This may sound like an April Fools’ joke, but it's not. That's just how unbelievable it is.
What if I told you there was a low cost way to wipe out the need for Social Security within one generation—and not only would it not cost the government a dime but it would massively generate more tax revenue. Would you believe me? Or would you call me an April fool?
Most folks would bet on the latter—and most folks would be wrong.
Introducing The Child IRA. It's the answer to all our retirement woes. It obviates the need for Social Security (at least the part that deals with retirement). It doesn't cost the government anything to implement. Best yet, it’ll leave the government with an ongoing tax windfall.
Here's how it works. Every child born in the United States would be allowed to accept up to $1,000 per year until their 19th birthday into their own “Child IRA.” Any adult can make a tax-deductible contribution into anyone's Child IRA, so long as the total contributions to any single Child IRA do not exceed $1,000. The contributing adult does not have to be related to the child that owns the Child IRA.
According to the U.S. Census, there are roughly 75 million children in the United States. If all Child IRAs are fully funded each year, that would reduce taxable income by $75 billion. Another way of saying, based on the Tax Policy Center's average Federal tax rate of 17.4 (for 2009, the latest year available), this would equate to a short-term loss of $13 billion in revenues per year. By eerie coincidence, according to the president's newly released budget, it costs a little more than $12 billion dollars to operate Social Security.
But let's not get ahead of ourselves. I said this wouldn't cost anything and here's why. Looking at the costs in another way, a fully fund Child IRA ($1,000 per year until that child's 19th birthday) would require a total of $19,000 in total tax deductible contributions. Again, assuming the average 17.4 percent tax rate, this reduces tax revenues by $174 per year for a total reduction of $3,306 over the 19 years contributions are allowed.
By age 70, when the child retires, assuming an average annual return of 8 percent (versus the historic average annual return for equities of 10.4 percent), the Child IRA would be worth $2,212,655. Furthermore, if the retiree now takes out 4 percent a year ($88,506) and pays the current average tax of 17.4 percent, the government will earn $15,400 in tax revenues a year. That's nearly a 9,000 percent return on that $174 annual “investment” the government makes during the contribution period of the Child IRA. Not bad for doing nothing.
Finally, that $88,506 is 72 percent more than the current median income of $51,371. Traditional retirement savings vehicles will still be needed because, like Social Security, the Child IRA isn't intended to fully fund retirement.
But what a head start it is.