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“Trump accounts” cannot possibly replace Social Security

This is just another tax break for the rich.

At a Breitbart conference yesterday, Treasury Secretary Scott Bessent said that the so-called “Trump accounts” could serve as a “back door for privatizing Social Security.” These accounts, part of the “Big Beautiful Bill,” allow parents and some others to put up to $5,000 per year into an index fund investment account for their child, tax-free, with the government pitching in $1,000 for newborns for the next four years.

The Trump mega-bill does not actually affect Social Security, and Bessent later clarified on Twitter/X that “Trump Baby Accounts are an additive benefit for future generations, which will supplement the sanctity of Social Security’s guaranteed payments.” But at the event, he said that the accounts would teach “the power of compound interest” and “if all of a sudden these accounts grow, and you have in the hundreds of thousands of dollars for your retirement, that’s a game-changer.” The idea seems to be that the rapid success of Trump accounts would render Social Security irrelevant, and therefore easier to eliminate down the road.

Let’s be generous and take Bessent at his word, that he believes Trump accounts will be so successful and popular that they will push Social Security into the background. That claim is ridiculous. Trump accounts are just another complicated tax benefit that will mostly benefit the upper middle class and the rich, if they even bother to use it.

There are two basic problems with Trump accounts. The first is administrative burden. Rather than every new baby being automatically enrolled, parents will have to sign up. Straight away, that will exclude many if not most working-class and poor people, who tend to struggle with paperwork or knowledge of the tax code. The very poorest people often don’t even have a bank account.

The second is that the government will only put in a measly $1,000, and that for just newborns over the next four years, from 2025 to 2028. As Anne Kim points out, that glorious compound interest, with solid 8 percent returns over an 18-year period, works out to something like $4,000. And that’s if your returns don’t get eaten up by fees, which they probably will, because rather than the government managing these accounts centrally—as it already does for federal workers with the Federal Retirement Thrift Investment Board—Trump accounts have to be at a private brokerage or other financial firm.

The real benefit would be for families who can afford to contribute the maximum of $5,000 per year—allowing them to stack up $90,000 in contributions. But there’s little reason for them to do this, since we already have other even more grotesquely unfair tax shelters for the multigenerational rich. Consider the appalling 529 college savings program. An analysis from years ago found that in Kansas in 2007, 81 percent of 529 benefits went to households making more than $100,000, and 37 percent to those making more than $250,000.

The 529 carve-out got even more generous in 2024, and more generous still under Trump’s mega-bill. Now you can contribute up to $19,000 per year as a single person or $38,000 as a married couple tax-free, or five times that much as a one-off—and even if you go above that, it’s still tax-free unless that pushes you over the lifetime gift tax exemption of $13.99 million for individuals or $27.98 million for couples. Total contributions cap out at between $235,000 and $575,000, depending on the state, and you can roll over up to $35,000 into a Roth IRA for the beneficiary. You can also spend the money on many more things, like vocational school, books, K-12 expenses, and so forth.

The estate planners over at Truxton Trust are happy to explain: “For wealthy families, a 529 plan can be an impactful tool for gifting and estate planning.”

A Trump account is just not that useful for rich people looking to avoid taxation of their dynastic wealth. With full contributions, it would add up to a lot over 65 years, but even among the few who would want that, they can already do it with other tools, and a $1,000 bonus just isn’t much. None other than The Wall Street Journal says of the Trump accounts: “For most families it doesn’t make sense to add money. 529 savings plans and even custodial accounts are more flexible and have better tax advantages for parents’ contributions.” Probably some will do it, but for most the only reason to set one up is to get the $1,000 in free money—chump change for them, and scheduled to expire in a few years anyway. From soup to nuts, this is a joke policy.

It would not be impossible to harness some of America’s wealth on behalf of the public. The way to do it is with a social wealth fund, similar to the Alaska Permanent Fund, owned and managed by the state government, which pays out an automatic annual dividend to every Alaskan citizen. That fund was built up with oil revenues, but there’s no reason it couldn’t be done with tax money. But that would require cutting out Wall Street middlemen and actually diverting a nontrivial fraction of the trillions of dollars in annual capital income away from the rich, and there is no chance whatsoever that Donald Trump is going to support either idea.

~ RYAN COOPER

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