- Wealth inequality poses a “black-swan-type” risk to investors and US capitalism, but the government can work to solve it, Pershing Square Capital founder Bill Ackman said in a letter to investors.
- The billionaire defended capitalism as “the best system for maximizing the size of the economic pie,” but noted that wage growth has “not kept pace” with wealth creation for the wealthiest Americans.
- The US could combat the disparity with mandatory investing accounts for every US-born child, Ackman said. If returns continue to average 8% per year, a $US6,750 investment at birth would yield more than $US1 million at retirement.
- The government could also mandate companies to set aside a portion of workers’ wages for a tax-free investment fund, similar to Australia’s successful pension system, Ackman added.
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Hedge fund manager Bill Ackman views wealth inequality in the US as a “black-swan-type” risk for investors, and sees two potential solutions for aiding lower- and middle-income Americans.
In a letter to Pershing Square Capital investors, the billionaire defended capitalism as “the best system for maximizing the size of the economic pie.” Yet long-stagnant wage growth for the majority of Americans presents “one of the principal problems” with the US economy, he added. If the disparity worsens, a growing share of Americans will push for radical changes to the system or look to overhaul it completely.
“Like those who rent rather than own their homes and thereby have no love lost for their landlords, Americans that have no ownership in the success of capitalism, and who are suffering economically, are more motivated to turn toward Socialism or other alternatives,” Ackman wrote.
It’s incumbent on those benefiting the most to close the wealth gap and improve capitalism for the rest, the billionaire said. One potential solution Ackman offered is the formation of a program that shares investing gains with those who can’t afford to enter the market.
For one, the government could fund investment accounts for every child born in the US. The accounts would invest in zero-fee stock index funds, compound tax-free, and only be tapped at retirement. If return rates continue to average 8% per year, a $US6,750 investment at birth could yield more than $US1 million by age 65, Ackman said. Such a program would cost the US $US26 billion per year should the birthrate hold steady, he added.
“Compounded returns over time are indeed one of the great wonders of the world, and every day we wait to address this issue, the problem looms larger,” the Pershing Square Capital manager wrote.
Another option involves a mandate for corporations to set aside a fixed share of workers’ salaries in a tax-free investment account for all workers. Funds could only be withdrawn at retirement. Australia’s superannuation system has already proven such programs can succeed, Ackman said. The country boasts the world’s fourth-largest pension and holds nearly $US2.7 trillion since its founding in 1991.
Mandatory investing accounts would help a larger share of Americans save for retirement, but they could also serve as an important lesson in investing, the billionaire said. The barrier to entry for retail investors has never been lower, with trading fees slashed in recent years and brokerages competing with various incentives to pull in new customers.
A government-led push for equities investing accounts could “encourage greater financial literacy” and share the stock market’s gains with more of the US population, Ackman said.
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