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For the last four months or so, I’ve been promoting my idea to turn Americans into the best damn savers the world has ever known. I’ve dubbed my idea the Junior IRA (JIRA for short).
If you’re new to this blog, I’ve provided links to my previous posts on the JIRA below. Reading these posts will get you up to speed. But if you rather not take on extra reading assignments, here’s the essence of the JIRA distilled down to one sentence.
The Junior IRA is simply a Roth IRA for minors that does not have a work requirement and can be funded by anyone or any institution.
In one respect, I’m not terribly disappointed that my JIRA idea hasn’t gone viral. Yes, it’s “freaking genius” (at least according to Maggie at Northern Expenditure), but it still has a number of bugs. And until those bugs are addressed, it’s just not ready for prime time. Better to wait and bring a strong product to the political market then to rush things and give the naysayers plenty of weaknesses to exploit.
One of the bugs I’ve been trying to address lately is my proposed $2,000 of tax-financed seed money. Here are the key aspects of my JIRA proposal that pertain to that.
Once established by law, every newborn in the United States would leave the hospital with a birth certificate and a JIRA.
The federal government and the birth state would each be required to contribute $1,000 to every newborn’s JIRA.
Many people will not look kindly upon more government spending. And this is completely understandable. I worked for over twenty years in government. We were so inefficient we needed about $2 in taxes to produce a dollar’s worth of services. And we were hardly an anomaly. Federal and state government are just as pathetic as the municipality I once worked for. That’s why the national debt is over $19 trillion. That’s why our states struggle to pay for Medicaid, civil service pensions, and K-12 education.
And I want to give them another program to fund? Really?
Answering This Objection
One answer to this objection is to scrap any tax-financed seed money for the JIRA. Newborns can just leave the hospital with a birth certificate and a JIRA with a zero balance. But that strikes me as foolish. To see why, consider the following:
A while back, Paul Merriman of MarketWatch wrote a post showing what $1 invested at birth would be at age 66 giving two hypothetical returns. With a ten percent annual return, that $1 would grow to $539.41. A twelve percent annual return would turn $1 into $1,771.70.
What do you suppose $2,000 invested at birth would be in 66 years with annual returns of either ten or twelve percent?
At ten percent, $2,000 would turn into $1,078,820.
At twelve percent, $2,000 would turn into $3,543,400.
Scrapping tax-financed seed money for the JIRA would deprive every child of at least a million dollars in retirement money. And for what? Don’t we have a supposed retirement crisis in this country? Doesn’t it make sense to spend a little extra now so we can take advantage of the greatest wealth-building tool ever created by man—compound interest? Not only would this help our children secure their retirements, it would help future taxpayers as well. Solve the retirement crisis and you ease the strain on the safety net.
Making JIRA Seed Money Part of the Social Security Infrastructure
After careful consideration, I’ve decided to scrap the $1,000 in state seed money. The states are broke and they can’t print money like the feds. Besides, as the power of compound interest in the above examples show, half the proposed seed money is enough to greatly improve a newborn’s retirement prospects. So my JIRA proposal will keep the $1,000 in federal seed money.
But how is the federal government supposed to come up with an extra $4 billion annually (4 million newborns times $1,000)?
My proposal is to make funding for the JIRA part of the Social Security program. Here’s how it would work.
To fund the Social Security program, the feds impose a 12.4 percent tax on employment income up to $118,500. Any income after $118,500 is not subject to FICA taxes.
In 2015, Social Security cost $900 billion. This means that for every $1,000 in employment income, the FICA tax brought in $759 million. To bring in another $4 billion to fund the JIRA seed money, the Social Security income ceiling would have to be raised from $118,500 to $123,800 (assuming that the 12.4 percent tax keeps bringing in $759 million for every $1,000 of income).
Raising the Social Security income ceiling $5,300 will not be painless. Americans making more than $118K will be sending even more money to the federal government for essentially nothing in return. But as long as every extra dollar brought in by the higher ceiling is used for JIRA seed money, I think taxpayers might go for it.
Final Thoughts
Social Security is a pay-as-you-go system. Money that comes in is immediately paid out to current beneficiaries. Any money that is left over is lent to the treasury so it can fund the current operations of other government agencies. Your Social Security account is therefore not like a 401(k). It’s not filled with return-generating contributions that you and your employer have made. Your Social Security account is filled with IOUs. As long as there are enough future workers, and as long as the treasury continues to make interest payments on the money it has borrowed, you’ll get your promised benefits. If there aren’t enough future workers, though, or if the treasury can’t make its interest payments, you won’t get your promised benefits. You’ll get less.
What if we made the Social Security system a little less pay-as-you-go? This way future beneficiaries wouldn’t be one hundred percent dependent on the fiscal fortunes of future workers and the U.S. Treasury.
Four billion dollars is less than 0.5 percent of current Social Security outlays. Think about that. With a minor tweak to the FICA tax income ceiling and the program’s benefits (adding JIRA seed money to the mix), we could forever end Social Security’s long-term fiscal woes.
For most future Americans, JIRA seed money plus their own contributions compounded over six decades will be more than enough to fund their expenses in retirement. Social Security checks will no longer amount to “I’m-screwed-without-this” money. They will be transformed into fun money—monthly bonuses, so to speak.
We are told that our roads, bridges, tunnels, and airports are crumbling. And to be fair to future Americans, we need to increase our investments in our infrastructure now. This may or may not be true. The one thing I know is true, however, is this. Our safety net is also part of our infrastructure. And an investment in JIRA seed money would do a heck of a lot more for future Americans than throwing more money at the Highway Trust Fund. A thousand dollars invested in a JIRA will return about $500K. What will a $1,000 invested in the Highway Trust Fund return? A dozen or so repaired potholes?
Okay, groovy freedomists, that’s all I got. Let me know what you think when you get a chance.
Past Junior IRA Posts
Congress Should Create the Junior IRA
And to make a further point to Tommy’s point, NO early withdrawals prior to age 62. Then means test for ANY social security benefits to further bolster the safety net. Why should anyone who contributed the max even thru age 18(pushing/surpassing an 8 figure net worth by age 62) receive social security?!? The more I read your thoughts on the JIRA, the more interested I become in trying to help qualify/quantify ways that we need to make this a reality. Keep the awesome coming!!
Thank you, Jeff. I think the Junior IRA would be a great way to phase out the old-age portion of Social Security. As you so wisely asked, “why should anyone surpassing an 8 figure net worth receive Social Security?” And here’s another question along similar lines: Why should the government be doing something for people when most people can do that something themselves? I don’t need the government to save for my old age, especially if I’m allowed to start saving when I’m born. I do need the government’s help to guard against Russian and Chinese cyber attacks. I can’t stop the Russians and Chinese. Maybe the feds can. Oh, well. Thanks for stopping by, Jeff. Excellent contribution to the conversation.
Love the JIRA idea.
I’d add that this account should not be accessible FOR ANY REASON before retirement. If they want to drain their IRA/401k early, so be it. But have this money not even an option.
Keep up the good ideas…
Sorry for the very late response, Tommy. Yes, I wholeheartedly agree. You shouldn’t be able to touch your Junior IRA until you’re at least 60. And I wouldn’t be offended if the not-touch rule were extended to 65.
A great, great idea. Count me as a JIRA supporter, my friend!
“And to be fair to future Americans, we need to increase our investments in our infrastructure now. This may or may not be true.”
If you’re suggesting there is already enough money for our multiple systems and infrastructures (e.g. electricity, water, railway, roadway, etc.) that is simply not being spent wisely, I would likely argue the other side. While I agree in general that there could be more efficiency in the collection and disbursement of funding, the reality is that at the present time our various infrastructures are being starved of funds. At this point, it isn’t a question of efficiency, it’s a question of no funding.
If you’re suggesting that the various infrastructures don’t presently need our attention, I would definitely take the opposite view. As someone that works on information systems, which rely on supporting systems and infrastructures (power, grounding & bonding, cableways and HVAC); and has seen the impacts of neglected infrastructures (on both the particular system itself and those it interfaces/supports) in my travels abroad, I don’t think there is any real question. All infrastructures need continual maintenance, refreshing and ultimately, replacement. As with most things, you end up paying more when you neglect the infrastructure. You may ‘save’ money in the short-term by delaying or taking shortcuts on maintenance and failure to follow a prescribed refresh schedule, but you definitely pay the price in the long-term.
Hey, James. I stand corrected. The only reason I hesitate in accepting the need for more infrastructure spending is that I just don’t trust our leadership. In my mind, there are three complexes we should be guarded against. The military-industrial complex, the compassion-industrial complex (health care, income support, education, TANF, etc.), and the infrastructure-industrial complex (roads, bridges, airports, dams, electrical grid, etc.). They all say they don’t have enough money to do their respective missions. Is this true? Does our media do a good job of vetting their claims? And what guarantee do I have that any increased taxes that I vote for will be actually used to improve something? Admittedly, I’m very ignorant when it comes to infrastructure. I’ve done some travel, and roads, bridges, and airports that I’ve seen appear fine. But you’re a voice of reason, and if you say our infrastructure spending is insufficient, then that’s reason enough for me to reconsider my position. Thanks for stopping by, James. Always appreciate your input.