The following is an excerpt from OpinionJournal.com’s “Best of the Web” written by the editor, James Taranto.
Bottom Stories of the Day
Math Is Hard
National Journal’s Norm Ornstein has an idea for reducing “income inequality”:
It is called KidSave, and it was devised in the 1990s by then-Sen. Bob Kerrey of Nebraska, with then-Sen. Joe Lieberman as cosponsor. The first iteration of KidSave, in simple terms, was this: Each year, for every one of the 4 million newborns in America, the federal government would put $1,000 in a designated savings account. The payment would be financed by using 1 percent of annual payroll-tax revenues. Then, for the first five years of a child’s life, the $500 child tax credit would be added to that account, with a subsidy for poor people who pay no income. The accounts would be administered the same way as the federal employees’ Thrift Savings Plan, with three options–low-, medium-, and high-risk–using broad-based stock and bond funds. Under the initial KidSave proposal, the funds could not be withdrawn until age 65, when, through the miracle of compound interest, they would represent a hefty nest egg. At 5 percent annual growth, an individual would have almost $700,000.
In its original form, this wouldn’t do anything about income inequality except among the elderly, and even for them not until 65 years in the future. Ornstein proposes modifying the proposal to allow tapping “a portion” of the funds at a younger age for college, medical or capital expenses, while still leaving “a substantial share” for retirement. Of course, someone who did that at, say, age 25 would lose 40 years’ worth of compound interest.
But the big problem with Ornstein’s ideas is that his numbers are wrong. Reader Steven Willis did the calculations, and we confirmed them:
If you put $1,000 in an account at 5% nominal annual interest compounded annually, you will have $1,276 in five years. Put in $500 per year for five years at 5% NAI compounded annually and you add another $2,762. Together, the contributions produce $4,038 in five years (assuming the $500 credit overlaps and starts at the beginning). Compound the $4,038 for the next 60 years at 5% NAI compounded annually, and the person has $75,426 at age 65. Where does the $700,000 come from? Ornstein is off by almost a full order of magnitude.
Good thing somebody caught this before those future infants started planning their retirement.
For more “Best of the Web” click here and look for the “Best of the Web Today” link in the middle column below “Today’s Columnists.”