Could Spending $7,000 at Birth Eliminate the Need for Social Security?
Written by
Vance Cariaga
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While U.S. lawmakers tussle over how best to fix Social Security as one of the program’s major trust funds heads toward depletion, some folks in the private sector favor a radical change that would replace Social Security with a government-sponsored savings account.
Under this proposal, babies would be given $7,000 at birth. The idea is that decades of compounding would turn that $7,000 into about $1 million when the babies hit retirement age. Among those who support the idea is billionaire investor and hedge fund manager Bill Ackman, founder and CEO of Pershing Square Capital Management.
In an interview posted on Instagram last week, Ackman repeated an idea he floated years earlier to have the U.S. government give every baby born in the United States a $7,000 tax-exempt account at birth that they can’t touch until they turn 65. The account could be invested in an index fund or some other vehicle that would allow it to compound over time.
“By the time you’re 65 it’s $1 million,” Ackman said in the interview. “By the way, that would cost [the government] $20 billion a year to do that…It’s like a nothing thing. It would start to give everyone in this country a piece of the success of the country. So I think we need these sort of savings accounts and we can’t wait until people start creating an IRA or 401(k) by the time they’re…25 or 30 or 35. You want to start when they’re a baby just because of the laws of compounding. That extra 25 years is very, very material.”
Ackman broached a similar idea in 2020, using $6,750 as an initial deposit. As Forbes reported at the time, Ackman dubbed it a “birthright fund” that would be invested in zero-cost equity index funds.
The concept is simple enough: Allowing an initial $7,000 investment to compound over time, assuming an 8% average annual return, would grow into $1 million after 65 years. That’s roughly 3.5 times higher than the average savings for seniors 65 and older, which Vanguard estimates was $279,997 as of 2021.
Ackman isn’t the only one who recommends giving babies a stake of several thousand dollars at birth. As GOBankingRates previously reported, Chloé Daniels of Quick Money Tips also favors depositing $7,000 the day a baby is born so they can have $1 million at 65. However, Daniels would have families deposit the money rather than the government.
If you don’t have $7,000 available, Daniels said you could invest $3,000 initially, deposit $200 a month for 20 years and then let your child take over their own contributions from the ages of 20 to 45. By 45, they’ll have $1 million.
Daniels’ idea would likely have broader support among lawmakers because it doesn’t involve spending government money or replacing Social Security. Most members of Congress have shown no interest in radically revamping Social Security.
A blog on the Retire By 40 website asserted that having the government give every baby $7,000 at birth is an idea that “would never get off the ground.”
“There are too many other things to deal with,” the blog said. “Also, it smells like socialism. Americans would never stand for that.”
Another option, at least for now, is to open a custodial account under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). These accounts are managed by a custodian and hold gifts or transfers that a minor has received, according to Vanguard. Minors actually own the assets in the account, which means it is held and reported under the minor’s Social Security number.
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Among the advantages of a custodial account are that there are no limits on the dollar amount of gifts or transfers, though amounts above a certain level will incur a federal gift tax. And unlike college savings plans, there’s no penalty if UGMA or UTMA account assets aren’t used to pay for college.
The potential downside, at least in terms of retirement planning, is that when the minor reaches adulthood, they’ll have full control of the assets and can use them for any purpose. This means the money could be spent by the time they reach retirement age if they don’t put it into a retirement savings account and leave it there.
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