Let Ben Franklin Create ‘Middle Class Millionaires,’ Eradicate Poverty in America

In a recent Wall Street Journal article, Brenda Leon asked: “Could $3,200 ‘Baby Bonds’ Help End Poverty in America?”^[i]

No, it won’t. Funding for Baby Bonds comes out of tax revenues, where America is already running ~$2+ Trillion in annual deficits for as far as the eye can see or the Congressional Budget Office (CBO) cares to predict.^[ii] Why add to existing debt burdens that will be borne by those who are too young to vote today, or generations yet unborn?

Intergenerational wealth transfer IS a major issue and a terrific opportunity for eradicating poverty. But state or local “Baby Bonds” initiatives won’t garner support from most government entities because those programs add to fiscal burdens while involuntarily redistributing taxes paid by unrelated adults.

American already has many such initiatives.^[iii] Experience to date with Child Savings Accounts (CSAs) shows that while there are over 1 million CSAs, most are largely unsuccessful.^[iv] GAO reports that families enrolled: “… for 7 years saved over four times more of their own money, on average, than families who were not enrolled—$261 compared to $59. … (CSA) enrolled families had about six times more total savings ($1,851) compared to other families ($323). …” After seven years, that’s a dismal level of family support and a dismal wealth accumulation. GAO also asserted that “participation in CSA programs may also increase families’ educational expectations for their children … nearly twice as likely to expect their children to attend college.” To me, that looks like increasing expectations without preparation.^[v]

As Milton Friedman once noted: “The great public sector mistake is to judge policies and programs by their intentions rather than their results.”

The related, federal “Baby Bond” solution proposed by Senator Corey Booker (D-NJ)^[vi] is another wealth redistribution scheme. The proposal lacks bipartisan support. The legislation establishes an American Opportunity Account for all born after December 31, 2023, and seeds it with $1,000 for each child. Most children born after December 31, 2007, would be eligible up until reaching age 18 if their household met the income limits. Accounts would receive progressively designed annual deposits of up to $2,000, where monies would be invested in Treasury debt instruments, with a hoped-for account balance at age 18 of as much as $45,000. However, most accounts would get smaller annual amounts, and, by 2041 (18 years from now), most accounts would have less than a quarter of that amount—some would only have ~$1,500. Monies could only be used for “wealth-building” assets—higher education, small business, or homeownership. The estimated 10-year addition to annual deficits is as much as $80B (and much more if the program, like most entitlements, expands).

So, before we add to deficits and national debt, why not start with an interim solution, and see if it works. There is a precedent for a federal solution offering tax preferences that will not add one thin dime to the 2022-2023 budget deficit nor to federal debt for the next 40+ years (until a child who is aged 17 or younger today turns age 59 ½).

We can call it the Benjamin Franklin Child Roth IRA.

Child Roth IRA

The precedent is the Spousal IRA—available for the past 46 years, since 1977. The same Roth IRA rules could apply to a child under age 18 who is a dependent (not filing an individual tax return). Anyone can contribute (or match contributions) to a Child Roth IRA—the children themselves, a parent, grandparent, sibling, aunt/uncle, an unrelated benefactor, a non-governmental organization (e.g., Prosperity Now, Urban Institute, etc.) or a government entity. In 2023, any person can receive $17,000 from any donor, tax exempt.

The maximum annual contribution to a Roth IRA is $6,500 in 2023. A Roth contribution in that amount is possible only where household income is less than:

• Single or Head of Household filer: $138,000
• Married (filing a joint return): $218,000
• Married (filing separately): $10,000

Annual contributions of up to $6,500 a year, invested properly, could accumulate to create “Middle Class Millionaires,” someday. A maximum Roth contribution for 18 years, earning 5%, allowed to accumulate up to retirement ages, would create a multi-millionaire!

Roth contributions can be withdrawn anytime, tax free. And IRA monies, whether a parent’s or the child’s, are not currently counted in determining the Expected Family Contribution (EFC) for federal student financial aid.

Why Ben Franklin?

If you would not be forgotten as soon as you are dead and rotten, either write things worth reading, or do things worth the writing – Poor Richard’s Almanack (Ben Franklin)

Ben taught us a lot about long term investing.^[vii] Franklin bequeathed £1,000 (about $4,400 at the time, or about $125,000 in 2021 dollars) each to the cities of Boston and Philadelphia, in trust to gather interest for 200 years.

The concept began in 1785 when the French mathematician Charles-Joseph Mathon de la Cour, who admired Franklin greatly, wrote a friendly parody of Franklin’s Poor Richard’s Almanack called Fortunate Richard. The main character leaves a smallish amount of money in his will, five lots of 100 livres, to collect interest over one, two, three, four or five full centuries, with the resulting astronomical sums to be spent on impossibly elaborate utopian projects. Franklin believed in the future of America and that of its citizens. He had “an extreme desire to see the state of America one hundred years from now”.^[viii] Well beyond these gifts to Boston and Philadelphia, Americans know that Ben Franklin “… shall in some Shape or other always exist.”

Ben Franklin’s modest gifts delivered value in the tens of millions of dollars over the subsequent 200 years. In his recent book on Ben Franklin’s Last Bet, Michael Meyer confirms: “Every generation discovers Benjamin Franklin for themselves. We can each of us choose to be his inheritor.”

We can learn anew from Ben’s actions 200+ years ago.

The Greatest Wealth Transfer in History Is Upon Us

An intergenerational transfer of wealth is in motion in America—and it will dwarf past transfers. The last of 73 million Baby Boomers will turn 60 next year. According to the Federal Reserve, as of year-end 2022, Boomers held half of America’s $140 Trillion of wealth.^[ix] Estimates are that Boomers will transfer $84 Trillion to younger generations, $16 Trillion in the next 10 years.

Recently, I spoke with a Gen X parent who just received an Inherited IRA from his parent. After he confirmed the SECURE 10-year distribution requirement, he also confirmed various spending plans—but no mention about passing wealth to his parent’s grandchildren.

No one expects this wealth transfer opportunity will be repeated in the future. Given the amounts and the income limits, a goal of ending poverty in America requires we target the everyday, low to moderate income American with no, small or modest accumulations of wealth.

While We Wait for Congress

If you wish to emulate Ben but find yourself unable to wait for Congress, consider IRC §529 plans. Those plans do not have annual contribution limits. But, because contributions to a 529 are considered gifts for federal tax purposes, each donor could contribute up to $17,000 to any one or multiple beneficiaries in 2023. And, because of provisions added by Section 126 of SECURE 2.0, there is an option for up to $35,000 of those funds, if not spent on education, to later be transferred to a Roth IRA.^[x]

Conclusion

Congress, why not try the Ben Franklin Child Roth IRA before adding millions, billions, or trillions in new taxpayer burdens for America’s future generations—today our federal debt is projected to be $46+ Trillion by 2033,^[xi] in addition to the existing $45+ – $160+ Trillion in underfunded Social Security and Medicare entitlements (depending on which estimate and time frame you want to use).^[xii]

Can America afford to miss this opportunity to facilitate a long-term reduction in poverty, and to reduce wealth inequity?

MORE FROM JACK TOWARNICKY:

• The ‘Smart’ Thing to Do with a Refund of 2023 Taxes

• SECURE 2.0: More ‘Impactful’ Stuff Plan Sponsors Don’t Need; Didn’t Ask For

I am always interested in your comments, corrections, criticisms, and suggestions. Happy to guide you should you decide to add true-up or automatic escalation provisions to your 401(k) plan, or to introduce HSA-capable coverage alongside your 401(k).

Disclaimer No. 1: My comments are my own based on my past experiences in plan sponsor and consulting roles and do not necessarily reflect those of any employer or association I have been employed by or affiliated with, past, present, or future.

Disclaimer No. 2: Information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have legal implications, and you should discuss this matter with legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not (and you/others should not use it as a substitute for legal, accounting, actuarial, or other professional advice. Any advice contained in this article was not intended or written to be used and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any transaction or subject addressed herein]. You (others) should seek advice based on your (their) particular circumstances from an independent tax advisor.

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^[i] B. Leon, Could $3,200 ‘Baby Bonds’ Help End Poverty in America? Connecticut, California and others are considering trust accounts some call ‘baby bonds’, Wall Street Journal, 5/12/23, Accessed 5/15/23 at: https://www.wsj.com/articles/could-the-government-help-end-intergenerational-poverty-with-3-500-for-each-child-b6845c56?page=1

^[ii] Congressional Budget Office (CBO), An Update to the Budget Outlook: 2023 to 2033, 5/12/23, Accessed 5/15/23 at: https://www.cbo.gov/publication/59096

^[iii] The Samuel DuBois Cook Center on Social Equity, Duke University, Baby Bonds: A Universal Path to Ensure the Next Generation Has the Capital to Thrive, Accessed 5/15/23 at:  https://socialequity.duke.edu/portfolio-item/baby-bonds-a-universal-path-to-ensure-the-next-generation-has-the-capital-to-thrive/ See also:  Prosperity Now, Baby Bonds, Accessed 5/15/23 at: https://prosperitynow.org/baby-bonds

^[iv] Government Accountability Office, Higher Education: Children’s Savings Account Programs Can Help Families Build Savings and Envision College, GAO-21-10, 12/10/20, Accessed 5/15/23 at: https://www.gao.gov/products/gao-21-10 See also: Z. Chen, M. O’Brien, S. Nielsen, H. Zheng, B. Starks, A Cross-Sectional Examination of Educational Expectation Among Welfare Users in an Asset Building Program, 1/25/23. “While welfare users were 43% less likely to expect their children to attend college, those who enrolled in the CSA program (and received a $500 credit) were about two times more likely to expect their children to go to college than welfare users who did not participate in the program.”  Accessed 5/15/23 at: https://doi.org/10.1007/s40609-023-00263-0

^[v] R. Ensign, S. Shifflett, College Was Supposed to Close the Wealth Gap for Black Americans. The Opposite Happened. Black college graduates in their 30s have lost ground over three decades, the result of student debt and sluggish income growth, Wall Street Journal, 8/7/21, Accessed 5/15/23 at: https://www.wsj.com/articles/college-was-supposed-to-close-the-wealth-gap-for-black-americans-the-opposite-happened-11628328602?page=1

^[vi] C. Booker, American Opportunity Accounts Act, S441, 2/15/23, with 15 co-sponsors, all Democrats, no Republicans. Accessed 5/15/23 at: https://www.congress.gov/bill/118th-congress/senate-bill/441.

^[vii] See: https://www.historynet.com/ben-franklins-gift-keeps-giving/  

^[viii] M. Meyer, Benjamin Franklin’s Last Bet, The Favorite Founder’s Divisive Death, Enduring Afterlife, and Blueprint for American Prosperity, 2022, Harper Collins

^[ix] Federal Reserve, Distribution of Household Wealth in the U.S. since 1989, Accessed 5/15/23 at: https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/chart/

^[x] C. Carosa, SECURE 2.0 Creates Backdoor Child IRA Opportunity, Forbes, 1/5/23. “Keep in mind that $35,000 at age 15, earning 5.75% per year, will grow to $1+MM by the age 75 Required Beginning Date.” Note: Required minimum distributions do not currently apply to Roth IRA assets. Accessed 5/22/23 at: https://www.forbes.com/sites/chriscarosa/2023/01/05/secure-20-creates-backdoor-child-ira-opportunity/?sh=447407273594

^[xi] Congressional Budget Office, Note ii, supra.

^[xii] J. C. Goodman, The Real Federal Deficit: Social Security And Medicare, Forbes, 2/25/23, Accessed 5/22/23 at: https://www.forbes.com/sites/johngoodman/2023/02/25/the-real-federal-deficit-social-security-and-medicare/?sh=46f7f1545679 ; See also: R. Boccia, Medicare and Social Security Are Responsible for 95 Percent of U.S. Unfunded Obligations, Cato Institute, 3/28/23 at: https://www.cato.org/blog/medicare-social-security-are-responsible-95-percent-us-unfunded-obligations#  See also: 2022 Social Security and Medicare Trustees Reports. The Office of the Actuary for the Centers for Medicare and Medicaid Services estimates unfunded obligations of $45+ Trillion ($38T Medicare, $7T Social Security) over the next 75 years.