Kill the Handout to Fix Trump Accounts

Adam N. Michel

The Wall Street Journal recently published my op-ed on how Congress could fix Trump Accounts so they’d actually be a useful investment vehicle.

My reform idea is straightforward: let parents deduct their contributions to Trump Accounts, so the investments are actually shielded from the tax code’s double tax. 

You can read the full piece here. 

I end the op-ed by arguing that Congress should also relax the lock-up rules and penalties that apply to Trump Accounts and instead allow the savings to roll into a more flexible Universal Savings Account at age 18, rather than a retirement-focused IRA. 

However, part of my argument was left on the cutting-room floor. The $1,000 government subsidy is the root of the Trump Account’s complexity. Once you start handing out other people’s money, Congress attaches strings. That’s not a bad impulse on its own, but the problem is that the strings attach to personal contributions as well, not just the government deposit. It’s the resulting lock-up rules and tax penalties for non-authorized access that make the accounts less useful. It is also the root of the confused tax treatment that makes Trump Accounts the least tax-advantaged savings account available to families.

Beyond making the accounts functionally useless outside the government transfer, the subsidy also fails to meet most of the other goals its proponents claim for it. 

For example, it is unlikely to mint a new generation of capitalists who come to see the benefits of markets by sharing in their growth. It’s a good story, but there’s not much evidence to back it up. As I detail in my recent report, in the US and around the world, the growth of private retirement savings is not associated with rising conviction in markets. If anything, the opposite is true. 

It is also not free money. The government is borrowing at increasingly high interest rates, betting that stock market returns will compensate. This shifts market risk onto taxpayers and adds to the already large fiscal pressures facing the US government. And those risks are unlikely to stay small. Trump Accounts currently cost about $3.5 billion a year. Once the accounts exist, every future Congress faces incentives to increase deposit sizes, add new types of matching incentives, and expand eligibility. 

Kill the handout, and the Trump Account structure can be easily simplified. No seed money means no lock-up to protect it, and no penalties to enforce the lock-up.

Government subsidies are neither a way to inoculate American youth against socialism nor a magic arbitrage machine whereby Washington borrows ad infinitum, invests the gains, and leaves everyone better off. There is no free lunch. Congress should focus on lowering taxes and simplifying the rules that keep people from saving their own money, not on redistributing everyone else’s. 

You can read my full Cato policy analysis on Trump Accounts here.