This US politician just introduced a law that would give $5K to every US child to invest in the S&P 500, kickstart their savings — is the American Dream Accounts Act a good idea?

Addressing wealth inequality

With rising costs for education, housing, and health care, having a $25,000 financial cushion could help young adults make more informed choices about their future. It’s also a step toward leveling the playing field and promoting financial inclusion, giving even the most disadvantaged children a start on the path to financial security.

By establishing investment accounts from birth, the program emphasizes the power of compound interest and long-term investing. Young adults would be able to track the growth of their funds, potentially fostering an interest in financial planning and a greater understanding of how to manage money as they enter adulthood.

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Just one catch: It’s expensive

Phillips’ proposal lacks a clear funding mechanism, but it would likely draw on Social Security’s resources at a time when the safety net is already under pressure and headed toward insolvency in 2035.

"We already know the funding issues Social Security is approaching in the coming years, and adding to the administration a $5,000 fund per child born in the country would be a massive task, both in terms of money and manpower," University of Tennessee financial literacy instructor Alex Beene told Newsweek.

Then there’s market risk. While the S&P 500 has historically returned around 10% annually, it’s not guaranteed. Market volatility could affect the actual value of the funds by the time young adults can access them.

Meanwhile, not all children or their families have the knowledge or resources to make the most of these funds. While tracking investment performance and accessing funds through an app sounds practical, financial illiteracy or technology gaps could make it hard for many to embrace the proposal’s vision.

Politically dicey

While the American Dream Accounts Act has received attention and praise for its potential to bridge wealth gaps, its path through Congress is uncertain at best.

Many similar ideas have been proposed over the years only to fade in the legislative process, including Democratic Sen. Cory Booker’s American Opportunity Accounts Act, which aimed to provide every child in the U.S. with a $1,000 account followed by up to $2,000 annually depending on family income.

And in 2004, then-GOP Sen. Rick Santorum’s ASPIRE Act would have given each child a $500 deposit at birth, with additional contributions encouraged from family and friends.