Baby bonds

Baby bonds are a suggested strategy to increase wealth by providing young adults with financial assets to pursue education, business ventures, or home ownership (Cassidy 2019). Available evidence suggests universal baby bonds may increase financial assets, especially for individuals with low levels of wealth, and reduce the racial wealth divide (Zewde 2020, Mitchell 2020). Additional evidence is needed to confirm effects.

Wealth distribution in the U.S. is inequitable; white families have 10 times more wealth than Black families and 8 times the wealth of Latino families (Zewde 2020). Model simulations suggest baby bond policies based on families’ net worth or income levels can increase assets for individuals and families at the bottom and middle of the wealth distribution in the U.S. (Zewde 2020, Mitchell 2020). Families on the low end and the bottom of the wealth distribution are likely to benefit the most from baby bonds, especially when income or wealth status is accounted for during baby bond investment allocations (Zewde 2020, Mitchell 2020). Available analysis suggests baby bonds can reduce the racial wealth divide (Zewde 2020, Mitchell 2020), and that all racial groups are better off at the median with baby bond policies that increase net assets for all young adults (Zewde 2020).

Baby bonds increase investment in future generations, help reduce the multigenerational effects of poverty, improve financial stability, and can support community wealth building efforts (Cassidy 2019). Child development accounts, a similar type of financial intervention although with smaller seed amounts and an education focus, may influence positive financial behaviors and increase savings amounts (Birkenmaier 2021), and help reduce disparities in educational attainment (Friedline 2013a).

Experts suggest the most successful baby bond policies should make it easy to develop long-term investing plans after a child turns 18, allow recipients to transition baby bonds to Roth IRAs, establish fiduciary protections, and support combining baby bonds with 529 college savings plans (Mitchell 2020). A universal baby bond proposal may be politically feasible, especially with increased diversity among voters, support for universal basic wealth, and awareness of growing wealth inequality (Cassidy 2019). Experts suggest a comprehensive package of strategies that includes baby bonds, reparations policies, and efforts to build economic security is needed to eliminate the racial wealth divide (Cassidy 2019).

Experts suggest that addressing equity and closing the racial wealth divide would add more than $2 trillion in GDP annually, increasing economic development and improving the health of the economy, which is an area of common ground for political parties (Cassidy 2019). In general, making equitable adjustments to existing tax subsidies that disproportionately benefit the highest income earners could generate enough savings to pay for baby bonds. In 2013, 70% of the $385 billion tax expenditure on asset-development subsidies (e.g. home mortgage interest deductions) accrued to the highest 20% of income earners (Urban-Kijakazi 2020). Baby bond proposals range in cost from $60 billion to $82 billion per year, or less than 10 percent of annual social security costs (Cassidy 2019, Urban-Kijakazi 2020).

Baby bonds are a suggested strategy to reduce disparities in wealth accumulation between people with low wealth and income levels and those with higher ones (Cassidy 2019). Available evidence suggests universal baby bonds have greater effects for people with low wealth and income levels and may help reduce the racial wealth divide (Zewde 2020, Mitchell 2020). The racial wealth divide, also called the racial wealth gap, refers to financial disparities between families from different racial, ethnic, or Native backgrounds. In the highest income quintile, white households have more than three times the wealth of Black households. In the lowest income quintile, white households have about 400 times the wealth of Black households (Collins 2019). Available model simulations and analyses of baby bond policies suggest they can increase assets for individuals and families at the bottom and middle of the wealth distribution in the U.S., which is disproportionately comprised of Black and Latino families (Zewde 2020, Mitchell 2020). Available analysis suggests that all racial groups are better off at the median with universal baby bond policies (Zewde 2020). Closing the racial wealth divide would also increase annual GDP and improve the national economy (Cassidy 2019).

Baby bonds may reduce the economic consequences of mass incarceration. Mass incarceration disproportionately affects people of color and has negative effects on wealth building opportunities for multiple generations (Cassidy 2019). Child development accounts, a financial intervention similar to baby bonds, appear to increase savings amounts (Birkenmaier 2021) and reduce disparities in educational attainment among recipients (Friedline 2013a).

The racial wealth divide began with the forced relocation and genocide of Native communities by settlers and federal government policy. It continued with the exploitation of slave labor that fueled the U.S. economy for hundreds of years (Collins 2019). This generated wealth for white people at the expense of people of color. After emancipation, people of color who accumulated some wealth repeatedly had it stripped from them through government action or violence. Laws, policies, institutional practices, and economic arrangements constitute the structural barriers that create unequal conditions that can’t be overcome by individual efforts alone. Employment and wage discrimination entrench the divide, as do discriminatory tax codes, credit exclusion, and loan denial. Residential segregation supported by discriminatory housing, lending, and exclusionary zoning policies (TCF-Quick 2019, Kaplan 2007) increases racial disparities in housing stability, homeownership, and property values (PRRAC-Haberle 2021). For example, in 1934, the Federal Housing Administration (FHA) was established with the premise that racial segregation protected property values for white neighborhoods. The FHA’s redlining policies denied people of color access to government-insured mortgages and labeled homes in neighborhoods where people of color lived as uninsurable, thereby guaranteeing that property values in those neighborhoods would be less than those in white neighborhoods (Kaplan 2007).

Many structural barriers that maintain the wealth divide remain. For example, the 2008 housing crisis revealed racial disparities in housing and lending and how Black homeowners and neighborhoods were targeted for predatory loans (PRRAC-Haberle 2021, Coates 2014, Kaplan 2007). Even with regulation after the housing crisis, homeowners with lower credit scores and smaller down payments continue to pay higher interest rates (PRRAC-Haberle 2021). In the U.S., William Darity and Darrick Hamilton were among the leading scholars who developed the idea of baby bonds as a forward-looking strategy to close the racial wealth divide over time when direct reparations payments for past actions were not politically feasible. Politicians began to propose baby bond policies in 2007, though a national policy has not been established as of 2022 (Cassidy 2019, S 222).

• What opportunities for a baby bond program exist at the local or state level? How can stakeholders, including program participants and their caregivers, inform the design, adoption, and implementation of the program?
• Who would benefit from a baby bond program in your community? How can the program be designed so individuals historically excluded from wealth building opportunities benefit the most?
• What initial seed amount should be invested so the program is effective at closing the racial wealth divide? How can the program allocate additional contributions so individuals from households with minimal wealth benefit the most?
• What are the rules and requirements for recipients to access and use their accounts? How do the rules create flexibility so individuals can invest in a variety of wealth building activities (e.g. college education, buying a home, saving for retirement, etc.)?
• What is the most effective narrative to build and sustain public will and support for Baby bonds across groups, geography, politics?

As of 2021, Connecticut and Washington, D.C. have adopted baby bond policies. Connecticut will invest $3,200 in a baby bond for every Connecticut baby born after July 1, 2021 whose birth is covered under their state Medicaid program (Prosperity Now-CT baby bonds). In Washington, D.C., the Council of the District of Columbia, is about to implement a baby bond policy. The policy plans to create a trust fund for each new child born after October 1, 2021 to families that are income eligible. These baby bonds will be seeded initially with $500, and annual additional investments up to $1,000 will be paid each year that parent income is below the established ceiling (DC Council-Baby bond). Both policies allow recipients to access funds once they turn 18 and to use funds for education, home ownership, or business ventures. Connecticut requires funds to be accessed before age 30 (Prosperity Now-CT baby bonds).

At the federal level, Senator Cory Booker of New Jersey and Representative Ayanna Pressley of Massachusetts introduced the American Opportunity Accounts Act in February 2021, and re-introduced it in 2023 (HR 1041). Prosperity Now supported Sen. Booker’s staff with the development of the act and offers information and resources on how to take action (Prosperity Now-Baby bonds).

The Ho-Chunk Nation has been operating a baby bond-style program in Wisconsin, the Child Trust Fund Program, since 1992. It is funded by the revenues from the tribe’s casinos and disburses funds to participants when they are 18 as long as they are at least 25% Ho-Chunk and have graduated from high school. Payouts have varied over the years as the casino revenue has increased, and they do not restrict what type of expenses the funds can be used for (PBS-Baker 2021).

‡ Resources with a focus on equity.

Prosperity Now-Baby bonds^‡ - Prosperity Now. Championing baby bonds: Baby bonds could help close the racial wealth divide.

Urban-State of Baby Bonds - Brown M, Biu O, Harvey C, Shanks T. The state of baby bonds. Washington, D.C.: Urban Institute; 2023.

* Journal subscription may be required for access.

Birkenmaier 2021 - Birkenmaier J, Kim Y, Maynard B. Financial outcomes of interventions to improve financial capability through children’s development accounts: A systematic review. Journal of the Society for Social Work and Research. 2021.

Cassidy 2019 - Cassidy C, Heydemann R, Price A, Unah N, Darity WA Jr. Baby bonds: A universal path to ensure the next generation has the capital to thrive. Duke University, Samuel Dubois Cook Center on Social Equity and Insight Center for Community Economic Development; 2019.

Coates 2014 - Coates T-N. The case for reparations. The Atlantic. 2014.

Collins 2019 - Collins C, Hamilton D, Asante-Muhammad D, Hoxie J. Ten solutions to bridge the racial wealth divide. Washington, D.C.: Institute for Policy Studies; 2019.

DC Council-Baby bond - Council of the District of Columbia. Baby bond program.

Friedline 2013a* - Friedline T, Elliott W, Nam I. Small-dollar children's saving accounts and children's college outcomes by race. Children and Youth Services Review. 2013;35(3):548-559.

HR 1041 - 118th Congress 2023-2024. House of Representatives (HR) 1041: American Opportunity Accounts Act.

Kaplan 2007* - Kaplan J, Valls A. Housing discrimination as a basis for Black reparations. Public Affairs Quarterly. 2007;21(3):255-273.

Mitchell 2020* - Mitchell L, Szapiro A. Baby bonds: Income-based program designs show promise for closing the racial wealth gap. Chicago: Morningstar, Inc; 2020.

PBS-Baker 2021 - Baker B, Wang Z. How could 'baby bonds' address Wisconsin's racial wealth gap? PBS Wisconsin. 2021.

Prosperity Now-Baby bonds - Prosperity Now. Championing baby bonds: Baby bonds could help close the racial wealth divide.

Prosperity Now-CT baby bonds - Gaiter D. Prosperity Now. Connecticut’s baby bond program.

PRRAC-Haberle 2021 - Haberle M, House S, eds. Racial justice in housing finance: A series on new directions. Washington, D.C.: Poverty & Race Research Action Council (PRRAC); 2021.

S 222 - 117th Congress 2021-2022. Senate (S) 222: American Opportunity Accounts Act.

TCF-Quick 2019 - Quick K, Kahlenberg RD. Attacking the Black-white opportunity gap that comes from residential segregation. Washington, D.C.: The Century Foundation; 2019.

Urban-Kijakazi 2020 - Kijakazi K, Carther A. How baby bonds could help Americans start adulthood strong and narrow the racial wealth gap. Washington, D.C.: Urban Institute; 2020.

WI Statute 20.144 - Wisconsin State Legislature. WI Statute 20.144: Baby bond program.

Zewde 2020 - Zewde N. Universal baby bonds reduce Black-white wealth inequality, progressively raise net worth of all young adults. Review of Black Political Economy. 2020;47(1):3-19.