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Commentary

Baby Bonds Are Back

The idea isn't new, but it's gaining traction as a way to narrow the racial wealth gap.

Policymakers and economists have spent years tossing around an idea that could cut wealth inequality in half: giving money to babies.

Well, not exactly. The actual concept is called “baby bonds,” a policy that would see the government contribute to special accounts and invest funds for children that goes up based on household income.

In a sense, the proposal of baby bonds was a longtime coming and is the result of decades, or even centuries, of incremental policy decisions. 

Morningstar recently examined how baby bonds would help shrink the racial wealth gap by establishing long-term financial equity in the United States. 

According to the 2019 Survey of Consumer Finances, white households’ median wealth stood at $171,000 compared with $17,600 for Black households and $20,700 for Hispanic households.

Granted that these funds have time to reach full maturity, our researchers found that it could result in children from Black and Hispanic households more than tripling their expected net worth by the time they reach the age of 18 in many cases. This would allow them to have a head start on starting the first chapter of their adult lives, whether it be by paying for college, placing a down payment on their first home, or starting a business. 

In their currently proposed iteration, baby bonds emerged into the general zeitgeist in 2010, after Darrick Hamilton and William Darity published an article advocating for the idea. But the concept of the government setting aside funds to improve the financial standing of its own citizens isn’t new.

Whatever form of baby bonds we may see put before Congress in the coming months or years, policies like these have been proposed and implemented before. Here’s how the baby bonds concept has evolved over time.

The Birth of Baby Bonds
When the United States of America was still in its infancy in 1797, Thomas Paine, an England-born political theorist and supporter of American independence, proposed a plan that would see every citizen be given 15 pounds (around $1,800 today) on their 21st birthday, according to The Washington Post.

Baby Bonds Across the Pond
In the early 2000s, the U.K. government introduced the Child Trust Fund as a means for citizens to have some sort of savings at their disposal once they reached the age of 18. The policy was ultimately abolished in 2010 under a different administration, but Child Trust Funds were in place long enough to have an impact on any U.K. citizens born between Sept. 1, 2002, and Jan. 1, 2011, according to Bloomberg Wealth.

Much like baby bonds, the Child Trust Fund offered initial grants that were dependent on a family’s income and ranged from GBP 250 to GBP 500, accordingly. Additional contributions could then come from the child’s family or gain interest in stocks over time.

Now that it’s been 18 years for the first group of eligible citizens, the funds set aside in their youth are becoming available. In some cases, they’ll be able to gain access to as much as GBP 70,000 if their accounts were managed properly.

And unlike U.S. funds such as 529s, these Child Trust Funds aren’t specifically reserved for education or any other expense. They can be spent on whatever the account owner sees fit.

Baby Bonds U.S. Debut
Baby bonds have been a talking point in the U.S. Congress for more than a decade.

In 2006, Sen. Hilary Clinton (D-N.Y.) convened with the Congressional Black Caucus about the overall benefits of giving every baby in the U.S. a $500 bond at the time of birth. 

During her 2008 presidential bid, she showed even greater support by suggesting that the amount should be increased to $5,000, according to ABC News.

While Clinton would eventually step back from her baby bonds push, the idea has maintained a consistent presence in political circles ever since.

American Opportunities Accounts
In perhaps the most recognizable attempt to reinvigorate the baby bonds concept, Sen. Cory Booker (D-N.J.) and Rep. Ayanna Pressley (D-Mass.) have advocated for them on the national stage.

Under Booker and Pressley’s proposed plan, American Opportunities Accounts, every newborn would receive $1,000 in an account managed by the Treasury Department. From there, they would receive up to another $2,000 a year, with the higher totals going to children from families with the lowest income.

If the plan works as expected, children from families with the lowest household incomes could have nearly $50,000 waiting for them once they turn 18.

Baby Bonds for New Jersey
In September 2020, New Jersey Governor Phil Murphy proposed a new budget that included a baby bonds program for the state. Murphy’s plan would invest $1,000 into the account of every baby born to a family with an income of less than $131,000, according to NJ.com, which would amount to nearly 72,000 babies in 2021.

If approved, this would make New Jersey the first state to pass and implement the policy.

The reception and implementation of baby bonds has been a mixed bag up to this point, but learning from our past experiences could help this next attempt be more successful than its predecessors.