Proposal: use a person's complete lifetime to retirement at age 65 to maximize the compounded value of a small initial investment. How to accomplish this for everyone? The government will loan $1000 to each newborn at 5% interest. The loan to be paid off with 2% of the FICA tax.
Assumptions: 10% annualized return from approved list of broad market index funds only in a Roth-type IRA. At age 65 the $1000 should become approximately $490,000. If the 2% FICA tax is added to the accumulation after the loan is repaid the total should be about $530,000. This is assuming that the person begins work at about age 19 at today's minimum wage and never makes more than TODAY's minimum wage. The loan would be repaid at about age 34.
What about inflation? Ibbotsen Associates predict annual 3.1% inflation over the next 26 years. They also predict an S&P total annualized return of 11.6% - 1.6% above what we are using in our calculation. Our assumption of no wage inflation in 65 years is extremely conservative and so the combination of these two factors should render the actual accumulation values to be at least equivalent to the above in terms of today's purchasing power.
What needs to be done? This plan at least would require the elimination of the earned income requirement for this retirement Roth IRA. Congress would have to approve the $1,000/citizen loan which would amount to a cost of about $4 billion/year (the present birth rate is about 3.9 million). As the workers begin paying the FICA tax this cost would be driven down drastically.
It would tend to eliminate elderly women living in poverty and it could be made optional if too many want to keep their children with the present system.
I would appreciate any comments, negative as well as affirmative.
Richard Becka
Office (979)845-1888
PO Box
4631
Home (979)778-1103
Bryan TX 77805