6750 USD per newborn, a good or bad idea?
Author: Daniël Asselbergs
January 8, 2021
The legendary billionaire hedge fund manager of Pershing Square Capital, most known for his short selling and his 2.6 billion dollar payout on credit swaps during the 2020 stock market crash, Bill Ackman along with a selection of business leaders and economists have started advocating for a plan that would give everybody a few thousand dollars in cash on the day they are born. According to Bill and his proponents this would essentially solve the retirement problem. It sounds absolutely absurd, however there is more merit to this story than one would initially suspect. Most advanced economies around the world today are dealing with ageing populations and declining birth rates. A future where the dependency ratio increased will make current pension schemes unable to cope with the increased pressure on the system. To solve this problem countries would either have to lower benefits or increase contributions. A more radical solution to this problem could be what is needed.
The age of retirement in most nations have been steadily increasing for the last few years, mostly out of necessity. Previously this wasn’t the case. Back when pension schemes were introduced there was a much lower life expectancy age while the retirement age was largely the same. As countries became richer the countries also increased the life expectancy of their inhabitants. It is well known that wealth is positively correlated with life expectancy. To combat this one could decrease the retirement benefits, this would however produce terrible social repercussions. The overall economy however wouldn’t suffer as much. Hong Kong would be a perfect example of this. The city is a beacon of wealth and prosperity across the world. Their elderly however live in cages because they can’t afford anything more.
Bill Ackman didn’t want to pay more tax , but he also didn’t want to have people starving. He thus proposed a plan where each newborn would get a few thousand dollars from the government, the sum would be higher or lower than 6750 USD depending on the average living costs. The money would consequently be inaccessible until the age of 65. This money would be invested into the stock market in a very diversified manner. Bill Ackman used an 8% yearly ROI, which is consistent with the historic average return. This way everyone would have a comfortable nest egg to retire on. He argues that giving newborns a few thousand is much cheaper than giving tens of thousand of dollars per retiree. Bill Ackman and his team calculated that the scheme would cost 150 billion a year for the United States, this is however much lower than the current expenditures for retirees.
The biggest advantage of this scheme is time. Giving newborns 6750 and investing that money would result in a nest egg of 1.25 million at the age of 65. They could use 92 thousand of this yearly without decreasing their value of their portfolio. Inflation would of course eat up some of these returns, resulting in roughly the same amount of benefits but for much less than we currently pay. The average yearly pension for developed nations is around 30.000 USD. If newborns would get this amount at once they would have over 5 million dollars at the age of 65. In this situation inflation would be less of an issue. Adopting such a plan would dramatically increase laborer morale, national unity and decrease the amount of heated debates surrounding inequality of wealth. To match this result a 25 year old would have to contribute a lump sum of 190 thousand to retire at the age of 65 with the same amount of wealth. One could see the dramatic effect compound interest has on an extra 25 years.
There are however major problems. One could argue that this scheme is expensive. Over the long run this scheme is cheaper that the current pension system. However the new pension system will be implemented alongside the current pension system, since the new pension system takes 90 years to be in full effect. The expenditures for the current generations would thus be very high, the current workers would have to support two pension schemes. This problem could be written down to making sacrifices for future generations but we all know that we are not really good at that. The more technical problem with this proposal is that this system relies heavily on the stock market. A short, however sharp, downturn in prices could result in a dramatically lowered nest egg for a recent retiree. Lower spending or longer employment could be the solution to this. Another argument used by opponents is that the data used to achieve a 8% return is based on the past performance of the stock market. Past performance is not an indication of future performance. A different argument is that the average person, who isn’t able to save for retirement, can’t successfully manage a portfolio of more than a million dollars without spending it all. Just look at the spending of retired sportsmen or lottery winners.
This plan thus seems more feasible after further investigation. The power of compound interest is also one of the reasons many countries have chosen for a pension scheme that is partially funded. This new scheme is of course fully funded. The plan is quite ambitious and it has to be seen how much traction this proposal gets within different government agencies. Every proposal, regardless of how impossible it is, is good for public acknowledgement that the current pension schemes will not work for the future.
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