By Nir Kaissar / Bloomberg Opinion
Treasury Secretary Scott Bessent raised some eyebrows last week when he referred to the new kids’ retirement accounts in President Donald Trump’s One Big Beautiful Bill Act as “a backdoor for privatizing Social Security.” He later backtracked, writing on X that the accounts “supplement the sanctity of Social Security’s guaranteed payments” and that the administration “is committed to protecting Social Security and to making sure seniors have more money.”
Bessent was more right the first time, only I would suggest tackling Social Security head on. If done right, private retirement accounts for kids could provide a far more dignified retirement than what Social Security can offer. But to get there, Trump’s new accounts require some tweaks.
Most people don’t want to touch Social Security, even though the system is obviously flawed. It’s not sustainable, for one. Social Security is the largest expenditure in the federal government’s deficit-plagued budget. When combined with Medicare, which provides health insurance for retirees, the two programs account for more than a third of federal spending.
Even if Social Security was affordable, it doesn’t pay enough for most retirees to live on. That means many Americans must supplement Social Security with their own savings, a practical impossibility for the nearly half of U.S. workers who don’t earn a living wage, according to the Dayforce Living Wage Index, never mind saving for retirement.
So, it’s not so much a question of whether Social Security should be reformed but how. Two years ago, I proposed that the federal government put away $10,000 for each baby born in the U.S. in a tax-free account invested in U.S. stocks and accessible only at retirement. If that investment grows 7.5 percent a year after inflation, which is roughly what the S&P 500 Index has produced over the past 100 years, it will blossom into roughly $1.8 million in today’s dollars when that baby turns 70.
That’s a richer retirement than Social Security can provide. A common rule of thumb in financial planning is that retirees can pull 4 percent of their savings every year with little risk of running out of money. The idea is that, as long as the growth on their savings exceeds 4 percent, which a competently invested portfolio should be able to achieve, they can sustain that level of spending indefinitely. By that math, a $1.8 million portfolio will generate $72,000 of income a year, about triple the amount the average retiree receives from Social Security.
The best part is that it would cost a fraction of what the U.S. currently spends on retirees. Roughly 3.7 million babies are born in the U.S. every year. Putting away $10,000 for each of them would cost the federal government $37 billion a year, adjusted periodically for inflation. Compare that with the $1.6 trillion the government will spend on Social Security this year. With $1.8 million in retirement savings, retirees might even be able to pay for their own health insurance, saving the government an additional $1 trillion on Medicare.
The difference is so massive that even if U.S. stocks were to produce a lower return than they have historically, supplementing retirement income for those who need it would still probably cost a lot less than Social Security and Medicare do today. It would also leave plenty of money for those who need support before retirement due to disability or other circumstances.
What makes it possible is the power of a seven-decade-long compounding investment in stocks, a resource readily available to the government but not easily accessible to individuals. Most families can’t afford to set aside $10,000 for newborns. And by the time most people can afford to save for retirement — if at all — they only have two or three decades to grow their savings. The government can give Americans a jump-start to a more abundant retirement.
The “Trump Baby Accounts,” as Bessent calls them, don’t have the same horsepower. They allow parents to contribute up to $5,000 a year into retirement accounts for their kids, although many families won’t be able to afford it. The money can also be spent when the child turns 18, which means it will probably vanish long before retirement. There’s also a universal contribution, but it’s limited to $1,000 for each baby born between January of this year and 2028. As it stands, neither avenue has any conceivable chance of replacing Social Security.
If the White House wants to get serious about deficits, it will need to come up with creative ways to tackle the biggest line items in the federal budget, retirement spending prominently among them. Bessent is right to nod in that direction. Now it’s time to think bigger.
Nir Kaissar is a Bloomberg Opinion columnist covering markets. He is the founder of Unison Advisors, an asset management firm.
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