California is looking to pass a law that would give EVERY baby a $500 savings account. And they do mean every baby, since it will be "regardless of their parents’ income or immigration status." I’m sorry, what? Come to America to have your baby illegals!! Not only will we allow your babies birth create an "anchor" for your immigration status – we’ll throw in $500 cash. Has the government gone completely mad?
Sadly, it gets much worse when you actually think about this proposal. Setting the illegals question aside lets look at the math behind this "encourage savings" project that will only cost California tax payers $285,000,000 each year. The article states that "If families added $50 a month to the state’s initial contribution, the savings account would grow to nearly $17,500 at 5 percent interest over 18 years." ACTUALLY, if you know how to use a financial calculator (and set it to monthly payments of $50 instead of yearly payments of $600), the account will really grow to $18,687 (though you are supposed to give back the initial $500 at that point so $18,187). What it fails to point out is that if families saved the $50/month WITHOUT the governments $500 it would grow to $17,460. Well suddenly all that growth doesn’t look quite as impressive does it?
Beyond that, you can simply visit your local bank to discover that a 5% savings account is a tad optimistic. I called my broker and found my current money market rate to be 4.875% – which is actually up with rising interest rates. So really 3-4% is a more realistic CD/savings account rate. Change the ROI to 3.5% and the governments magic $500’s interest drops from the already low $727 to a mere $438.
But wait, there’s more! When you take into account inflation the money is worth even less. Inflation in this country is typically 2-3%, so we’ll use 2.5%. This means $438 of free government interest in 18 years will be worth the equivolent of $98 in today’s money. Everyone give the governement a standing "O" – they came up with a way to give everyone $98 for college, and it only costs $285 MILLION dollars a year
Now I hate to beat a dead horse, but there are a few more glaring problems with this great idea. First of all, undoubtedly the program’s cost stated in the article only accounts for the actual $500 of savings multiplied by the number of babies born. On top of that you will also have the efficient government administration of millions of tiny savings accounts. Think social security. And speaking of social security, we all know what happend to the money being saved for the good of the people. That’s right all the money was raided and replaced with a thick stack of IOUs. Don’t think it won’t happen here.
If the government wants to encourage savings it should try teaching math in school. I mean practical math. Financial math. Barring that, it could run community service announcement ads extolling the virtues of savings. This would in the end prove less expensive and more effective than this bill.
What the government should really try to increase is INVESTING not savings. Let’s take our earlier example of $50/month for 18 years and instead of saving it at 3 or 5% lets invest it. A good mutual fund will average around 12% over the long run. Invested, that $50/month payment would grow to $37,893. Adjusted for inflation your looking at the buying power of $28,369. And since the government didn’t give you the wooping $500 head start, you can spend that money on anything you want – free of government restrictions. Oh but the government will take 15% of your gain in taxes to help them pay for programs that encourage illegal immigration -oh- I mean savings.