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Strong Families Act idea Part 1

jstepp590

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This thread is the third of a three part series on specific ideas for solving our national debt problem. I am a grass roots activist who has come up with specific ideas to solve our fiscal problems and I need input and constructive criticism on the ideas to help me develop them. I am non-partisan, am very well educated on these issues and would not waste your time with anything that wasn't a politically and economically viable solution to these problems. It is designed to solve our national debt while growing our middle class. Ok, was afraid of this. Apparently the thread is too long. I will have to split into Part 1 and Part 2.




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Strong Families Act

This is probably my favorite idea out of the bunch. I am going to make a deliberately provocative statement here that sounds like it will not pass the sniff test, and then I will show you exactly how I believe we can accomplish this. Ok, here goes.

We can stabilize our social programs and pay off our national debt by making our children millionaires for $5000 while growing our middle class. Sounds unbelievable, right? Here is how I propose we go about it.

I kind of look at this as a conservative alternative to Social Security, but one that works with Social Security to strengthen it instead of damaging this vital safety net. This idea also provides us with two methods for paying off our national debt of $16 trillion (or is it $17 trillion now?) with minimal austerity or social disruption. At the same time it should create a turbocharge effect on the world economy while doing it, spreading business opportunities and jobs through the world and turning a profit for our citizens. It should turn globalization into a force of good for our families and others around the world.

See, it is ordinarily going to take a long time for our nation to pay off its core debt based off what I am hearing from economists. To put it simply, our debt is $16 trillion and we as a nation take in $2.5 to $3 trillion a year in taxes. On top of our taxes we also run a deficit which is adding to our debt. At the top end of that $3 trillion a year in taxes scale our debt is 5-6 X the amount we tax every year to run our entire government on! Out of that yearly $2.5 to $3 trillion in taxes we pay for things like schools, military, social programs, highways, everything. Even though the debt is sold at low interest rates those payments to service the debt still have to be made from our yearly tax base, which means we cannot use that money for other things.

This situation is exacerbated by the fact that the demographic event called the Baby Boom is going to start increasing our deficits again as they start to retire in mass over the next 20yrs or so. That means more debt added to what we already have now. If interest rates rise on new bonds issued while we start borrowing to pay for that then the costs could create a real problem for us by eating an even larger portion of our budget to service it. An example of the pressure on our budget that is easy to understand is this pie chart from Wiki. It’s from 2010 but not too much has changed. Just to get an idea of how badly it is distorting our budget priorities just compare what we spend on things like science and educating our children to what we spend on Medicare and Social Security. So what are our options?

Austerity during a downturn is a bad idea unless we want to look like Europe’s 20%+ unemployment rates and social unrest with questionable results. We can monetize it but that leads to inflation eventually. It is too large to outgrow in any reasonable timeframe. We own a lot of property as a government but the potential problems with selling that are legion and not likely to come close to covering the debt without swamping the markets. We could drastically cut benefits to our elderly, but it just doesn’t seem right to me. It is a lot of debt and not likely to be easily or painlessly resolved without some creative thinking.

As we all know, the American family is also facing different challenges than in the past. Bubble economics, the recession, high family and government debt, outsourced jobs, wages not keeping up with inflation, and the steady erosion of our middle class are just a few of these forces. If we lose our middle class we lose the spark that made this country great. We therefore need more financial stability in our lives and we need it to stay systemic for all of our countries citizens.

In order to help alleviate these problems what I propose is that we take a new approach to our retirement. We create a new system that not only stabilizes our social programs and doesn’t interfere with them but simultaneously offers a way to pay off our national debt while minimizing damaging austerity. So how are we going to do that? We start by offering people a better deal.

Let’s do a quick chronological rundown on how this would work.

1) Child’s parents decide to enroll their child in the new retirement program. They apply for a tax deferred account and order a legal trust to use as a protective container for the account.
2) Parents/family/friends place $5000 in the account. The government will provide the opportunity to have the payments taken out of their checks before they are issued if they need to use a loan through a financial institution. This is to keep interest on the loans low and participation high because payments to the financial institutions are prioritized.
3) That account is split between several different licensed investment firms/brokers who follow the rules of the program to invest those funds before the child even starts to work.
4) Until the age of 26yrs old the child may still revert to the old Social Security system. If they choose to, all money accrued in their account is forfeit to the Social Security fund except the original $5000.
5) Child once an adult works and pays into Social Security like everyone else. Their funds will be used to first stabilize Social Security and then their payments into Social Security, at the discretion of the Social Security administrator as to when the fund is stabilized, switch to paying down the principal of the national debt.
6) Starting at the age of 65 but no later than 80yrs old their retirement funds may be withdrawn. At that time they pay taxes on all the money in the account except the original $5000. They may withdraw all at once or in increments. All funds must be disbursed and closed on the 80th year.

Pretty simple so far, right? Let’s look at what it would mean a little further.

In order to understand this idea there is a very simple concept to comprehend.

Whenever you invest there are generally three parts to it that will apply here. The first is principle, how much are you investing. The second is time, how long are you investing for. The third is your return, how much percentage yearly profit do you average over the long term. The neat thing is that these three figures are sort of interchangeable.

Think of it like this.

Principle x Time x Return= Goal

So by changing any of those figures you can overcome weakness in one with strength in another. As an example, if I had a goal of $1 million dollars and I invest a high principal like $900k for five years or so at 6% return I should hit that goal. If I have five years to invest and a couple thousand dollars but was getting something ridiculous like a 2000% or 5000% percent yearly return on my investment I could also do it. However the important part, the point relevant to this discussion, is that time is also one of those values that are interchangeable. So, who in our families have a lot of time? Children do, and we have almost four million every year.

Here is a good example. The Excel file is an .xls so older and newer versions of MS Excel or most other spreadsheet programs should be able to use it. This is a simple straight line extrapolation without taxes added in. As you can see the result is impressive. In order to read it, the bottom tabs represent your average yearly (6-9%) return and the row number -1 as the year for how many years of the investment. This is a very simple Excel calculation so I am leaving it unlocked for people to look at the formulas used in making it. Just to put this into perspective, the S&P 500 average return for an 80yr period (1932-2012 source Moneychimp: learn Stock Investing, Index Funds, Valuation Models, and more.) already adjusted for inflation is 7.11% and unadjusted was just under 11%. [sorry cannot figure out how to upload the spreadsheet. Any assistance would be appreciated]

If we calculate the worth of the account without including inflation based on those historical returns the child would have over $20 million in the account. This is not adjusted for inflation so it will not be the same amount in today’s dollars. However it is the end taxable amount for the deferred tax.

If we do adjust for inflation the child would have just under $1.3 million in today’s money at the end of 80yrs to retire on.
 

CalGun

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I think the concept is fine but I think the execution sounds like an IRS tax code ( far too complicated ). The simple means is to use existing IRA laws and enable IRA contributions for children 1-5 years of age. Parents who want to can put $5k a year into an IRA for a child during their first 5 years. After that same (existing) IRA rules apply.

All this really does is enable the top 5% maybe top 10% to provide better for their kids but that's better for everyone.
 

Paschendale

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There's a whole lot of families in this country that can't afford to pay $5000 upfront for anything.
 

jstepp590

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Thank you for the reply. I don't believe setting up the tax deferred bracket for this is too complicated but if using the existing IRA would be easier then I'm ok with that. The important part for this plan to work would be the tax deferred designation because of the long term growth trend. If taxes are taken out then it doesn't work, if taxes are not taken out it would be very possible to accomplish it. IRA, seperate tax shelter as long as it was tax deferred then it works for me.

As for the top 5-10%? Not sure about that as I am nowhere near that and could afford it as it is explained in Part 2 I believe. If I could take out a loan and have the payments removed from my paycheck first for the financial institution then I could easily afford it and I only make about $40k. By doing it this way it was my intention to make it accessible to more families because it would help them get the loan in the first place if the finance company knew their payments were prioritized.

Thank you, James
 

jstepp590

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Thank you for you reply. As I explained to the last poster I believe that I could afford it and I'm not anywhere near the top tax bracket. If even 25% could do it though then the concept is viable. Please read Part 2 of this idea though and let me know what you think about the ways I tried to make it more accessible to more families. I would really like to hear any ideas you may have that would make it easier for families to afford it and would incorporate it into the web page if you can. Thank you for your input.
 

jstepp590

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There's a whole lot of families in this country that can't afford to pay $5000 upfront for anything.

They wouldn't have to pay for it up front. That is why I made the point that, if needed, they could get a loan from a financial institution and have the payments taken from their paychecks before they get them. That means the payments to their lenders are prioritized and should make it easier for them to get the loan. The loans could be based as much off work history as much as credit rating because of this. I think that part is in Part 2 of this idea. Besides, one of the reasons that the Fed is having a hard time generating inflation right now is that people are paying down their bills so much it is creating a headwind against QE so I believe more people could afford it now than they could have 5yrs ago.
 

jstepp590

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Ok, so if after reading parts one and two of this thread nobody has anything negative to comment on it then I think this thread is closed. The only negatives were that the $5000 may not be affordable to 25% of the population but maybe 5-10% so I will try to work on that. Thank you to the people who commented and see you at the debates.
 

cpwill

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I think the concept is fine but I think the execution sounds like an IRS tax code ( far too complicated ). The simple means is to use existing IRA laws and enable IRA contributions for children 1-5 years of age. Parents who want to can put $5k a year into an IRA for a child during their first 5 years. After that same (existing) IRA rules apply.

All this really does is enable the top 5% maybe top 10% to provide better for their kids but that's better for everyone.

<------- I am nowhere near that number, and I would take advantage of this program. The ability to live beneath ones' income is an amazing thing.
 

cpwill

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There's a whole lot of families in this country that can't afford to pay $5000 upfront for anything.

I put that much into my own IRA while qualifying for food stamps, and he includes subsidized loans as an option.
 

Aunt Spiker

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Let’s do a quick chronological rundown on how this would work.

1) Child’s parents decide to enroll their child in the new retirement program. They apply for a tax deferred account and order a legal trust to use as a protective container for the account.
2) Parents/family/friends place $5000 in the account. The government will provide the opportunity to have the payments taken out of their checks before they are issued if they need to use a loan through a financial institution. This is to keep interest on the loans low and participation high because payments to the financial institutions are prioritized.
3) That account is split between several different licensed investment firms/brokers who follow the rules of the program to invest those funds before the child even starts to work.
4) Until the age of 26yrs old the child may still revert to the old Social Security system. If they choose to, all money accrued in their account is forfeit to the Social Security fund except the original $5000.
5) Child once an adult works and pays into Social Security like everyone else. Their funds will be used to first stabilize Social Security and then their payments into Social Security, at the discretion of the Social Security administrator as to when the fund is stabilized, switch to paying down the principal of the national debt.
6) Starting at the age of 65 but no later than 80yrs old their retirement funds may be withdrawn. At that time they pay taxes on all the money in the account except the original $5000. They may withdraw all at once or in increments. All funds must be disbursed and closed on the 80th year.

So you're wanting families to pay $5,000 per child to have monies invested in the stock market. And this is supposed to stabilize something?

Someone pointed out that numerous parents can't afford $5K - especially not per child. They're already covering the cost of health/life/auto insurance - and later, education...What happens when the stock market crashes or when the money has been embezzled by said 'licensed investment firm?"

People have this option (investing), now - to dump money into the stock market and accrue an account, the value of which they can put into a stock/bond for their child with written restraints.

Parents are better off funding their children's education and helping them get off on the right foot - while retaining good health - thus setting said child up to support their selves.

And the crux of all plans: People have to WANT to do something (anything).

People would actually be better off 'loaning' out their monies to the state/federal government when they raise funds for various projects - thus - when that project is complete and said revenue from it is flowing back to the state, the individual reaps the financial benefits.
 

jstepp590

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So you're wanting families to pay $5,000 per child to have monies invested in the stock market. And this is supposed to stabilize something?

Someone pointed out that numerous parents can't afford $5K - especially not per child. They're already covering the cost of health/life/auto insurance - and later, education...What happens when the stock market crashes or when the money has been embezzled by said 'licensed investment firm?"

People have this option (investing), now - to dump money into the stock market and accrue an account, the value of which they can put into a stock/bond for their child with written restraints.

Parents are better off funding their children's education and helping them get off on the right foot - while retaining good health - thus setting said child up to support their selves.

And the crux of all plans: People have to WANT to do something (anything).

People would actually be better off 'loaning' out their monies to the state/federal government when they raise funds for various projects - thus - when that project is complete and said revenue from it is flowing back to the state, the individual reaps the financial benefits.

I never said it would be for everyone, I estimated roughly 25% of people top end. Also, people do not have the option for tax deferred accounts right now at all taxation is on profits yearly and that makes a huge dent in the earning potential. I also said that there should be a sharp limit on how much can be used in money accounts and how much should be invested in real companies that hire real people in order to avoid a stock bubble followed by a crash.

"People would actually be better off 'loaning' out their monies to the state/federal government when they raise funds for various projects - thus - when that project is complete and said revenue from it is flowing back to the state, the individual reaps the financial benefits." Not even sure what this means, but it would be part of this plan if that is where they could get their best return.

"What happens when the stock market crashes or when the money has been embezzled by said 'licensed investment firm?"" Ok, you do know what a fiduciary agrement is, right? Also I am starting to believe you never read part 2 of the plan that I had to put on a seperate page because of character limits. Most of your objections were covered under that.

The simple truth, whether you believe it or not, is that based on real world historical values of investing from 1932 to 2012, which includes both the Great Depression and the Great Recession, your family would be vastly further ahead fiscally than if you had stayed in government run Social Security. If you don't believe me feel free to look it up yourself.

Good objections but ones I already thought of and covered.
 

Aunt Spiker

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I never said it would be for everyone, I estimated roughly 25% of people top end. Also, people do not have the option for tax deferred accounts right now at all taxation is on profits yearly and that makes a huge dent in the earning potential. I also said that there should be a sharp limit on how much can be used in money accounts and how much should be invested in real companies that hire real people in order to avoid a stock bubble followed by a crash.

"People would actually be better off 'loaning' out their monies to the state/federal government when they raise funds for various projects - thus - when that project is complete and said revenue from it is flowing back to the state, the individual reaps the financial benefits." Not even sure what this means, but it would be part of this plan if that is where they could get their best return.

"What happens when the stock market crashes or when the money has been embezzled by said 'licensed investment firm?"" Ok, you do know what a fiduciary agrement is, right? Also I am starting to believe you never read part 2 of the plan that I had to put on a seperate page because of character limits. Most of your objections were covered under that.

The simple truth, whether you believe it or not, is that based on real world historical values of investing from 1932 to 2012, which includes both the Great Depression and the Great Recession, your family would be vastly further ahead fiscally than if you had stayed in government run Social Security. If you don't believe me feel free to look it up yourself.

Good objections but ones I already thought of and covered.

As one of many options - it would be ok and some people would love it.

But to claim that it would strengthen the economy and absolve debt is presumptuous at best.
 

jstepp590

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As one of many options - it would be ok and some people would love it.

But to claim that it would strengthen the economy and absolve debt is presumptuous at best.

Actually all we have to do to see my point is the math. If 25% of our population was paying into Social Security and would never expect anything out of it then Social Security would get stabilized for our elderly to be as secure as they can be and our promises to them kept.

Once the fund is stabilized their funds would be used strictly to pay down our deficit spending because the fund would not need any more money. I did the math in the long version but for 1yr of grown children paying into it at a conservative payment of $40 a week we would be able to pay down or off $2.6 billion or better every year. That is like deficit spending without the debt. That means as the baby boomers start to retire, drastically raising our deficits to cover it, we would have a countervailing force moving in the other direction and it would get larger and larger every year for 80yrs. Then at the end of the 80yrs it would mean a massive series of payments going towards whatever we need at the time, such as infrastructure or lowering taxes or paying whatever debt we have at that point. It would do all of this in a healthy way, one which nobody familiar with our debt or deficit would argue with. It would redistribute wealth without taking anything from anyone. It would level the social playing field a little between the haves and have not's. It wouldn't work for everyone but I will continue to try to figure out more ways to make it more accessible to a broader range of our people.

Some people are comfortable with a government run program. Some people do not believe that hedge funds and investment vehicles work in the face of overwhelming evidence just as a lot of people do not trust government. This program would not be for them but I am not taking anything away from them either, they would have exactly what they have now. This type of program would be strictly voluntary and people would have to work harder for it. However the odds are very good that they would have a more financially secure family at the end of it also and would take us from generations of families living paycheck to paycheck and help them create a better future for themselves.

I have tried to build in safeguards for their money such as strictly commission for the financial advisers based on profit so that you do not pay them anything unless they are making you money. I built it with a requirement for fiduciary agreements to legally cover ourselves if they decide to sneak steal it. I have made sure that each persons funds have to be split between multiple financial advisers in case one of them goes south. However people will have to do this for themselves and their families. I just want to give us a better choice that we do not have now and the math says it could also be used to pay down the massive deficits we will be getting when the baby boomers retire and everyone knows that is coming. The problem with the baby boomers, as I am sure you have already heard, is that we will have a worse worker to retiree ratio and that creates a huge problem for us. That money has to be added to our debt, print money and risk inflation or we have to cut benefits because we will have a hard time affording it. Personally I love my grandma and do not want her to feel like a burden and that her retirement, which she paid for at least partly, is hurting our country and the next generations of our family. This is my way around that.

If you can think of additional safeguards I would like to hear them and would be happy to incorporate them into my website with credit going to you. I am looking for good ideas and critique though so I do appreciate the thought you have put into this and I do not take it personally. :)
 
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