Baby bonds

Governments across the world have undertaken various initiatives to get children to effectively start saving when young (or more their parents and relatives to start saving for them when they are children). In the UK, we previously had “Child Trust Funds” between 2002 and 2011 and currently have the “Junior ISA” available which allows children under the age of 18 to save up to £9,000 per annum in either cash or stocks.

The USA has just introduced so called “Trump Accounts” to allow saving by children in the same fashion with the added benefit that the government will add $1,000 to every account created and thereafter parents and relatives will be able to contribute further funds.

Intriguingly, Scott Bessent, the US Treasury Secretary, suggested that such “Trump Accounts” could, if they were successful, eventually replace the need for Social Security (the US equivalent of the state pension).

Conceptually this is obviously sound. If all US citizens have an account of their own at retirement, which was established at birth and paid into whilst they were children, that was of sufficient size to fund their retirement there would indeed be no need for Social Security.

There is obviously a significant benefit in starting to save young due to the power of compound interest.   But is it realistic to assume that normal citizens could accumulate such a fund in an account based on childhood saving?

To test the proposition, we are going to invent a fictional type of similar product in the UK that we will call “Starmer Accounts”. Rather than $1,000 we will contribute £1,000 at birth from the UK Government. With the number of births in the UK numbering around 600,000 such a policy would cost the UK Government around £600 million per annum.   A bargain if these people never required a state pension.

We need to be cautious about the amount of saving that relatives can thereafter contribute to each child’s account given that Mr Bessent is suggesting it can replace the state pension which is relied on by the lower paid in retirement. Let us imagine then that, for each child, the parents and relatives can save a further £10 a week for the child, increasing in line with inflation, from birth till they reach age 18.

How much will they have in their “Starmer Account” at age 70 as a multiple of the expected basic state pension at that time?

The full rate state pension is currently £230.25 per week or £11,973 per annum and is expected currently to increase at the higher of wages, prices and 2.5% each year (the “triple lock”).

Allowing for standard actuarial assumptions we would see that a “Starmer Account” solely funded by these contributions would amount to around 8 ½ years of the expected basic state pension on retirement at age 70. Clearly this would be inadequate, given a life expectation for such a person post-70, of at least 15 years to replace in full the basic state pension.

However, the impact of the “triple lock” is very significant. Increasing the state pension at the higher of wages, prices and 2.5% each year is often seen as overly generous and unsustainable in the long term. If the state pension were to grow instead only in line with inflation there would be nearly 17 years of state pension within the “Starmer Account” at age 70.

Therefore, it is clearly not beyond the realms of possibility that relatively modest savings made on behalf of a child by the government and their relatives before the age of 18 could, with the magic of compound interest, fund a pension in retirement relatively close to the state pension in the event that the “triple lock” does not continue to be applied for the next 70 years.

However, the extremely long time period in question means that the outcome for individuals will be highly variable and sensitive to long term returns.   Our base case, assuming the “triple lock” continues is that the “Starmer Account” will hold 8 ½ years of the expected basic state pension on retirement at age 70.   If returns were 1% per annum higher than we have assumed this outcome would be just over 15 years, and if returns were 1% lower then this would be less than 5 years.

Whilst “Starmer Accounts” do not exist and there is no free £1,000 from the government available, there are Junior ISAs available that could be used by parents and relatives to build up such a fund. Starting to save early on behalf of your children (or grandchildren) is, due to the power of compound interest, likely to prove beneficial.

However, a Junior ISA becomes the property of the child immediately on age 18 at which point they can withdraw the money and spend it as they wish such that such efforts on behalf of children are unlikely to result in pensions in 70 years’ time.

Will the state pension be replaced by “Starmer Accounts”? It seems unlikely given the requirement for parental contributions to make the sums work. If the whole account was funded by the government, the initial contribution at birth would have to be raised sevenfold and the annual cost would be over £4 billion in the first year.

Mr Bessent’s musings on Social Security are not without total foundation but we do not expect that state pensions will be replaced by childhood saving any time soon.

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References:

Junior Individual Savings Accounts (ISA): Overview - GOV.UK

Child Trust Fund: Overview - GOV.UK

Births in England and Wales - Office for National Statistics

Benefit and pension rates 2025 to 2026 - GOV.UK

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