BC: SOCIAL SECURITY REFORM
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Washington — One new proposal emerging from the national debate on 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.So
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 for 65 years, 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.
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