American Birthright Accounts

         Browsing The Wall Street Journal one day, I saw a piece by David Smick about federal baby bonds. The article mentioned a decade-old piece of legislation that would have given every baby born in the USA a $500 bond. It failed to pass Congress despite bipartisan support. I couldn’t get baby bonds out of my mind. As a college math major and a CPA, I am good with numbers. This post presents my realistic and affordable plan to make every child born in the USA a millionaire and in today’s’ dollars.

        During my career in what now is called wealth management, I advised clients who owned businesses to set up Roth IRA accounts for their children as young as age 6. This is legal provided you pay them for actual work around the office. If my clients contributed the maximum amount each year until the children finished college and if the money continued to grow until their retirement, the sum could approach $1 million tax free – even if not another penny ever was contributed after the kids left college.

       Thus, I already was familiar with the power of money to grow over long time periods. People, like my business owning clients, could afford IRAs for their kids who likely would be well off no matter what. Those on the lower rungs of the economic ladder however are mostly wage earners who cannot legally make (nor afford) Roth contributions for kids and who never benefit from stock ownership over time. These folks need a user-friendly way to participate in future global wealth generation.

        My plan is simple. The federal government creates a tax-free American Birthright Account (“ABA”) for each child born in the USA and funds it for $5,000. Each year until the recipient retires, another $500 is added. The ABA is professionally invested in a diversified portfolio of global index funds. Since 1930, markets have increased 7% per year net of inflation despite depressions, bubbles and meltdowns. Since the 2009 market bottom, stocks quadrupled but working class families have not participated. When the ABA beneficiary is 65 years old, the account exceeds $1 million and generates over $6,000 per month of income – all tax free and in today’s dollars.

         My plan is affordable. There were 3,945,000 US live births in 2017. Taking into account infant mortality and premature deaths, there will be about 3.5 million new ABA beneficiaries every year. This equates to an annual cost of $17.5 billion for the initial $5,000 and $1.75 billion for the additional $500 per year. The average cost for the first 10 years is $25 billion. In year 11 the cost is $35 billion and increases $1.75 billion each year thereafter. This is only one-half of one percent of the federal budget.

          Every person born in America is a millionaire and receives tax-free over $6,000 per month in retirement income. A retired couple, both with ABAs, receives $150,000 per year tax free, equivalent to $200,000 taxable income in the 25% bracket. Unlike Social Security, ABA beneficiaries own their accounts and a couple would have $2 million to bequeath to heirs. ABAs would reduce inequality and give working class families the same advantages enjoyed by affluent Americans. Moreover, ABAs would give all Americans a stake in our economic system by making them stockholders.

        There are no tricks or legerdemain involved; American Birthright Accounts would transform America. It would be the most significant economic legislation ever enacted and would rival the Homestead Act of 1868 as the greatest legislation in American history. Just as the Homestead Act made landowners out of working class Americans, American Birthright Accounts would make them stakeholders in America and would affix an entirely new and profound meaning to “Born in the USA“!