18-year period

Here’s a riddle for you: A conservative Republican senator, a top economic advisor to the Trump White House and a venture capitalist walk into a conference room at a financial conference and claim a new government program will be a boon for all American families.

Question: Do you think these people are looking out for your interests?

If you trust Sen. Ted Cruz, economic advisor Kevin Hassett and millionaire Brad Gerstner to do so, feel free to stop reading here.

If you’re skeptical, read on.

But keep in mind that Cruz (R-Tex.) was last seen in these pages promoting yet another big tax break for the 1%, Hassett appeared the other day on Fox Business arguing that while Americans are spending a lot more on gasoline, “they’re spending more on everything else too” on their credit cards, as if forcing households to max out their credit is a good thing; and Gerstner is, well, a millionaire tech investor.

At their panel discussion on May 4 at the annual Milken conference, Cruz, Hassett, Gerstner and their interlocutor, Michael Milken, talked as though the Trump accounts would be so fabulous for average American families that they would obviate the need for Social Security.

“Here’s the dirty little secret,” Cruz said. “Trump accounts are Social Security personal accounts.”

Milken echoed that thought: “Do you have the right to decide where your money goes, or should you be giving it to the government and [letting] them decide where it goes?”

That gave the game away — this is yet another effort by Republicans and conservatives to end a program they’ve been trying to kill, and to give Wall Street firms a bigger bite of your retirement resources.

Let’s start with a primer about the Trump accounts, which were part of last year’s GOP budget bill and will be open to investment starting on July 4.

The headline pitch for these accounts is that they’ll be seeded with a one-time $1,000 government contribution for children born from 2025 through 2028, unless Congress extends the government donation. Accounts can be opened for children born before or after those dates, but they won’t get the government donation.

Families can add up to another $5,000 in contributions every year until the child reaches 18, but those donations won’t be tax-deductible.

The money must be invested in low-cost stock index funds or exchange-traded stock index funds, and can’t be withdrawn for any reason without penalty until age 18. After that, the funds can be withdrawn without penalty for certain purposes such as educational expenses or the purchase of a first home. The accounts eventually become converted to conventional individual retirement accounts, or IRAs, and distributions will be taxed as ordinary income, though family contributions will be returned tax-free.

That $1,000 donation is the best feature of the accounts. But that may be their only good feature. For almost all the financial goals confronting average American families, such as saving for college or retirement, they’re inferior to tax-advantaged savings plans already on the books.

Like those programs, they’re much more advantageous for wealthier than to low-income families: Wealthier families typically have the wherewithal to make their annual contributions, and get a larger break from the tax deferrals of investment growth within the accounts because their tax rates are higher.

Though their promoters claim that the accounts will level the economic playing field for all families — “helping the bottom 10%,” Hassett said on the panel — that’s not the case. “Clearly, the program is structured to subsidize savings for those who already have the capacity to save, rather than meaningfully closing the wealth gap,” observes Sheryl Rowling of Morningstar.

Another drawback cited by economists and financial planners is that the accounts are locked into corporate equity investments. Before the beneficiary reaches age 18, the investment mix can’t be adjusted. That’s dangerous because portfolio concentrations in corporate shares are inherently risky.

“A high school senior who plans to enroll in college next year cannot change the investment to a lower-risk portfolio,” say, to a mix of equities and bonds, notes Greg Leiserson of the Tax Law Center at NYU. “If the market crashes the summer before she plans to enroll, the Trump Account is of greatly reduced use.”

Trump account promoters have massively overstated the potential wealth gains for ordinary Americans. At the Milken conference, Cruz said that a child with a Trump account will have about $170,000 in it when he or she reaches 18 and $700,000 at age 35. “And very quickly after that, you get into the millions,” he said.

Cruz did acknowledge that those figures apply to households that “contribute regularly.” In fact, they apply largely to households that contribute the maximum $5,000 every year.

The White House estimates of potential returns are based on questionable assumptions about stock market gains over the 18-year periods in which the accounts will grow on a tax-deferred basis.

According to the government’s own estimates, the account of a family taking the $1,000 seed money but making no contributions beyond that would have as little as $2,577 in their account after 18 years if stock market returns come to 5.4% over that period.

The government estimates, however, that the account would hold $730,395 if the family contributes the maximum every year and the stock market returns more than 18%. Another 10 years of growth at that level, and the account would grow to $1.9 million when the child reaches age 28.

The problem with long-term market estimates, such as the ones offered by the White House, is that they’re highly variable. No 18-year periods are the same. One thousand dollars deposited in a hypothetical account invested in a Standard & Poor’s 500 index fund would grow to about $6,600 if its 18-year lifetime culminated in 2025; if the 18 years ended in 2008, however, that deposit would have grown only to $3,960. In the 18-year period that ended in 1960, the account would have grown only to $2,940. What will the next 18 years bring? Who knows?

Variability like this, along with the sheer uncertainty of stock market projections for the future, helped sink George W. Bush’s 2005 attempt to convert Social Security into private accounts, which was also pitched as a key to minting millionaires by the millions through the magic of the market.

I asked the White House to respond to these criticisms. Spokesman Kush Desai called my questions “both a stupid and out-of-touch take,” asserting that the accounts are “already shaping up to make a generational difference for working-class children.”

The truth is that if Trump were really intent on taking steps to “strengthen the financial security of American workers” and creating a “path to prosperity for a generation of American kids,” as he claims to be, he and his GOP followers in Congress wouldn’t have scissored away the American safety net, which is what they’ve done.

They wouldn’t have imposed new work requirements and narrowed eligibility standards for food stamps, resulting in the exclusion of more than 3 million people from the program, a decline of 8%. They wouldn’t have cut nearly $1 trillion in funding for Medicaid over 10 years, jeopardizing coverage for 3.6 million young adults. They wouldn’t have allowed Affordable Care Act premium subsidies to expire, resulting in a drop in Obamacare enrollments of about 1.2 million Americans this year compared with last year.

If they really cared about educational opportunities for “a generation of American kids,” they wouldn’t have narrowed eligibility for higher education Pell grants, and wouldn’t slash research grants for universities coast to coast.

So how can families better prepare for college and retirement expenses? For education, 529 plans are probably preferable to Trump accounts. The investment choices are more flexible, withdrawals are tax-free at the federal level and sometimes at state levels if used for most education expenses, and there are no federal limits on contributions (contributions aren’t tax-deductible).

For retirement, advisers have been favoring Roth IRAs. Contributions are not tax-deductible, and this year can be made by couples filing jointly with taxable income up to $242,000 ($153,000 for singles) and are limited to $7,500 a year ($8,600 for those 50 and older). But withdrawals aren’t taxed if you’ve held the account for at least five years and you take the money out after you turn 59 1⁄2.

The bottom line, then, is this. Take the $1,000 if your child is eligible. As Rowling wisely advises, “Any time the government offers free money, you should take it.”

As for the rest, treat any claims offered by Trump account promoters as inherently suspect.