Bill Ackman has a solution to America’s retirement crisis: Give $7,000 to ‘every baby born in America’

They say the best time to start investing was yesterday.

What if you could harness the power of compounding even before you understood or knew what a retirement account was?

Billionaire hedge fund manager Bill Ackman once proposed a creative solution to America’s retirement crisis: giving every American-born child a $7,000 investment account.

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In a 2023 interview with Harry Stebbings on “The Twenty Minute VC” podcast, Ackman explained why this idea could have many benefits.

$7,000 birthday gift

Ackman’s plan is for the US government to put $7,000 into an account created for each child at birth. To be clear, this is not a cash grant. He believes the account should be restricted from withdrawals and also tax free.

The money should be invested in an index fund and left alone until the baby is old enough to retire, Ackman says. He estimates that these accounts could be worth $1 million each after 65 years. He doesn’t mention an expense ratio, which would reduce long-term returns, but we can assume he’s referring to a low-cost index fund.

Based on these numbers, it looks like Ackman is assuming an 8% compound annual growth rate. That’s roughly the historical average for the US stock market. The S&P 500 gave an average annualized return of 10.5% from March 1957 to March 2024.

As for the costs to the government, Ackman believes it would be minimal and “nothing at all.”

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There were 3.6 million babies born in the United States in 2021, meaning such a program would cost the government about $25 billion a year assuming the birth rate remains constant. By comparison, federal spending in fiscal year 2024 on transportation, commerce and housing credit, social security, and national defense was $60 billion, $65 billion, $715 billion, and $433 billion, respectively.

Ackman did not mention whether such a plan would be funded by additional taxes or more government borrowing. But given the fact that he has bet against the US Treasury in 2023 because of the federal debt, it seems unlikely that he wants this program to be financed with more borrowed capital. Ackman has been a vocal critic of the interest tax loophole that allows wealthy money managers like him to lower their tax bill, making it likely to favor tax hikes.

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Regardless, this hypothetical birth subsidy program illustrates how important timing is to compound growth.

The power of composition

Although most investors try to maximize returns and initial capital, they have little control over their time horizon. The average American starts investing at age 33, according to a 2021 study from Personal Capital cited by Bankrate. This means that a typical investor has less than 30 years to save for retirement.

Although an adult starts saving and investing at the age of 25, he has lost more than two decades of his early life. For example, a 25-year-old who puts $7,000 into an S&P 500 index fund and gets an 8% annual rate of return would have about $150,000 by the time he turns 65. That’s significantly less than the $1 million an investor would have. they would accumulate under Ackman’s plan, but they’re also supposed to leave the account intact and not add to it as they earn and save. However, this example demonstrates the advantage of starting early.

A baby grant recipient would have nearly $48,000 saved for retirement by age 25.

“We can’t wait until people start setting up an IRA or a 401(k) when they’re, you know, 25 or 30 or 35 … Just because of the capitalization laws,” Ackman said. “That extra 25 years is very, very material.”

In addition to securing the financial future of many young Americans, Ackman believes such a program would allow every young citizen to inherit a stake in the economy. “I would start by giving every baby in this country a piece of the success of this country,” he said.

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This article provides information only and should not be construed as advice. Offered without warranty of any kind.