O’NEILL ON SOCIAL SECURITY, PART 2….Last month, former treasury secretary Paul O’Neill wrote a peculiar op-ed in the New York Times saying that we should come up with a way of guaranteeing all Americans a million dollar nest egg by the time they retire. I criticized it at the time because he provided no details about exactly how he thought we could finance this.

Today O’Neill takes to the LA Times to switch gears and explain a way to get there from here:

If we decided as a society that we were going to put $2,000 a year into a savings account from the day each child was born until he or she reaches age 18 ? and if we assume a 6% annual interest rate ? each child would have $65,520 at age 18. (The worst return for a 25-year investor in the stock market from 1929 before the crash to 2004 was an average of 6% a year.) With no further contributions, again with a 6% interest rate, those savings would grow to $1,013,326 at age 65.

If we began to do this now, the first-year cost would be $8 billion; that is $2,000 times the roughly 4 million children born each year. The second year would cost $16 billion and so on until we were contributing $2,000 per year to a savings account for every child from birth until age 18. When fully implemented, the cost would be $144 billion per year. To put this $144 billion per year into context, this year’s combined spending for Social Security and Medicare will exceed $750 billion.

I’m not going to quibble with his 6% interest rate, even though that’s rather higher than it should be. After all, if you assumed a lower interest rate you could just increase the yearly contribution to $3,000 and still have a workable plan.

The bigger problem is that his plan doesn’t do anything to fix today’s Social Security system, which would need to stay in place for the next hundred years or so. When you add that in and also assume a more reasonable interest rate, he’s suggesting total additional spending down the road not of $144 billion, but more like $400 billion a year. Or maybe $500 billion.

O’Neill’s idea is one that’s been floating around DC think tank circles for a number of years in various forms, and it has some merit ? although I’d be interested in hearing from some serious economists whether it would really work. Would we all really have a million bucks when we retire? Or would it expand the money supply in an unsustainable way? Or what?

But I still have the same problem that I did with O’Neill’s initial op-ed: how is he going to finance it? Details matter, and they’re still missing.

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