Sunday, March 4, 2007

California Legislators at it again.

If you plan to have a child after January, 2008, you may want to start planning a little California vacation for right around your due date.

If a certain bill passes in their state legislature, every baby born in the Golden State will be given a $500 savings account, which will accrue 5% yearly interest and grow. (Yes, folks, every baby, regardless of the parents' income, or immigration status.)

The only catch is that the child will owe the state $500 when s/he turns 18, and the money must be used for education, a down payment on a home, or starting a retirement fund. There is no provision in the bill for what will happen should the child die before the age of 18. I have yet to hear what happens if the child moves out of state, or how they are going to prevent people from spending the money on other things. To top it off, this will cost the taxpayers quite a bundle, since there are a lot of new babies born in California every year.

But, even if you are thinking about using the money honestly, don't get too excited. You'll still have to teach your kids self discipline and good financial sense.

A year of undergraduate study at a University of California campus right now costs over $23,000 a year. That's up from about $14,000 per year in 1999, an increase of $9,000 in only seven years. At that rate, by the time a kid born in 2008 turns 18 and the savings account grows to nearly $17,500 in 2026, college costs are bound to be even higher. You'll be lucky if that $17,500 eve covers half of their first year. Who will pay for the rest?

Ok, what about a down payment on a house?

Maybe if your child moves out of state, that will be viable.Currently, according to this article, the median home price for a detached single family home in California is over half a million dollars, and still rising, which means that currently, if one pays the median price, that $17,500 amounts to a 3% down payment. In many of the coastal regions of California, where most people want to go, that median home price is closer to a full million. That $17,500 isn't going to keep the mortgage payments down. Picture how much more unhelpful that will be in 2026, when the prices will be even higher. Your kid will still have to work and save for a long time before s/he is able to purchase a home in that state.

So, the most significant area in which this money could be of any sizeable help at all, is retirement savings. But, if your kid has to wait that long, you might as well provide the $500 yourself. Or, you could help your child save her money from that high school job behind the counter at Starbucks, and invest it in a good retirement account that gets better than 5% interest. That way nobody owes the government anything on her 18th birthday,

Source: Asociated Press article posted at Fox News.

Text of California Senate Bill 752.

Edit: This move is bound to infuriate people on both sides of the political aisle. The Left won't want rich kids to get any more money, and the right won't want the children of illegal immigrants to get any funding either. Add to that the fact that the CA budget isn't doing so great already, and nobody wants their taxes to go up. The Republican State Senator who began as a co-author of this bill has already withdrawn his support.

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