Two politicians who agree on almost nothing both reached a similar conclusion: Put money in an investment account for babies and walk away. Even though they both missed the mark, they were onto something worthwhile.
Earlier this year, President Donald Trump launched Trump Accounts and California Gov. Gavin Newsom expanded his baby bond program, CalKIDS. Both programs seeded accounts for newborns, harnessing the power of compounding returns to fund various life phases, like college or retirement. They are structured slightly differently but aimed at similar goals.
The Trump Accounts are a chaotic creation. Through our unintentional generosity, we taxpayers gave $1,000 to seed investment accounts for each child born between 2025 and 2028.
But not my kids, who were born in 2022 and 2023. No, my kids and millions of others might get $250 on behalf of Michael Dell if we live in a low-income zip code. Or, if we lived in the relatively wealthy state of Connecticut, which we don’t, we might get $250 from another wealthy benefactor. Or if we worked for companies like Goldman Sachs, which we don’t, then our kids might get an employer contribution. Or if we were fans of Nicki Minaj, which we’re not, our kids might get a portion of $300,000 split across however many fans she has who qualify.
Don’t waste your time trying to make sense of that. Their hearts are in the right place, but the program epitomizes the government’s horrible trend of picking winners and losers (funded by the losers – you’re welcome – and rich people who won’t even notice the money missing).
After the seeding, parents and then children can make contributions up to $5,000 annually. The accounts draw some of the worst tax treatment possible, funded with after tax dollars with growth taxed in the future.
The instinct to seed the accounts and then let compounding do the heavy lifting is a good one, but the taxes and contribution limits make these accounts structurally worse than other options, though most other options aren’t geared towards infants (which is a Trump Account strength).
CalKIDS is similar, with taxpayers generously and unintentionally seeding these accounts up to $1,500, though most kids would get between $100 and $175 (not a typo). The accounts are means tested, so the government is again picking winners and losers (and, again, funded by the losers – you’re welcome again!).
Where the Trump Accounts are primarily structured for retirement, CalKIDS accounts can be used for higher education or career training.
Did we need another vehicle for education savings, with 529 plans, Coverdell Education Savings Accounts and Roth IRAs, not to mention scholarships and student loans? Probably not. Sure, college keeps getting more expensive, but the rise in college expenses heavily correlates to the influx of available dollars going to pay those expenses.
There are other specifics about how these two programs work, but you get the gist. Both pick winners and losers, both are somewhat funded by taxpayers but also rely on the generosity of rich people and both are limited in scope.
But both also nod to the reality that time in the market is the most reliable wealth creation tool possible.
The S&P 500 index has averaged 10% annual return since its launch in 1957. Using that to estimate performance, the $1,000 seed in a Trump Account would grow to $290,312 in 59.5 years (the age at which penalty-free withdrawals can begin, in most instances). And that $100 seed in a CalKIDS account would grow to around $556 in 18 years.
Not bad returns for doing nothing, though inflation would eat them up a bit. And when I say, “not bad returns for doing nothing,” I of course mean as a percentage. In real terms, $556 probably won’t even buy a ham sandwich in the UCLA cafeteria in 18 years. But contributing regularly throughout the years, especially early on, would magnify the returns (then everyone gets a ham sandwich!).
It’s easy to see the point both programs are trying to make: A modest investment on Day One can grow significantly with very little work over a few decades.
Decades ago, then-President George W. Bush also pitched a plan harnessing the power of time and compounding returns that would have reduced future retirees’ dependence on social security by allowing portions of payroll taxes to go into investment accounts.
The plan wasn’t bulletproof. Social Security is known as a pay-as-you-go program, which means workers today are funding benefits for current retirees; it’s not workers setting aside money now to use later. The flaw in Bush’s plan was that diverted payroll deductions meant fewer dollars for funding current retirees, which is structurally and politically untenable.
But Bush wasn’t wrong. As it stands now, the social security trust fund is running out of money because people are living longer and the ratio of workers to retirees is going in the wrong direction. Bush’s plan would have given retirees more security and, according to the American Enterprise Institute, more money in retirement for lower- and middle-income retirees.
If the government is going to insist on being involved in retirement, then Bush’s idea shouldn’t be dismissed entirely. Sure, there is still the issue of the funding gap for current and soon-to-be retirees, but having that tough discussion is certainly more pleasant than having one over raising the retirement age.
Wouldn’t it be better that everyone had their own pot of money to use in retirement instead of a system dependent upon workers of the future?
Privatized social security has more theoretical risk, as the market is subject to swings. It would cause a lot of pain for someone near or at retirement who just lost 30% of their wealth in a bear market. But markets recover from crashes on a knowable timeline; the Social Security trust fund shortfall has no such self-correction.
Will there be a massive taxpayer bailout of social security? Or will workers have to wait until late into their 70s to retire? It seems that the risk of a market drop might be preferable to the reality of policy making.
Fortunately, we don’t need to answer these bigger policy questions today to spot the lessons to learn: Modest seeds can grow to major holdings, compounding returns are significantly more powerful than government programs and starting early maximizes returns.
The baby bond programs are not perfect, and at times absurd, but the solutions are obvious.
Matt Fleming is the communications director and a policy fellow at the Pacific Research Institute.