How to save our kids from poverty in old age: the case for American stakeholder accounts.

• Author: Longman, Phillip
• Position: THE FUTURE OF SUCCESS

The federal government spends more than $500 billion a year on policies designed to help individuals acquire or build assets. The three most expensive of these policies--the mortgage interest deduction, the property tax deduction, and preferential rates on capital gains and dividends--together deliver 45 percent of their benefits to households with average income exceeding $1 million. "Put another way," concludes a report commissioned by the Federal Reserve, "the poorest fifth of Americans get, on average, $3 in benefits from these policies, while the wealthiest one percent enjoy, on average, $57,673."

What if we re-crafted our wealth accumulation policies so that they primarily helped average Americans build assets? Nothing could be more American. It's what the Homestead Act did. It's what the GI Bill did. And here's another example of how it could be done for the next generation of Americans.

Every child born in the U.S. gets a Social Security number. Going forward, every child should get at the same time what could be called an American Stakeholder Account. Parents, grandparents, and anyone else who cared to could contribute funds to a child's stakeholder account, as could children themselves. Children whose families qualify for the federal child tax credit would have up to $500 added to their accounts each year by the government. Contributions from all sources would be capped at $2,000 per year.

When an account holder reached eighteen, he or she could begin withdrawing a portion of the accumulating funds, but only for the purpose of pursuing post-secondary education and training. At age twenty-five, the account holder could use a portion toward buying a first home or starting a business. But a substantial remainder would be earmarked for retirement.

Now let's add another important feature. Throughout their working lives, members of the next generation of Americans would be required to contribute 4 percent of their earned income to their stakeholder accounts. Their employers would have the option of contributing another 2 percent. Low- and middle-income households would be eligible for up to $500 per year in government matching funds. Up on retirement, the balance built up in these accounts would be automatically converted into an annuity--a stream of monthly benefits that would flow for the rest of the account holder's life.

That last part is important. One big problem with saving for retirement through today's 401(k)s or IRAs is trying to figure out how...