Carried Interest – An Elixir for Retirement, Population Growth & a Happy Life?

 

Many years ago, a friend of ours had a conversation with his 11 year old son (give or take a year). He told his son that his responsibility was to be a “basic” parent and he would happily fulfill it. But he added, he could also be a “premium” parent. The son had accompanied his father on trips to Disney World, Epcot and stayed in Marriotts & Hyatts using the great American invention called Frequent Flier Rewards. So the young son was well aware of the distinction between a premium membership & a basic membership.

That enabled the father to explain to his son that to justify being a “premium parent”, he would need an equity stake in the son’s future, much like the stake Venture Capital Firms take in funding start ups. The son did ask whether, when he grew up, he could simply pay back the father the monies invested in the son. The father asked whether start ups can only pay back Venture Capital Firms the invested capital and not the returns on that capital. The father then went on to explain that the son would keep benefiting from the father’s help because of the father’s “carried interest” in the financial & career growth of the son. 

The son saw the benefit and after some discussion they came to an agreement – the son agreed to pay the father 50% of his after-tax compensation for up to 10 years beginning with his first professional job after college. And they signed a one-page agreement to that effect.

As we have been told, the father did fulfill all the requirements of a “premium parent”. The son stayed in an elite private school in Manhattan through out high school; the father introduced him to Golf and took him to a well known Golf Academy to improve the son’s skills. During 3-day holidays & vacations, the father took his son to play at the top 20 public golf courses in America. The father also helped the son in school work whenever the son needed it.

The combination of good scores and passion for golf enabled the son to attend a first-tier Ivy League college. As a “premium” parent, the father paid the entire four-year tuition with room & board. You would think the father made a good trade, right? The 50% carried interest on the post-tax compensation of his son for 10 years would be a nice payback to the father, right?

Wrong. Because the son had come to know that the agreement he had signed with his father was both invalid and unenforceable because the son was a minor when he had signed it. So the son dismissed the entire agreement as a funny joke. What could the poor father do? He tried to explain how the son was morally bound and how millions of dollars are exchanged on Wall Street via verbal trades. That fell on deaf ears.

The father now wishes his agreement had been governed by the laws of Taiwan instead of the laws of America. Because a recent ruling by the Supreme Court of Taiwan ordered a Dentist son to pay his elderly mother the sum of 1 million dollars in fulfillment of the agreement signed by him with his mother. That agreement stipulated that the son was to take care of his mother in exchange for the mother paying for the son’s Dentistry education.

This clear contrast demonstrates a lacuna in American law & social practice.

Historical Practices vs. Today’s Reality

Remember store signs through out America that said “XXX & son/sons”? Those were the premium parents of those days. Fathers groomed their sons in their businesses both to give sons employment & to take over when the fathers retired. This was true whether the profession was blue collar or white collar. The win-win relationship between parents & children made parents want to have more children. In contrast, sons of  basic parents had to struggle to find a paying job.

Today the reality is very different. Children have become a cost stream for parents instead of a revenue stream. Just a generation ago, parents bid their kids goodbye when they turned 18. Parents paying for college education for their kids was rare. Those were very premium parents indeed. But even they didn’t get any carried interest in future incomes of their children. No wonder parents are now opting to have fewer children. It is better to have 1-2 kids instead of 4-5 because you can give 1-2 kids a higher quality upbringing & education for a better start to their lives.

But that is proving bad for both parents and for societies. Parents with 1-2 children have greater worries & needs in their retirement & old age than parents with 4-5 children for obvious economic & logistical reasons. A society that produces less children sees its future declining into eventual non-existence like Japan or faces the need to bring in higher levels of immigration that creates severe social strains. And in both cases, societies can look forward to severe cash crunch from entitlement costs of older retirees.

More “Premium Parenting” with Defined “Carried Interest”?

Consider a simple modification of the approach used by our “premium parent” friend above. Let us mandate say, a 10% carried interest for parents in future-after-tax-incomes of every child of theirs as long as they fulfill the requirements of being a basic parent? Assuming average American income of $18,000, parents of a working age child get $1,800 per year as carried interest, while parents of 4 working age children will get $7,200 per year as carried interest.

The benefits for parents would rise fast as the number & income of their children rises. Consider the “carried interest” of a couple from 2 children working in a Wall Street firm – with average after tax compensation of about $150,000 in the first 3 years of work, the annual “carried interest” income of the couple becomes $30,000, even at the basic parenting level of 10%. For a couple with 4 such children, the “carried interest” income becomes $60,000 which is greater than today’s retirement income of over 90% of Americans.

Now assume a higher rate of “carried interest” of 25% for parents who qualify for “gold premium” category based on the expenses incurred & help provided to their children. The annual “carried interest” income at this 25% level becomes a cool $75,000. And what about a couple with 4 such children – a very cool $150,000 annual after tax carried interest income.

Just think. What if the children become highly compensated Traders, Bankers, or TV anchors with over $1 million in after tax income? Just 2 such children can generate $500,000 “carried interest” annual income for the parents. And having 4 such children would generate $1 million annual “carried interest” income for parents. That could start a competition to have more & more children, couldn’t it?

Clearly the definitions of “basic” and “premium” parenting have to be defined and appropriate percentages of “carried interest” have to be calculated. But that would be easy for America. Doesn’t every reward program already have Platinum, Gold, Silver and Basic levels?

Such a program would also have benefit reduction penalties for say divorce of parents, sub-basic level parenting based on addiction, crime etc. Parents can also be upgraded based on additional benefits they provide to their children such as babysitting of grandchildren, helping in their education etc. But all that is highly manageable.

Such a “carried interest” for parents for basic to premium levels of parenting can go a long way in making children income-positive for parents. This will provide society far reaching benefits from higher retirement incomes to decrease in entitlement costs to the ultimate goal of increasing the numerical growth of society. 

A simple first step could be to enable a child, say entering high school, to negotiate & enter into a binding “carried interest” agreement with the parents, aided of course by a lawyer & another family member. How simple & fair would that be for both parents & children?

But some would raise bogus questions about morality, wouldn’t they? Surely, they have heard of the old but true & deep phrase about the child being the father of man, haven’t they? We have already discussed the social & economic aspects of such “carried interest”. So now let us venture into comedy with a serious touch and listen to (specifically from 03:47 to 4:06):

Man was made to help support his children, which is the right & proper thing to do; but with a little bit of luck, with a little bit of luck, they will go out & start supporting you

 

And how did this man describe such a state? He said “the sun is shining on Alfred P. Doolittle“. Remember how the renowned Professor Henry Higgins described Mr. Doolittle? The professor called him “ a philosophical genius of the first water” and asked his manager to write to an American millionaire about  “Mr. Alfred P. Doolittle, a common dustman, one of the most original moralists in England“.

Our friend, the self-described “premium parent” above, doesn’t want an annuity like the one Mr. Doolittle received due to the Professor’s recommendation. He probably just wants the “carried interest” amount agreed to in his agreement with his son.

What do we want? Recognition of the innovative moralism & social ethics of our friend in defining new ethical, moral and hopefully soon to be legal concepts of “premium” parent and “Carried Interest” of & due to the parents from their children.

This “carried interest” concept can indeed be an elixir for many problems in our society – retirement crisis, entitlement costs & population decline. And it would bring Happy days back again for parents.

Could we wish for any better gift for fathers on this Father’s Day?

 

 

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