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Here’s a riddle for you: A conservative Republican senator, a top economic advisor to the Trump White House and a venture capitalist walk into a conference room at a financial forum and claim a new government program will be a boon for all American families.
Question: Do you think these people are looking out for your interests?
If you trust Sen. Ted Cruz, economic advisor Kevin Hassett and millionaire Brad Gerstner to do so, feel free to stop reading here.
Here’s the dirty little secret: Trump accounts are Social Security personal accounts.
— Sen. Ted Cruz (R-Tex.) reveals that Trump accounts are designed to threaten Social Security
But keep in mind that Cruz (R-Texas) was last seen in these pages promoting yet another big tax break for the 1%, Hassett appeared the other day on Fox Business arguing that while Americans are spending a lot more on gasoline, “they’re spending more on everything else too” on their credit cards, as if forcing households to max out their credit is a good thing; and Gerstner is, well, a millionaire tech investor.
At their panel discussion on May 4 at the annual Milken Institute conference, Cruz, Hassett, Gerstner and their interlocutor, financier Michael Milken, talked as though the Trump accounts would be so fabulous for ordinary American families that they would obviate the need for Social Security.
“Here’s the dirty little secret,” Cruz said. “Trump accounts are Social Security personal accounts.”
Milken echoed that thought: “Do you have the right to decide where your money goes, or should you be giving it to the government and [letting] them decide where it goes?”
That gave the game away — this is yet another effort by Republicans and conservatives to end a program they’ve been trying to kill, and to give Wall Street firms a bigger bite of your retirement resources.
A new proposal for saving Social Security would cap benefits at $50,000 per person. Here’s how that would hurt the working class but save the rich from a tax increase.
Let’s start with a primer about the Trump accounts, which were part of last year’s GOP budget bill and will be open to investment starting on July 4.
The headline pitch for these accounts is that they’ll be seeded with a one-time $1,000 government contribution for children born from 2025 through 2028, unless Congress extends the government donation. Accounts can be opened for children born before or after those dates, but they won’t get the government donation.
Families can add up to an additional $5,000 in contributions every year until the child reaches 18, but those donations won’t be tax-deductible.
The money must be invested in low-cost stock index funds or exchange-traded stock index funds, and can’t be withdrawn for any reason without penalty until age 18. After that, the funds can be withdrawn without penalty for certain purposes such as educational expenses or the purchase of a first home. The accounts eventually become converted to conventional individual retirement accounts, or IRAs, and distributions will be taxed as ordinary income, though family contributions will be returned tax-free.
That $1,000 donation is the best feature of the accounts. But that may be their only good feature. For almost all the financial goals confronting ordinary American families, such as saving for college or retirement, they’re inferior to tax-advantaged savings plans already on the books.
Like those programs, they’re much more advantageous for wealthier than to low-income families: Wealthier families typically have the wherewithal to make their annual contributions, and get a larger break from the tax deferrals of investment growth within the accounts because their tax rates are higher.
Though their promoters claim that the accounts will level the economic playing field for all families — “helping the bottom 10%,” Hassett said on the panel — that’s not the case. “Clearly, the program is structured to subsidize savings for those who already have the capacity to save, rather than meaningfully closing the wealth gap,” observes Sheryl Rowling of Morningstar.
Another drawback cited by economists and financial planners is that the accounts are locked into corporate equity investments. Before the beneficiary reaches age 18, the investment mix can’t be adjusted. That’s dangerous because portfolio concentrations in corporate shares are inherently risky.
The Dow Jones Industrial Average just crossed 50,000 points for the first time, but that doesn’t mean the economy is healthy.
“A high school senior who plans to enroll in college next year cannot change the investment to a lower-risk portfolio,” say, to a mix of equities and bonds, notes Greg Leiserson of the Tax Law Center at NYU. “If the market crashes the summer before she plans to enroll, the Trump Account is of greatly reduced use.”
Trump account promoters have massively overstated the potential wealth gains for ordinary Americans. At the Milken conference, Cruz said that a child with a Trump account will have about $170,000 in it when he or she reaches 18 and $700,000 at age 35. “And very quickly after that, you get into the millions,” he said.
Cruz did acknowledge that those figures apply to households that “contribute regularly.” In fact, they apply largely to households that contribute the maximum $5,000 every year.
The White House estimates of potential returns are based on questionable assumptions about stock market gains over the 18-year periods in which the accounts will grow on a tax-deferred basis.
According to the government’s own estimates, the account of a family taking the $1,000 seed money but making no contributions beyond that would have as little as $2,577 in their account after 18 years if stock market returns come to 5.4% over that period.
The government estimates, however, that the account would hold $730,395 if the family contributes the maximum every year and the stock market returns more than 18%. Another 10 years of growth at that level, and the account would grow to $1.9 million when the child reaches age 28.
The problem with long-term market estimates, such as the ones offered by the White House, is that they’re highly variable. No 18-year periods are the same. One thousand dollars deposited in a hypothetical account invested in a Standard & Poor’s 500 index fund would grow to about $6,600 if its 18-year lifetime culminated in 2025; if the 18 years ended in 2008, however, that deposit would have grown only to $3,960. In the 18-year period that ended in 1960, the account would have grown only to $2,940. What will the next 18 years bring? Who knows?
Variability like this, along with the sheer uncertainty of stock market projections for the future, helped sink President George W. Bush’s 2005 attempt to convert Social Security into private accounts, which was also pitched as a key to minting millionaires by the millions through the magic of the market.
I asked the White House to respond to these criticisms. Spokesman Kush Desai called my questions “both a stupid and out-of-touch take,” asserting that the accounts are “already shaping up to make a generational difference for working-class children.”
The truth is that if Donald Trump were really intent on taking steps to “strengthen the financial security of American workers” and creating a “path to prosperity for a generation of American kids,” as he claims to be, he and his GOP followers in Congress wouldn’t have scissored away the American safety net, which is what they’ve done.
Trump’s statistical claims are often untethered from reality.
They wouldn’t have imposed new work requirements and narrowed eligibility standards for food stamps, resulting in the exclusion of more than 3 million people from the program, a decline of 8%. They wouldn’t have cut nearly $1 trillion in funding for Medicaid over 10 years, jeopardizing coverage for 3.6 million young adults. They wouldn’t have allowed Affordable Care Act premium subsidies to expire, resulting in a drop in Obamacare enrollments of about 1.2 million Americans this year compared with last year.
If they really cared about educational opportunities for “a generation of American kids,” they wouldn’t have narrowed eligibility for higher education Pell grants, and wouldn’t slash research grants for universities coast to coast.
So how can families better prepare for college and retirement expenses? For education, 529 plans are probably preferable to Trump accounts. The investment choices are more flexible, withdrawals are tax-free at the federal level and sometimes at state levels if used for most education expenses, and there are no federal limits on contributions (contributions aren’t tax-deductible).
For retirement, advisors have been favoring Roth IRAs. Contributions are not tax-deductible, and this year can be made by couples filing jointly with taxable income up to $242,000 ($153,000 for singles) and are limited to $7,500 a year ($8,600 for those 50 and older). But withdrawals aren’t taxed if you’ve held the account for at least five years and you take the money out after you turn 59½.
The bottom line, then, is this. Take the $1,000 if your child is eligible. As Rowling wisely advises, “Any time the government offers free money, you should take it.”
As for the rest, treat any claims offered by Trump account promoters as inherently suspect.
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Ideas expressed in the piece
- The article argues that Trump Accounts are essentially Social Security personal accounts and represent yet another Republican and conservative effort to dismantle Social Security and give Wall Street firms a larger share of retirement resources
- The piece contends that while the $1,000 government donation is the best feature, it may be the only good feature of these accounts, as they are inferior to tax-advantaged savings plans for most financial goals confronting average American families
- The article suggests that these accounts disproportionately benefit wealthier families who typically have the wherewithal to make regular annual contributions and receive larger tax benefits, rather than meaningfully closing the wealth gap for low-income families
- The piece argues that these accounts’ requirement to lock investments entirely in corporate equity until age 18, with no ability to adjust the investment mix, creates dangerous portfolio concentration risk, particularly for high school seniors who may face market declines before college enrollment
- The article contends that account promoters have massively overstated potential wealth gains through unrealistic assumptions about consistent maximum annual contributions and sustained high stock market returns
- The piece argues that long-term market projections are highly variable, with historical 18-year periods showing dramatically different returns depending on when the periods ended, making future projections unreliable
- The article asserts that the administration’s broader cuts to food stamps eligibility, Medicaid funding, Affordable Care Act subsidies, and higher education Pell grants demonstrate insufficient commitment to supporting working families and American children
Different views on the topic
- Proponents emphasize the substantial long-term wealth-building potential of Trump Accounts through compound growth, with projections suggesting that a single $1,000 government deposit could grow to approximately $148,000 by age 65[1], and families maximizing annual contributions of $5,000 could accumulate approximately $7 million by retirement[1]
- Supporters highlight that the $1,000 government contribution is genuine, free money that does not count toward contribution limits and does not reduce other tax benefits[2], constituting a benefit families should embrace rather than dismiss
- Advocates stress that the accounts feature extremely low fees capped at 0.1% annually and include built-in discipline that prevents households from accessing funds before age 18[1][2], noting that this forced long-term structure removes temptation to spend the resources
- Proponents point to significant philanthropic support, including Dell Computer founders’ commitment of $6.25 billion to seed Trump Accounts with $250 contributions for approximately 25 million children, with priority given to those in lower and middle-income ZIP codes[2]
- Treasury Department officials characterize the program as historically significant policy, with Treasury Secretary Bessent calling Trump Accounts “the defining policy” of the presidency and projecting that initial $1,000 deposits could grow to approximately half a million dollars by retirement age under favorable market conditions[3]
- More measured perspectives acknowledge that the $1,000 government contribution represents genuine value worth claiming, while noting that families also have access to competing savings vehicles such as 529 plans, UTMA accounts, and Roth IRAs, each offering different advantages for various financial goals[2][3]