Expert: We should issue retirement bonds 'when the baby is born'
Along with a birth certificate, the government should issue a bond for each newborn baby to help fund the tike’s retirement 70 years later, according to one expert.
"The basic premise is this: Why is it our American retirement system says we can’t save for retirement until after you get a job? We are squandering two or three decades of compound growth," said Ric Edelman, founder of Edelman Financial Engines, told Yahoo Finance. "Let’s start when the baby is born."
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Here’s what Edelman has in mind. Called the Retirement Income Security for Everyone, or RISE, the government bond program would aim to solve two crises plaguing Americans: retirement savings and wealth inequity.
The federal government would issue and sell savings bonds to fund a retirement savings fund for each baby born in the U.S. Investors would buy the bonds and redeem them 20 years later, while the money used to purchase the bonds would grow for 70 years untaxed. This would be at no cost to taxpayers.
Funds would then be distributed to Americans when they hit 70 as a monthly check — in addition to Social Security — that is based on the parents’ income at the baby's birth. Babies born to poorer families would get larger monthly payments, while babies born to wealthier families receive smaller ones.
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"Because not every baby is born into an equal family circumstance, we've got to break that pattern," he said, "and the most effective way to do it is to provide income at birth, targeted so those who are born into lower-income households get more than those who are in higher-income households."
By Edelman’s calculations, the proposal works with a one-time issuance of roughly $5,884 per baby, or about $23.4 billion per year, accounting for the approximately 4 million annual births.
That’s all it takes, according to Edelman, and after 70 years of "market-based returns," the professionally managed matured investment will be greater than the annual income offered from Social Security. Similar to the way the nation’s pension funds and endowments are managed, RISE accounts can rely on larger annual returns.
"That is the key, to have the money professionally managed...so that the accounts can be expected to produce returns that are enough to allow this thing to grow in value to the level it needs to," he said.
Starting at birth also gives the funds 20 to 30 more years to grow than the average 401(k), because those plans aren’t available until you start working and not everyone contributes as soon as they can. Social Security contributions also don’t begin until workers are in their 20s when they’re working in their first jobs.
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But even more "compelling," according to Edelman, is that the idea can close the nation’s systemic gaps of income and inequity.
"We have a huge problem in our country, as we all know," he said. "We have minorities earning dramatically less, accumulating far less wealth, and what the academic data tells us is that this is intergenerational — if you're born into a low-income household, you will probably stay there your entire life."
Stephanie is a reporter for Yahoo Money and Cashay, a new personal finance website. Follow her on Twitter @SJAsymkos.
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