What if the U.S. government gave every American money at birth so they could retire as millionaires?
The New York Times DealBook recently asked a number of business leaders how to fix America. The suggestion for so-called birthright funds was from hedge fund manager and activist investor Bill Ackman, chief executive of Pershing Square Capital Management.
“Birthright funds would be invested at birth in zero-cost equity index funds; be prohibited from withdrawal until retirement; and would compound tax-free for 65 years or more,” Ackman suggested in the TImes article. “At historical rates of equity returns of 8% annually, a $6,750 at-birth retirement account — which would cost the government $26 billion annually based on the average number of children born in the U.S each year — would provide retirement assets of more than $1 million at age 65, or $2 million at age 74.”
We decided to ask three of our own experts their opinion of the idea and if it could work. Here’s what they said.
1. The numbers don’t work.
David Blanchett, head of retirement research for Morningstar’s Investment Management Group:
While 8% has been the approximate geometric annual equity return, it doesn’t include inflation. This is a “gimmick” I think a lot of people play to make compound growth seem bigger than it actually is.
People spend money in “real” terms and therefore it’s important to incorporate inflation when doing any kind of financial projection (especially over a really long time period). Inflation has been about 3% a year historically in the United States. This would drop the real return (or after-inflation return) to 5%.
Over 65 years that would result in $6,750 growing to closer to $160,919. It would take an at-birth contribution of around $42,000 to get to $1 million assuming a 5% return.
Also, it’s not clear that historical returns on equities are going to be realistic going forward. Average 10-year government bond yields have been around 5% and they are closer to 1% today. If I had to guess, you’d be lucky to get that $6,750 to grow to $100,000, in today’s dollars, over 65 years, versus the eye-popping number that Ackman is going with.
But let’s assume his numbers are correct. Just giving everyone $1 million at retirement isn’t a very efficient solution and would create its own issues. People don’t really do a good job spending down wealth at retirement and so we need to focus on increasing “pension-like” income in retirement versus savings.