Can Baby Bonds Fix Intergenerational Wealth Inequality?

Investing News

During his 2019 presidential bid, Senator Cory Booker (D-N.J.) put forward some fairly radical plans. As part of his keystone message—and attempt to close the intergenerational wealth gap—he proposed that the federal government put money aside for every child born in the country, and keep adding to this fund until each of them reached adulthood. These funds became known as “baby bonds,” which, like the concept of a universal basic income, aim to address income and racial disparities in the U.S.

Key Takeaways

  • In his bid for the presidency in 2019, Senator Cory Booker proposed that the federal government set aside money, dubbed “baby bonds,” for every child born in the U.S. and contribute to it over time.
  • The goal of baby bonds is to provide children of poor families with a financial boost as they reach adulthood and to end the cycle of poverty that ensnares many of these families.
  • The amount the government would contribute would depend on families’ income, levels of wealth, their race, and their ethnicity, with Black and Latinx families receiving more than White families.

The Proposals

Back in 2019, Senator Cory Booker ran for the Democratic presidential nomination in the primaries, and made ending intergenerational poverty the key message of his campaign. Among his proposals was a novel one—that the federal government would start a fund for every child born in America, and contribute to it every year until they reached adulthood. This fund, according to analysis from Booker’s team, would eventually provide almost $50,000 for the poorest young people in America to pay for college tuition.

These funds quickly became known as “baby bonds.”

Though the proposal was seen as radical by many Republicans, in reality, similar ideas have been around for centuries. In 1797, Thomas Paine suggested that the government provide 15 pounds (now about $1,800) to every American citizen when they reached the age of majority. The United Kingdom actually launched a program in 2005 in which some children received vouchers worth 250 British pounds, but the government stopped contributing to it after the great recession in 2010. A long-standing proposal by Duke University suggests that similar bonds, in this case worth up to $60,000, could make a real difference in fighting poverty in the U.S. Booker’s proposals fall somewhere in the middle of these varied plans.

The central idea behind these funds—whether they are called baby bonds or not—is to provide the children of poor families with a financial boost as they reach adulthood and to end the cycle of poverty that many poor families have been stuck in for decades (if not centuries).

Before looking at whether they might be able to accomplish such a task, however, it’s worth clarifying what baby bonds mean in this context.

Baby bonds in this case can cause confusion because they are not what are normally referred to as baby bonds—that is, bonds with a low face value. If you take a look at the definition of a bond, you’ll notice something equally strange: that baby bonds may not be bonds at all. They may be better understood as a form of trust fund, similar to those many wealthy children inherit when they reach adulthood. The difference here is that the federal government is the major contributor.

Addressing Wealth Inequality

Although many similar “baby bond” proposals exist, Senator Booker’s recent proposals are among the most detailed, so it makes sense to use them to explain the principles of the idea.

In theory, the idea behind baby bonds is simple. A $1,000 bonded savings account would be given to every child born in the U.S. (or, presumably, to U.S. citizens born abroad). The federal government would then contribute up to $2,000 to this savings account every year. The account would be inaccessible until the child turned 18, at which point federal contributions would also cease.

The amount of these contributions would vary depending on the income of the child’s family—those from families with lower incomes would receive more than those whose families have higher incomes. But when compounded through interest the accounts could eventually grow to a significant sum. The figures published by Booker’s office also suggest that there would be significant differences in the sum available to families with different levels of wealth, and between those of different races and ethnicities. Given the wealth of various groups, Black and Latinx children would collect nearly twice the amount that White children would, on average.

By age 18, figures from Senator Booker’s office indicate, the poorest children would have about $46,200 in their accounts, while the wealthiest would have about $1,700.

It is this last element of the proposal—the difference in the amount given to rich and poor, and to families of different backgrounds—that makes it attractive to Booker and other liberals. Proposals such as baby bonds can, they claim, make a major contribution toward ending the gap between rich and poor in America.

Pros and Cons of Baby Bonds

Pros

  • Baby bonds could help increase entrepreneurship and home ownership.

  • Youth from poor backgrounds would have the means to attend college

  • Redistributing wealth could have huge beneficial impacts on both individuals and society.

Cons

  • Baby bonds would be extremely expensive—$60 billion, according to Senator Booker’s estimate.

  • Critics claim that the accounts would act as a disincentive to recipients to save on their own or to get an education.

  • Tax rates on investment income and inherited assets and estates would need to be raised to pay for the accounts.

Research has repeatedly shown that there is a striking gap between the wealth of White families and that of families of other backgrounds. It’s important to note that although few White families feel rich—and very few have more than $1 million in liquid assets—on average, White families are far richer than others. Overall, Black families have only a fraction of the net worth of White families. The median net worth for White 65–74-year-olds, for example, is $302,500, whereas for Blacks in this age group the median net worth is $46,890, according to the Brookings Institution.

This gap is reinforced and deepened by the transfer of wealth, as White families are three times as likely to receive an inheritance as Black families, according to a 2018 study by the Center on Poverty and Social Policy at Columbia University.

Those who support programs like baby bonds argue that redistributing some of this wealth would have huge beneficial impacts, not just on individuals but on society as a whole. Young people from poor backgrounds, they argue, are far less likely to go to college, and far more likely to become dependent on state and federal benefits. A cash infusion, at a critical juncture in their life, could increase entrepreneurship and rates of homeownership, and reduce the average level of college debt.

Critics of baby bonds say it would be extremely expensive—costing up to $60 billion, according to Booker’s own figures. Some have also argued that receiving funding from the federal government might actually decrease the motivation of poor young people. “If you are a child receiving a baby bond, you might have less incentive to save, less incentive to get an education, knowing that this account is sitting there,” Rachel Greszler, a research fellow in economics at the Heritage Foundation, told The Washington Post. Others argue that there is little evidence that this is true.

In fact, many argue that the baby bond program doesn’t go far enough. Research done by the same study at Columbia University showed that even in the most “extreme” versions of the program, it would do little to address structural wealth inequality in the U.S. The top 10% of citizens would still own much more than the bottom 90%.

The Bottom Line

Now that Senator Booker’s presidential run is long over, the term “baby bond” is slowly fading from the national conversation. It’s important to recognize, though, that this is merely one version of an idea—universal basic income—that has been around for decades, and will likely reappear in American political rhetoric for some time to come.

Another popular form of universal basic income was Andrew Yang’s Freedom Dividend. As part of Yang’s 2020 presidential campaign, he pledged to implement a $1,000-per-month payment to each American over age 18, regardless of income or employment status.

It’s also worth noting that even though a federal “baby bonds” scheme seems radical to many, there are state-level precedents across the country. Residents of Alaska, for instance, receive regular dividends from the Alaska Permanent Fund, which is funded by payments made by oil companies drilling on state land. In 2020 each resident received $992 from the fund.