Necessary Roughness

Fox News reports that a bipartisan bill would give $500 to each child born in California, which they can use to either build a nest egg for college, a down payment for a home, or a retirement account.

Under the bill, every child born in California after Jan. 1, 2008, would receive the money, regardless of their parents’ income or immigration status. Recipients would repay the state’s initial $500 investment once they turn 18.

Regardless of immigration status? As if we didn’t provide enough incentive for families to come across and have their children in the States. Is the federal government going to be responsible for the increased immigration costs, as the governor would like to see happen? Indeed the federal government is constitutionally bound to protect the states from invasion (Article IV, Section 4), but California need not make the situation worse.

If families added $50 a month to the state’s initial contribution, the savings account would grow to nearly $17,500 at 5 percent interest over 18 years. Steinberg said that would promote saving money in a culture that now is carrying record levels of debt and has the lowest savings rate since the Great Depression.

Using Excel’s FV() formula, at 5%, 216 payments (18×12), $50 payments, with a $500 present value, I get:

FV(5%/12,216,-50,-500,1) = $18,760.36

Start without the $500 kick off, and I get:

FV(5%/12,216,-50,0,1) = $17,532.85

The $500 provided by the government results in $1227.51, but one has to give $500 back, so the net entitlement is just $727.51 at age 18. Hopefully this will still be enough to buy books in 2025.

When government feels it needs to legislate what should naturally be good behavior, it pays to figure out who benefits from this legislation. This forces deposits to be higher, so the banks win. They can take the deposits and make even more money. The $727.51 may seem like free money until one considers that it was confiscated from some Californians in the form of taxes.

I wonder how the interest from the forced savings will be taxed. A 1099-INT in every pot!