With Social Security’s ongoing insolvency concerns, is it better for the federal government to seed a savings fund with a nominal amount at birth and let compound interest work its magic? It’s an idea long floated, and now a heavy hitter pushing it forward.
High-profile hedge fund manager Bill Ackman responded to an open-ended request from The New York Times’ DealBook, which was to provide one idea the country act on right now to make it a better place.
Senators and rappers, professors and pundits all chimed in, but Ackman’s explanation of “Birthright funds” is resonating in many media outlets.
“A potential solution to the wealth inequality problem is to create a way for those with no investment assets to participate in the success of capitalism,” the Chief executive of Pershing Square Capital Management writes. “To do so, we need a program that makes every American an owner of the compound growth in value of corporate America.”
Not that they would necessarily replace Social Security entirely, but anything to relieve actuarial pressure might help. Details include:
- Birthright funds would be invested at birth in zero-cost equity index funds.
- They would compound tax-free for approximately 65 years. At historical rates of returns for equities of 8% annually, Ackman calculates a $6,750 at-birth retirement account would result in more than $1 million at age 65, or $2 million at age 74.
- The cost to the government would be $26 billion a year based on the average number of children born in the United States each year.
The funds would be unavailable to recipients until retirement age is reached.
Social Security spending
Considering that expenditures from the Social Security Administration totaled $902.8 billion in 2019 for OASI alone, $26 billion is quite the bargain, even if it’s only modestly successful.
As it currently stands, full Social Security benefits will be paid through 2034, according to the 2020 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. At that point, if no funding changes are made, only 75% of scheduled benefits would be paid.
Ackman is celebrated for big investment win in companies like fast-food chain Wendy’s, but widely criticized for his handling of others like Herbalife.