One of the more intriguing — and one of the few positive — things to happen in the last few weeks is the announcement that Michael and Susan Dell will contribute $6.25 billion toward “Trump accounts” set up under the Big Beautiful Bill.
Shameless self-promotion aside, this is one good thing that’s come out of that administration. The accounts will be set up with a $1,000 contribution from federal taxpayers (not Trump, of course) for each of the 4 million or so babies born each year during the second term of his presidency. The program expires with his reign at the end of 2028. While I can’t wait for Trump to be gone, the accounts should outlive him — and be renamed.
And, for this to work, it’ll need a lot more than even the Dell’s record-setting philanthropy. While over $6 billion sounds like a lot of money, it’s not enough to make these accounts meaningful. The Dells would contribute only another $250 per kid and only for those kids who are from low-income families. Even $1,250 invested today at the average stock market growth rate of 6% per year will yield around $3,000 in 18 years. Nice and not nothing, but not much either.
This basic idea has been around for a while. In fact, Democratic Sen. Cory Booker proposed it a few years ago, though he started with an initial $1,000 and then would have added $2,000 a year for low-income families.
I think the thing to do is to start with a target amount we want each kid to have upon turning 18. It seems reasonable to peg that to the downpayment for an average house. The current national median home price is $420,000 and the average downpayment for a first-time homebuyer is 6% to 9%. So, if we assume a 7.5% downpayment, that’s about $31,000.
So, then the question becomes how much do we need to put in a kid’s account so that it roughly equals the downpayment on a house when he turns 18? Well, it’s actually about $31,000. That’s because the average annual increase in the value of a house is close enough to the average annual increase in the stock market — around 6%. So, if you invest $31,000 in the market today, it should be worth around $88,000 in 18 years and that should roughly equal an average downpayment on a house in 2043. And, a nice coincidence, that’s also close to the average cost, at the low end, for a year in college. So, this might also function as the downpayment on a college education.
And how much will that cost taxpayers? Not much in the big scheme of things. That’ll run us about $120 billion a year. Peanuts compared to the $1.5 trillion annual Social Security budget or the $1.1 trillion we spend on Medicare or the $900 billion we spend on Medicaid. Defense (excuse me, War) Department spending is around $824 billion.
Right now we back load a lot of our social spending. So, I’m 66-years old and I get Social Security. That’s great, but my most productive years are behind me. I hate to be so blunt about it, but at this point in my life I’m a net drain on society. To make matters worse, some of the cost of that — much of which I paid myself during my working years — is being borne by younger people who are working now.
Big picture, we need more upfront investment in people. So, education reform — not just shoveling more money into the current mediocre system — should be our top priority. But if we’re going to give old folks money to keep them out of the poorhouse in the evening of their lives, why not provide some seed capital to young adults just getting started? Of course, wealthy families already do this. That rags-to-riches success story, Donald Trump, started with only a million dollars given to him by his dad. What a scrappy kid that Donald was!
The policy wonk in me can’t help but think of wrinkles, so here’s a few that occur to me off the top of my head.
When should the kids get the money? The accounts need to be held by the government until the kid turns 18. We don’t want him to blow it all on video games or invest it bitcoin or the ponies.
Should this be means tested? We could reduce the cost by targeting it to middle class and poor families, but I’m not sure that’s a good idea. Over two decades a family’s circumstances change. If you means test the program, parents who are Harvard law students will qualify because they have no income. But in a few years they’ll likely be on their way to joining Bernie Sanders in “the one percent.” And, of course, there are also reversals of fortune where, due to divorce or illness, a family drops out of the upper middle class. Better to just keep it simple.
Somebody needs to research unintended consequences. For example, if virtually every adult is sitting on almost $90,000 will that have an inflationary effect on things like housing prices and college tuition? In other words, will we just be treading water?
What do we do about the lost generation? A kid who turns 18 in 2042 would get nothing while a kid who turns 18 in 2043 gets $90,000. You see the problem.
Do Americans (and politicians) have this much patience and discipline? We won’t start seeing the benefit of this for two decades. In the meantime, the pols will be tempted to borrow from these funds to pay for government services, just the way so many states have raided their pension funds. Having all that money sitting around and growing in these accounts may be irresistible.
How do we head off the inevitable scams? Scammers will line up to ripoff every kid on their eighteenth birthday. So, maybe there should be some guardrails. Perhaps the money should be dispersed only when there’s a plan to invest in a home, an education or a viable business plan. But who makes that judgement? The last thing we should want is a big new bureaucracy.
What happens if a kid doesn’t make it to 18? Do his parents have any claim on a pro-rated amount if their child dies tragically young? What if a poor family is struggling with childhood cancer — can they borrow against the fund for treatment that they couldn’t otherwise afford? What good is the promise of $90,000 at 18 if your child dies of leukemia at 17?
So, as you can see, this simple idea isn’t all that simple. But the notion that every American kid should come with their own little trust fund isn’t a bad one. It worked for Trump.
Yellow Stripes & Dead Armadillos 