It is called KidSave, and it was devised in the 1990s by then Sen. Bob Kerrey of

Question

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. 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 Under the initial KidSave proposal, the funds could not be withdrawn until age 65, when, through the miracle of compound interest, they would represent a hefty nest egg.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 9.4 percent annual growth, an
individual would have more than 1 million dollars. 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. More than 65 percent of Americans have a net worth of less than $100,000. About 90% of the total social security collections of more than $300 billion dollars is used to pay current beneficiaries and in some years the payout exceeded the collection. Is this a valid proposal? Is it even possible? Hint: Calculate FV

Explanation / Answer

The compund Interest can be calculated using the formula: A = P ( 1+ (r/n))nt , where

P = principal amount (the initial amount you borrow or deposit)

r = annual rate of interest (as a decimal)

t = number of years the amount is deposited or borrowed for.

A = amount of money accumulated after n years, including interest.

n = number of times the interest is compounded per year

In the given case: $1000 is deposited in the account at 9.4% nominal Interest compounded annually. Thus the account holder will have A = $ 1,567.06 in the respective account in a span of 5 years time. Now, if the Fed adds Put in $500 per year for five years at 5% NAI compounded annually and you add another $3,239.

When combined together the contribution will produce $4,806 in five years based on the assumption that $500 credit overlaps and starts at the beginning.

Now we need to compound the $4,806 for the next 60 years at 9.4% NAI compounded annually, and the person has A = $ 1,053,957.47 at age 65.

But Norm Ornstein has stated that the individual will receive $700,000 at the age 65 which is way far ahead than the calculated numbers.Ornstein is off by almost a full order of magnitude.

Hence, this is not a valid proposal and it is not possible.

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