This report is part of a series. Learn more about how federal baby bonds policy could impact Atlanta, Baltimore, Boston, and Oakland by reviewing modeling specific to those cities and learning what young adults and city leaders had to say about the potential impact in their communities.

For several years, policymakers have had a growing interest in policies that promote shared prosperity for all American families. There has been particular interest in policies that build wealth at early stages of life, so that wealth has the opportunity to benefit from markets and compound over time. Baby bonds—trusts set up and funded by the government when every child is born and managed by the government until the child reaches adulthood—are one example of an early-life wealth building policy that would provide all 18-year-old recipients with access to funds for wealth-building activities, such as attending college, purchasing a home, or starting a small business. 

This research is one of the first of its kind to project the impact that a federal baby bonds program would have nationally on family wealth, student loan, home equity, and retirement savings across the life course of individuals.

Why This Matters

White families have $1 million more in wealth, on average, than Black and Hispanic families, which leads to differences in access to wealth-building opportunities—such as the ability to attend college, start a business, or buy a home—by race and ethnicity. The racial wealth gap is too large for individual families to make up for with their earnings. In 2010, Dr. Darrick Hamilton and Dr. William Darity Jr. proposed the idea of baby bonds as a way to close this gap. Since then, although variations of this initial idea have been proposed on a federal, state, and local level, only a few studies have estimated the impact a universal and income-progressive baby bonds policy would have on wealth, and none have reviewed its impact on a wider set of outcomes, like student loan debt and home equity. 

We modeled the impacts of a national baby bonds program using Urban’s Dynamic Simulation of Income Model (DYNASIM), using the baby bond structure proposed in the American Opportunity Accounts Act (AOAA). This program would invest $1,000 into baby bonds accounts for each newborn. The accounts would be added to annually with contributions based on family income, with a maximum annual contribution of $2,000 for children from the lowest income families. Our simulation shows what would happen if the AOAA were implemented in 2024, such that the first cohort of children would gain access to their accounts when they turn 18 in 2042.

Key Findings

Our research provides insights into what impact a federal baby bonds proposal would have on key wealth outcomes like student loan debt, homeownership, and retirement savings for 2024–28 birth cohorts.

• If the American Opportunity Accounts Act—which would create a federal baby bonds program—were passed and implemented in 2024, all American families with children born between 2024 and 2048 would experience an increase in wealth. Black and Hispanic families would benefit more, as they are disproportionately concentrated among the lowest income families. We estimate the average baby bond account balance at 18 to be $26,000 for Black people, $27,000 for Hispanic people, and $18,000 for white people.
• In addition to a universal increase in wealth for American families, baby bonds would lead to a reduction in the racial-ethnic wealth gap. Without baby bonds, we project the median white family would have $300,000 in financial wealth in 2042–46, while the median Black family would have $126,000 and the median Hispanic family $125,000. With baby bonds, the median white family wealth increased slightly, to $310,000, while the median wealth for Black and Hispanic families increased more significantly, to $148,000 and $165,000, respectively. That represents a decrease in the wealth gap: Without baby bonds, white families have 2.4 times the wealth of the median Black and Hispanic families, but with baby bonds, white families have 2.1 times the median wealth of Black families and 1.9 times the median wealth of Hispanic families.
• Baby bonds would decrease the share of people that take on student loans and would reduce the total amount of debt borrowed by student loan holders by age 45. The greatest impacts would be among loans for Black and Hispanic people. Most significantly, without baby bonds, 58 percent of Hispanic women took on student debt; after baby bonds, that number fell to 36 percent. The biggest impact by value is for Black men, who took out an average of $31,000 in student debt before baby bonds; this amount falls to $19,000 with baby bonds.
• Baby bonds would increase home equity accumulation among those that use the funds to buy a home, with greater impacts for Black and Hispanic people, particularly Black women. We also see some increase in retirement savings, especially for Black men and for Hispanic men and women.

How We Did It

We used Urban’s microsimulation tool DYNASIM to estimate how the AOAA might impact family wealth, student debt, home equity, and retirement savings across sex, race, and ethnicity. DYNASIM simulates major life events and outcomes—including education, health, family formation, labor market, and retirement—for a sample of the US population, starting in 2007 and ending in 2100.