Trump Accounts Promise Free Money. Is There a Catch?

0:00Donald Trump is rewriting the Washington rulebook and reshaping the global economy. If you're trying to connect the dots behind the headlines, Bloomberg's Trumponomics podcast is here to help. I'm Stephanie Flanders, head of government and economics at Bloomberg. Every week, I'll bring you a smart, focused conversation with reporters and experts from Washington, Wall Street and beyond. Listen to new episodes every Wednesday and follow Trumponomics wherever you listen. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy.

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1:20Bloomberg Audio Studios. Podcasts. Radio. News. Hey, it's Sarah. Today on the show, we're going to talk about the Trump administration's plan to give millions of babies savings accounts. But first, I want to tell you about a special new series we at Bloomberg have been working on called The Sixth Bureau, about a spy for China's elusive intelligence agency and how he got caught. I'm here in the studio with Drake Bennett, who covers tech, and Jordan Robertson, who covers cybersecurity, the hosts of the show. Hi. Hey there. Hey. Can you give me the one-sentence elevator pitch? What is this show about?

1:56Yeah, it's a wild story about a Chinese spy who ran operations all over the world to steal aviation trade secrets and eventually got caught and documented a lot of his life in a kind of diary that we wound up getting. This was someone working out of basically like MSS headquarters in China who was sort of masterminding one of these spy rings. And so it was just totally unprecedented to get this kind of thing. And we had never seen, Drake and I both covered China stories for quite some time. we had never seen a spy get arrested and leak all of this information. And neither had the U.S. government.

2:30I really can't wait to listen. Thank you guys both so much for joining me. And we're excited for the rest of the listeners to get to hear it too. Thank you. Thanks. The Sixth Bureau from The Big Take will be right here on our show tomorrow and every Friday for the next few weeks. And now here's today's episode. Dear America. If I start investing when I'm 16. Nine. Seven. It could change my future. Between all the advertisements for weight loss drugs and AI chatbots that aired during this year's Super Bowl, there was one commercial you might have blinked and missed. It was sponsored by a nonprofit called Invest America, promoting a new government initiative.

3:10This year, every American child gets an investment account. The administration is calling them 530A accounts, or Trump accounts. They're financial savings accounts that can't be touched until a child turns 18. Starting in July, parents of kids under 18 will be able to sign up. And kids born between 2025 and 2028 will get a seed deposit of$1 ,000 straight from the U.S. government. That's free money. Bloomberg reporter Ben Steverman didn't catch the ad live. I missed the Super Bowl this year, so I missed it. Entirely. Yeah, yeah, I just watched the movie instead. But Ben says the prime placement shows just how central the idea is to the administration's affordability messaging.

3:56I think that this is about their signaling for 2026, the election this year. We're not just a party and an administration focused on helping rich people. We want to help everyone. This raises questions like how much could these Trump accounts help the kids who get them and who stands to benefit most? They're the questions economist Derek Hamilton has interrogated as he weighs the program's promise and potential pitfalls. You know, some of the good news is there's an interest in how do we afford financial security in a wider way, but the delivery is really problematic.

4:37I'm Sarah Holder, and this is The Big Take from Bloomberg News. Today on the show, what is a Trump account? How does it work? And how could it impact the financial future of millions of American children?

4:56Tucked inside Trump's one big, beautiful bill, along with trillions of dollars of tax breaks, were$15 billion earmarked for a new program called Trump Accounts. The original name was actually MAGA accounts, and then they decided to change the name to Trump accounts as the bill was going through the process. And they actually changed a lot of the details about this as it was going through. It became less generous. I think they realized that it was going to be too expensive if they did what they were planning to do. So the programs changed a lot, but these are basically individual retirement accounts for babies.

5:29The money is locked up until they're 18, and then they become IRAs. Babies born between 2025 and 2028 will get a head start on saving with$1 ,000 from the U.S. government. The other thing that they're hoping people do is that they're hoping employers pitch in on behalf of their employees' kids. They're also hoping that philanthropists step up and they're hoping that parents contribute to their kids' accounts over time. And you could also imagine like grandma and grandpa like can contribute on behalf of the kid. So they're hoping that this$1 ,000 will become much more than$1 ,000 over time. How will that money be invested?

6:12The idea is it's going to be in an index fund invested in U.S. stocks. And the federal government has yet to announce who is going to manage that money and how exactly it's going to work. But the idea is it's supposed to be low-fee index funds of some sort. So hopefully this money is not eaten up by fees and that if the stock market does well, those gains will actually reach these kids. I can save for a house with a trampoline. Two trampolines. One of the real benefits of the idea of investing on behalf of a baby is that you have the power of compounding. You can put that money in the stock market and it could go up potentially 10 % a year.

6:54And that could grow the money into something substantial if you're able to save over time. You could get two trampolines. Maybe. These accounts will be administered by the U.S. Treasury and open for enrollment in July. But the administration is also in the process of picking firms to serve as trustees for these investments. According to Bloomberg reporting, Robinhood is one of the companies that the U.S. government is considering for a key role. All this is uncharted territory in terms of keeping track of so many like these accounts. It's going to be very, very complicated. and let's hope that the computer systems of the U.S.

7:31government are up for it. Launching a program at this scale may be uncharted territory, but the idea of the government helping children build wealth through investment accounts isn't new or unique to the U.S. The U.K. offers a similar program that it calls a child trust fund. And for years, there have been efforts at the federal and state level in the U.S. to offer parents something called baby bonds, a government-funded program first proposed by Derek Hamilton, who's a professor of economics and director of the New School's Institute on Race, Power, and Political Economy. In a nutshell, it is a trust account to democratize wealth.

8:11It affords everybody the opportunity to have a nest egg when they become a young adult so that they can invest in a vehicle to build wealth. Connecticut's been running a baby bonds program since 2023. Hamilton came up with the idea after seeing how access to an elite education shaped his own life path. When understanding differences across class, race, gender, etc., it often comes down to resources. The learnings was how can we better democratize that investment so that everyone would really be able to build the economic security and agency that comes along with wealth. And in your conception and proposal for baby bonds, how are those nest egg accounts funded?

8:54Federally funded in the ideal scenario, similar to Social Security. That's another linkage we can use when we think about baby bonds. We have something for us when we reach the twilight of our life. We have the federal government reserving the economic resource of a pension that's pretty much universally established. But we have nothing for young adults beginning a life cycle of trying to have economic security. What Hamilton is pitching is essentially a savings account created for babies by the federal government to give them a head start on financial security in their young adulthood. Sounds a lot like Trump accounts, right?

9:35But Hamilton says there are some key differences. Unlike baby bonds that are intended to provide everyone in a democratized way an opportunity to build wealth, the Trump account, sadly, in the delivery will enhance inequality in the long run.

9:56We get into criticisms of the program and do some math after the break.

10:04Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real, lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio.

10:46That's vanguard.com slash audio. All investing is subject to risk, Vanguard Marketing Corporation Distributor. Hello, I'm Stephen Carroll. I'm in Brussels, where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London. We're the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled, and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now.

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11:57One of the key selling points of Trump accounts is that they're universal. Any U.S. citizen can sign up. But that also means they're not designed to offer more advantages to families who have fewer resources. Derek Hamilton's baby bonds or other almost democratic proposals in places like Connecticut, a larger share of the money is set aside for poor kids. And that would help, he says, narrow inequality, narrow the racial wealth gap. The idea is that that would give poor kids the sort of the same start in life that richer kids get in terms of help from parents, help with down payments, help with college educations.

12:37implications. The idea being there are some kids who basically have a savings account built in when they're born because of the wealth of their parents. Right. I mean, they get a baby bond essentially because their parents are wealthy or their grandparents are wealthy or they just there's somebody in their network that they can rely on. Whereas the really the knock on Trump accounts is that this could potentially, depending on how this plays out, this could potentially be really a benefit for affluent families in some cases that some poor families might not even know exists and might not even learn, you know, remember to access and might not sign up for.

13:14Why is it a universal program instead of a means tested program? The Trump administration doesn't seem to want to think of this as purely for low income kids. They want to think of it as getting all Americans to save more money and put more money in the stock market especially and help the broad swath of the country benefit more from economic growth when the stock market goes up. Derek Hamilton points out that the program's universality could have downsides. If you literally gave everyone the same resource throughout society, you're effectively raising asset prices in a way that won't achieve what it is you're trying to achieve, which is to provide those that need it more to have greater access.

14:00And while everyone is eligible for the accounts, some families might have even more opportunities to grow their cash. Employers like JPMorgan Chase and BlackRock have already pledged to contribute on behalf of their workers' children. We haven't yet heard like McDonald's or Walmart or, you know, sort of the mass other employers step up. Philanthropists are expected to step up, too. At the Trump Account Summit in January, Trump touted a$6.25 billion investment from the billionaires Susan and Michael Dell, the founder of Dell Technologies. Stand up, Michael. What a great guy. The Dells hope to cede 25 million accounts for kids 10 and under who aren't already eligible for the government money, targeted in zip codes where the median income is below$150 ,000.

14:48Michael Dell's generosity is obvious, like$6 billion is a lot of money to give away. But when you spread that$6 billion over millions and millions of kids, you're talking about$250 each, which really just doesn't move the needle for a lot of kids. Beyond these questions of equity and impact, Ben says there's another big asterisk attached to these accounts. The tax treatment is less favorable than college savings accounts, 529 plans and other tools. the money that comes out of a Trump account at the end of the process is treated and taxed as ordinary income. So if some money was given on your behalf and then it grows, those investment gains are going to be treated as ordinary income to you and you have to be taxed on them.

15:37Whereas 529 college savings plans, usually the money is tax free if it's spent on a qualified expense like education. You also have to remember when people throw out the math on how much money this is going to eventually become. Don't forget about inflation. Even if this growth, if you got really lucky in the stock market and you left it in long enough and it became$20 ,000, which would be a real stretch. Remember, that's$20 ,000 in 25 years, not$20 ,000 now. So it's going to buy a lot less. A graphic on TrumpAccounts.gov says that if you open an account for your child today with just the$1 ,000 government deposit and make no further contributions, the account would hold$243 ,000 by the time the kid is 55 years old.

16:24But inflation really changes the math. I think you have to remember that 55 years is a really long time and that a lot can happen in that time frame. And so the stock market can do very well, but the dollar can also lose a lot of value. So you end up with a much smaller amount than you would really imagine. Yeah. What is$243 ,000 in 55 years from now? Inflationary terms. I was trying to do the math and it was like, if you look at how much inflation we've had in the last 55 years and you kind of blast it forward to the next 55 years, it's something like$30 ,000 now. That's good. But again, it's more than$1 ,000.

17:06When we're talking about a 55-year-old, we're talking about retirement expenses. One of the ideas of these programs is that they're going to help a 23-year-old get a good start in life and maybe be able to go to a vocational class or something like that that really jumpstarts them. If you're waiting until you're 55, there was a lot of other things that probably should have happened in the wealth building department in between. Right. I mean, and the other thing that we've touched on before is taxes, you know,$243 ,000 would also be taxed once you take it out, right? Right. And those taxes will be complicated, but these do not have the same tax advantages as some of the other programs that are out there.

17:44Financial advisors say, you know, like a 529 plan is probably a better investment for your kid's college if it's you putting the money. Right. So maybe sign up for the account, get the$1 ,000 and watch it grow. But adding more money to the account won't have the same effect as it would if you were contributing to a 529 account. Exactly. Even people who are skeptics of Trump accounts say, there's no doubt that if your baby is eligible for this, you should sign up and you should access this money. There's just no doubt. Like, that's free money for you. Now, should you save your own money in a Trump account?

18:22Maybe not. Like, actually, probably not, according to the financial advisors we've talked to. And again, maybe this is a first step, like maybe this is an area of bipartisan agreement going forward that there can be compromises on and people can work something out. Because it does seem like both parties understand the need to do something about wealth inequality. The question is, which of these solutions is really going to make a difference in an actual kid's life? Affordability has been a major concern for Americans in Trump's first year back in office. And it's top of mind for the administration heading into the 2026 midterm elections.

19:03Ben says Trump accounts are just one of many policies in Trump's one big, beautiful bill, pitched to working and middle class families. No tax on tips, no tax on overtime, a bigger senior deduction and the Trump accounts. I think that this is about their signaling for 2026, the election this year. We're not just a party and an administration focused on helping rich people. We want to help everyone. Could this move the needle on affordability? I guess I would just say, like, I don't think a thousand dollars for these millions of babies is really going to move the needle on wealth inequality in America.

19:41But it is nice that we're having this conversation. It's nice that we're like thinking about creative approaches to this problem and what might really move the needle going forward and how we might build on this and change it going forward and how we might get everybody saving potentially and working toward some kind of goal that narrows wealth inequality a little bit. we have a tax system that is actually very advantageous to wealthy people in this country. And we have lots of tax incentives in the law around retirement and 529 plans and other things that really are favorable to upper middle class people, too.

20:19And these Trump accounts come as there are broader cuts to the social safety net. I mean,$1 ,000 is potentially a month's utility bill for this cold winter. I mean, it's a good amount of money, but there's a lot of challenges that middle class and working class families are facing right now in terms of affordability. And this is in some ways, it's a little bit of a frustrating conversation because there's a lot of emphasis on this symbol of the Trump accounts when the reality behind the symbol is like a little bit smaller. Derek Hamilton doesn't see the 530A Trump accounts as the right solution to narrow inequality.

20:56But he does see potential in the symbol. You know, we often maintain or manage poverty rather than investing in the capabilities of those individuals with lower resources. So I hope that this ushers in a new genre of public policy where we flip the equation rather than trying to maintain people, we invest in them. So to the extent we consider baby bonds or 538 investments accounts in people's capabilities, that's a good thing.

21:33This is The Big Take from Bloomberg News. I'm Sarah Holder. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. If you like this episode, make sure to subscribe and review The Big Take wherever you listen to podcasts. It helps people find the show. Thanks for listening. We'll be back tomorrow.

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