A newspaper headline reads, “Millionaire Babies: How to Save Our Social Security System.” It sounds a little wild, but the concept expressed in the title of this newspaper headline probably refers to an economic plan proposed by a member of Congress. Senator Bob Kerrey (D-Nebraska) has proposed giving every newborn baby a $1,000 government savings account at birth, followed by five annual contributions of $500 each. (Kerrey offered this idea in a speech devoted to tackling Social Security reform.) If the funds are left untouched in an investment account, Kerrey says, then by the time each baby reaches age 65, his or her $3,500 contribution will have grown to $600,000 over the years, even at medium returns for a thrift‐savings plan. At about 9.4% compounded annually, the balance would grow to be $1,005,132. (How would you calculate this number?) Since about 4 million babies are born each year, the proposal would cost the federal government $4 billion annually. About 90% of the total annual Social Security tax collections of more than $300 billion is used to pay current beneficiaries, making Social Security one of the largest federal programs in dollar expenditure. The remaining 10% is invested in interest‐bearing government
bonds that finance the day‐to‐day expenses of the federal government. Discuss the economics of Senator Bob Kerrey’s Social Security savings plan.