflation will do to the value of the dollar between now and 2079. And 5% long-term real rates of return are not unheard of--though they've required investment in stocks rather than lower-risk instruments like bonds or money-market accounts. Even so, what looked like a half-baked idea appears to be even rawer than we'd initially thought.