One of the underlying issues in the ongoing debate on the future of Social Security is its limitations as a source of retirement security. According to one popular metaphor, retirement income for Americans is a three-legged stool: one leg is private (generally job-based) pensions; the second is private savings; and the third is Social Security. As Timothy M. Smeeding and James P. Smith demonstrated in a November 1998 policy report for the Progressive Policy Institute, low-income and minority Americans disproportionately depend on the third leg, having little or no access to private pensions or personal savings.
Sen. Bob Kerrey (D-NE) is one politician who has focused on the non-Social Security part of retirement security for years. Yesterday he introduced a new version of his innovative "KidSave" proposal to give every American citizen at birth a $2,000 loan deposited in a mandatory retirement savings account that could produce through the miracle of compound interest as much as $250,000, or more, by the age of 67. The original $2,000 would be paid back at age 30, and the accounts would be managed by the highly successful Thrift Savings Plan for federal employees, which offers participants a range of safe investment vehicles. While beneficiaries could not withdraw any funds until retirement, they could supplement their accounts with tax-deferred private savings of up to $500 per year (by the parents for minors), just as in an IRA.
This simple but revolutionary idea would immediately create a second leg of the "retirement stool" for the poor, in a way that would give them a real stake in the market economy. One way to think of it is as a Homestead Act for the information age. Just as the federal government once gave citizens a hand up by giving them land to farm, it can now give them "seed corn" in capital to invest. Clearly, wealth-building assets are as critical factor in upward mobility today as land-ownership was in the agricultural age.
The costs, while not negligible, are manageable at a time of large budget surpluses. Starting up KidSave for newborns would cost about $8 billion per year, plus administrative costs that would be limited by use of the existing infrastructure of the Thrift Savings Plan. But in 30 years, KidSave would move towards becoming a self-financing revolving loan fund as repayments of the original "stakes" began to come in.
In keeping with his determination to link private retirement savings to Social Security reform, Sen. Kerrey proposes financing KidSave through a "carve-out" of funds from the Social Security payroll tax. Given the relatively low annual cost of KidSave, and the strong public desire to sequester Social Security revenues from any other use, we think it makes more sense to simply fund it from non-Social Security surpluses (just as Vice President Gore proposes to finance voluntary and less retirement-focused personal savings accounts in his Social Security Plus plan).
This approach also helps make it clear that the purpose of KidSave is to supplement, not replace, the Social Security leg of the retirement security stool. Moreover, using budget surpluses for personal retirement savings is not only a prudent investment in the future of our country, but one sure way to keep surpluses from being diverted to the kind of tax cut or spending binges that could boost consumption and destabilize the economy.
With Sen. Kerrey retiring from the Senate (but hopefully, not from public life) this year, it's appropriate his parting gift is to renew his push for this innovative idea. KidSave would make participation in our capitalist economy a birthright for every American, not just those blessed with wealth as an accident of birth.
