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Wednesday, February 23, 2005
 
One Meeelion Dollars

MyDD relates some of the hopeless bs that is the Social Security debate, and points to this proposal from former Treasury Secretary Paul O'Neill:

To move away from Social Security's chronic funding problems, O'Neill suggests that the government put $2,000 in a special investment account for every newborn American. The government would invest $2,000 more each year until the child reaches 18.


The money would be invested in a conservative index of stocks and bonds and couldn't be touched until retirement. The investment would grow at a compounded rate, meaning that as the value of assets in the account grows, profit would be reinvested so the account would grow even more. Without adding a single cent beyond compounding after the child turns 18, he or she would retire at age 65 with $1,013,326 in the account, O'Neill reckons.


"If you do the arithmetic, the $1 million would provide an annuity of $82,000 a year for 20 years," O'Neill said in an interview.


O'Neill assumes a 6 percent annual return on investment. He calls that figure conservative since it represents the worst performance to date of any 25-year cycle on Wall Street.


Sounds pretty good, right? Let's run the numbers. Assuming an inflation rate of only 1%, in 2075 the $82,000 annual payment becomes $43,099 in today's dollars. A rate of 2% drops it to $22,505, and 3% (the historical average since 1900) to $11,674. And those annual payments are worth less and less every year. Continuing the projection, at rates of inflation of 1%, 2%, and 3%, respectively the payments at age 85 would be worth between $34,898,$14,724, and $6,157 annually.

Also, don't live past age 85, because O'Neill's annuity money runs out then. Or play it safe at 65 with a lifetime annuity and get a much lower annual payment.

In the bargain, O'Neill proposes getting rid of Medicare, presumably because millionaire retirees will be able to afford to pay for it themselves. What's medical care going to cost in 65 years? Health care costs are currently going up by more than 6% per year. I'm going to go out on a limb and say that, in 2090, $6,157 per year in today's dollars is going to cover approximately squat. If medical care continues to outpace inflation, it won't even cover that.

Edit: Today's children will be 85 in 2090, not 2070.