It seems like Baby Bonds are in the news. I’ve been reading at Dollar Roller and Money Smart Life. The idea seems to be that the government would open a $5,000 account for every newborn baby in the US. The money would grow and mature at the child’s 18th birthday. Through the power of compounding interest, this money could be used to pay for college or buy a home.
I love the idea. In fact, I loved it enough to propose the lazy man’s trust fund nearly a year ago. In my plan, the idea is to put $10,000 away and use it for child’s retirement. My rational is that this gives more time for interest to compound. The result is that it the initial $10,000 can cover a good portion of retirement expenses – even when you account for inflation, taxes, and investment fees.
I’m not sure I like the government’s version of the baby bond though. Where does this $5,000 come from? It has to come from raised taxes or a higher US deficit (which is already far too high in my opinion). How is the money going to be invested? If it’s safer bonds, I wonder how much buying power would be left after inflation, taxes, and administration/investment fees. I can’t see that much left over. It almost becomes the same problem that Social Security has. The funds don’t grow enough to make up for the growing number of people to take advantage of it.
Financial Reaper says
I was about to blast this article for falling into the trap of a government smoke screen, aka, bread and circuses. But, your last paragraph summed up my thoughts. Where exactly is this money coming from? The national debt is fast becoming a national burden along with huge liabilities with social security, Medicare, Medicaid. I doubt this bond will ever see the light of day. More importantly, what population of voters is this proposal trying to buy. How about some type of free government literature on how to save properly and fund your child’s education.
Chris Kakaras says
That kid’s trust fund idea is genius. Kinda makes me wish my parents would have set me up. Keep up the good work lazy man.
Mrs. Micah says
Setting up money for the kid makes sense. But the baby bonds—I think you’ve pointed out some of the biggest objections to them. Where does the money come from and what will they be worth?
It could come from reduced expenses in the future. Perhaps in exchange for giving all future generations baby “bonds”, benefits are reduced across the board for college financial aid, federally-backed mortgages and social security. The “bond” will be invested in 50% stock, 50% bond so the growth will be a % or two larger the future government obligations.
I think parents setting up something like this for their own children is a great idea – be it for college or retirement. I don’t think the govt. doing this is a good idea at all.
Wow! Can you imagine the inflation that will be on college campus when ever single 18 year old has the money to pay for college. University tuition rates would be through the roof.
The baby bond scheme is one of the dumbest ideas that’s come out of Washington in…oh, several weeks. This country’s misadventures over the past few years haven’t racked up a big enough debt? The tax burden we will have to shoulder to build an adequate medical care system is not huge enough?
The basic idea of establishing a $5,000 savings plan for a newborn baby is great–but let Mom and Dad fund it, not the taxpayer. Maybe Mom and Dad could get a modest tax deduction as an enticement. . .but the rest of us shouldn’t have to fork over five grand for every baby born in this country.
If you assume the $10,000 trust will grow at 6% about inflation, rule of 72 say it will double every 12 years. Retire the kid at 60 to keep the math easy, and you have 5 doubles or $320,000 in 2009 dollars. Not enough to retire, but not chump change. Put away $3000 every year though, and at 21, tell the kid he has to continue the tradition, now he has $100K/yr starting at 60.