Speaking at a live-streamed Breitbart event Wednesday, Treasury Secretary Scott Bessent crowed about the Trump (formerly MAGA) accounts established by the Big Ugly Bill, and how they would be a back door into privatizing Social Security.
For those who are unfamiliar with these Trump accounts, they function in a similar fashion to IRAs, in that up to $5,000 per child can be deposited each year for them from employers or individuals. The government will also deposit $1,000 per child born during 2025 through 2028. The funds are tax-deferred, restricted from withdrawal until age 59, or for the purchase of a home or college expenses. But here's the catch: They MUST -- not may, MUST -- be invested in stock index funds.
For perspective on this, think about IRA accounts or 401k plans. In those plans, you are permitted to spread your investments around to minimize risk, so that most balanced portfolios have some stock, some short and long term bonds, maybe some real estate investments, and some cash. But the "Trump accounts" are only permitted to invest in stocks, which would drive cash into the stock market and prop up companies' equity ratios for sure, but also transfer all of the high risk onto individuals.
So here's what Scott Bessent said:
[W]e are going to push with these accounts that if you have the account, we want you to learn about it, we want you to understand it, it's almost like if you get a pet, you understand everything about your pet.
So if you have these accounts, why are you investing it this way?
How are you doing it?
How can you understand the power of compound interest?
And also at the end of the day, I'm not sure when the distribution level date should be, whether should it be 30 and you can buy a house, should it be 60, but in a way it is a backdoor for privatizing Social Security.
Social Security is a defined benefit plan paid out to the extent that if all of a sudden these accounts grow and you have in the hundreds of thousands of dollars for your retirement, then that's a game changer too.
As to Bessent's first question, "why are you investing it this way?" I echo that question. Why on God's green earth would you pour thousands more dollars into ONLY stock funds, and put the risk on the person saving?
Compound interest isn't really a thing in these accounts since they are REQUIRED to be invested in what's called a "qualified mutual fund." Qualified mutual funds must follow either the S&P 500 stock market index or another index comprised of equity investments in primarily US companies, and for which regulated futures contracts are traded on a qualified board or exchange. The only "compound interest" would be reinvested dividends, if there are any to reinvest. RISK RISK RISK
And then the punchline, that it's a backdoor to privatizing Social Security. 401(k) plans have been around for 30 years, but they're not intended as, nor do they serve as a "backdoor to privatizing Social Security." In fact, they are part of the 3-legged stool for retirement: Personal savings, 401(k), and Social Security as the foundation. All too often, Social Security is the ONLY piece people can rely upon.
The idea that the government will donate $1,000 for each child born between 2025 and 2028 strikes me as a huge boondoggle. Why not just put that $1,000 in a savings account, or put it toward shoring up Social Security for the future?
The bottom line here is that we need to make sure they don't sell these accounts as alternatives to Social Security since they've admitted they're intending to use them as a "back door" to privatization. This is just an overly complicated way of propping up the stock market and inflating it falsely while trying to toss all of the risk on individuals instead of keeping one retirement fund risk-free.
[h/t Politico]
