How Giving $1,000 to Every Baby in America Could Reduce Income Inequality

The sooner someone implements it, the better.

A young baby sits in a car seat on the I 90 Freeway as people seek high ground after flooding August 31, 2005 in New Orleans, Louisiana. Devastation is widespread throughout the city with water approximately 12 feet high in some areas. Hundreds are feared dead and thousands were left homeless in Louisiana, Mississippi, Alabama and Florida by the storm.
National Journal
Norm Ornstein
Feb. 12, 2014, 2:45 p.m.

Like it or not, the sharp in­equal­ity in the coun­try is a fun­da­ment­al is­sue.

The gap between the richest and the rest of us is great­er than it has been since 1929 — a not­able year. The gap between the pay of CEOs and top ex­ec­ut­ives and the av­er­age pay of their com­pan­ies’ work­ers has grown in­to a yawn­ing chasm com­pared with the ra­tio just a couple of dec­ades ago.

One can be­lieve, along with de­luded ol­ig­archs such as Tom Per­kins, that any cri­ti­cism of the rich is like Kristallnacht — or, more reas­on­ably, that without the drivers of wealth, the en­tire so­ci­ety would fal­ter and fail to grow. Or one can be­lieve, as some stud­ies show, that so­cial mo­bil­ity has not fun­da­ment­ally changed in sev­er­al dec­ades — that Amer­ic­ans can still move up the lad­der.

Or one can be­lieve that the fail­ure to deal with the stag­nant in­comes of the lower half of the pop­u­la­tion will lead to a sag in de­mand that will it­self im­per­il growth. And one can be­lieve that as our pop­u­la­tion ages and people live longer — mak­ing the ra­tio of So­cial Se­cur­ity con­trib­ut­ors to So­cial Se­cur­ity be­ne­fi­ciar­ies much less fa­vor­able — stag­nant or lower in­comes will un­der­mine the vi­ab­il­ity of the en­tire sys­tem, much less the abil­ity of those re­ly­ing solely or mostly on So­cial Se­cur­ity to get by.

Whatever com­bin­a­tion of those things you be­lieve, one thing should be ac­cep­ted uni­ver­sally: If Amer­ic­ans lose the sense of the Amer­ic­an Dream — that if you work hard and play by the rules, you can rise to the ab­so­lute lim­its of your own abil­it­ies — and if Amer­ic­ans gain a sense that the rich get rich­er while the rest of us get screwed, our na­tion­al unity will be im­periled, and the op­por­tun­it­ies for real dem­agogues to emerge will grow.

Is there any way to deal with this prob­lem that doesn’t get caught in our par­tis­an, ideo­lo­gic­al, and tri­bal crosshairs? There is, and I am sur­prised it has not entered our policy dis­course at all as the de­bate over in­equal­ity and ad­equate liv­ing stand­ards has raged.

It is called Kid­Save, and it was de­vised in the 1990s by then-Sen. Bob Ker­rey of Neb­raska, with then-Sen. Joe Lieber­man as co­spon­sor. The first it­er­a­tion of Kid­Save, in simple terms, was this: Each year, for every one of the 4 mil­lion new­borns in Amer­ica, the fed­er­al gov­ern­ment would put $1,000 in a des­ig­nated sav­ings ac­count. The pay­ment would be fin­anced by us­ing 1 per­cent of an­nu­al payroll-tax rev­en­ues. Then, for the first five years of a child’s life, the $500 child tax cred­it would be ad­ded to that ac­count, with a sub­sidy for poor people who pay no in­come. The ac­counts would be ad­min­istered the same way as the fed­er­al em­ploy­ees’ Thrift Sav­ings Plan, with three op­tions — low-, me­di­um-, and high-risk — us­ing broad-based stock and bond funds. Un­der the ini­tial Kid­Save pro­pos­al, the funds could not be with­drawn un­til age 65, when, through the mir­acle of com­pound in­terest, they would rep­res­ent a hefty nest egg. At 8.5 per­cent an­nu­al growth, an in­di­vidu­al would have al­most $700,000.

The ini­tial idea of Kid­Save was to provide a re­tire­ment sup­ple­ment to So­cial Se­cur­ity, mak­ing it easi­er in some ways to re­form So­cial Se­cur­ity to achieve fisc­al solvency. But the concept can serve mul­tiple pur­poses at a very small cost.

Ima­gine if we ad­jus­ted the Kid­Save rules so that at cer­tain pivot points in life, in­di­vidu­als could with­draw a por­tion of their nest egg to pay for col­lege ex­penses or a down pay­ment on a house or a med­ic­al or oth­er emer­gency, or even the cre­ation of a small busi­ness, while still mak­ing sure that a sub­stan­tial share of the funds would stay in a re­tire­ment ac­count. We could ameli­or­ate many of the prob­lems fa­cing hard-pressed middle-class and work­ing-class fam­il­ies and en­cour­age en­tre­pren­eur­ship, while pro­tect­ing a ma­jor nest egg for re­tire­ment years. No doubt, some would squander or mis­use the money, but for most, it would provide an op­por­tun­ity and a life­line.

More than 65 per­cent of Amer­ic­ans have a net worth of less than $100,000. The av­er­age net worth in the U.S. is about $37,000. But av­er­ages dis­guise an­oth­er real­ity: the dra­mat­ic dif­fer­ences in net worth between the bot­tom and the top. The wealth owned by the top 1 per­cent of the pop­u­la­tion is more than 37 per­cent of the total; the top 20 per­cent own 87.7 per­cent of the wealth. Kid­Save would sig­ni­fic­antly change all those num­bers and ra­tios, and provide a cush­ion of wealth for those at the bot­tom of the lad­der.

Kid­Save drew sup­port from lib­er­als and con­ser­vat­ives, from uni­ons and busi­ness in­terests, from the Her­it­age Found­a­tion and AARP. For con­ser­vat­ives, it meant a uni­ver­sal in­vestor class. For lib­er­als, it meant giv­ing wealth and se­cur­ity to tens of mil­lions of people who have little or noth­ing. But for reas­ons I can’t ex­plain, it went nowhere.

The same was true of a second it­er­a­tion of the pro­gram, where each child would get an ini­tial $2,000 loan at birth from So­cial Se­cur­ity, with the money also placed in a re­tire­ment ac­count in­ves­ted through the Thrift Sav­ings Plan; the ini­tial $2,000, as ad­jus­ted for in­fla­tion, would be paid back in five an­nu­al in­stall­ments start­ing at age 30, but with the ac­crued in­vest­ment growth con­tinu­ing to build in the in­di­vidu­al’s ac­count. That plan was co­sponsored by Ker­rey and fel­low Sens. Rick San­tor­um, Daniel Patrick Moyni­han, Charles Grass­ley, and John Br­eaux, but it still died on the vine.

In his State of the Uni­on mes­sage, Pres­id­ent Obama pro­posed a com­mend­able plan for starter re­tire­ment ac­counts, MyRA, provid­ing an in­cent­ive for work­ers to have small amounts auto­mat­ic­ally with­drawn from their salar­ies to in­vest in prin­cip­al-pro­tec­ted Treas­ury bonds. Nice, but tiny. Kid­Save is much more am­bi­tious, with much great­er po­ten­tial. Why not give every Amer­ic­an a piece of the pie? If the cost, in the end, were even $20 bil­lion a year, that is chump change in a $17 tril­lion eco­nomy — and, of course, money that would all be in­ves­ted in Amer­ica. Kid­Save is an idea whose time has come.

Any takers?

COR­REC­TION: The ori­gin­al ver­sion of this column over­stated the nest-egg pro­jec­tion; I said it was based on a 5 per­cent rate of re­turn when it was ac­tu­ally based on an 8.5 per­cent rate of re­turn.

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