News stories about surging home prices, student debt, and the state of the economy have shone a spotlight on the growing racial wealth gap in the US. The disparity is stark: in 2019, white households had eight times the wealth of Black households and five times the wealth of Latinx households. Despite some fluctuations over the past four decades, this disparity was as high in 2019 as it was in 1983 for the typical Black family.
This gap in wealth accumulation is a direct result of more than a century of racist policies and practices that systematically denied opportunities for Black households and other households of color to build intergenerational wealth through housing, educational, and employment discrimination, among other barriers. Evidence clearly shows the wealth gap does not stem from individual choices.
Recognizing the need for structural fixes, more and more policymakers are turning to baby trust or baby bonds legislation, also known as “baby bonds,” as a potential solution.
Darrick Hamilton, one of the leading scholars on the racial wealth gap, describes baby bonds as “an economic birthright to capital.” Hamilton’s vision entails endowing all American newborns with an average account of $20,000 accessible at age 18, with families with low wealth receiving up to $60,000. The accounts would be federally managed and grow at a guaranteed annual rate of at least 1.5 to 2 percent (PDF) to 3 percent per year to curtail inflation. When the child reaches adulthood, they could use the account exclusively for an asset-enhancing activity (such as a home down payment, higher education to avoid student loan debt, or seed capital to start a new business).
In the past four years, baby bonds transformed from theory to action. In 2018, Senator Cory Booker (D-NJ) introduced legislation (S.2231) to create a baby bonds program, with the amount of the endowment based on income rather than wealth. Though federal legislation has failed to advance, today, states and localities are pursuing their own versions of baby trusts. Connecticut was the first to enact baby bonds legislation, followed by Washington, DC. Baby bonds legislation has also been introduced in California, Delaware, Iowa, New Jersey, New York, Washington, and Wisconsin.
States align on some of the fundamentals of a baby trust policy, but policy design varies across states. The Urban Institute recently convened states with enacted, active, or potential baby bonds legislation to explore what it takes to design such policies. The following are the top policy design questions that emerged:
1. Who is eligible for a baby trust, and how do you identify those people?
Because baby bonds are meant to address wealth inequality, it could be logical to base eligibility on a measure of wealth, with larger deposits for people from households with little wealth. Unfortunately, publicly available data on household wealth are limited at the local and state levels, making it difficult to identify eligible people. Urban and others are working to improve local measures of wealth, which could help states better target their programs.
Current legislative proposals use household income or eligibility for public benefits as a proxy for wealth and program eligibility. For instance, New Jersey’s legislation applies to children from households earning less than 200 percent of the federal poverty level. In Connecticut (PDF) and Washington, DC (PDF) enrollment is automatic for births covered by state Medicaid.
Relying on Medicaid eligibility to determine baby bonds eligibility, though smart and implementable as a policy, may have drawbacks. In California, Medicaid-based eligibility would include nearly 4 in 10 children, which would make a Medicaid-based baby bond program costly and thus politically difficult to achieve. Furthermore, linking eligibility to other public benefits programs could unduly exclude children of immigrants (PDF), who are less likely to participate in public benefits programs for many reasons.
States are also contending with how to identify and enroll people into baby trust accounts. Birth certificates and Social Security numbers identify new births but aren’t easily linked to family income or wealth. If income proxies are used for enrollment, like Medicaid enrollment, states still need ways to notify families of their child’s baby trust account and contact families early and often over the years to leverage and link other services and supports that maximize health and economic well-being. At Urban’s convening, several states reported they are exploring solutions to share datasets to help identify and contact eligible families.
2. What account structure should hold the money, and how should it be invested and managed?
In principle, most state policymakers want to hold baby trusts in tax-advantaged, principle-protected accounts that grow steadily over time. Attendees of Urban’s convening expressed interest in the different implications of establishing a pooled account with subaccounts—like Connecticut has proposed and several Children’s Savings Accounts use—versus having baby bonds flow through existing infrastructure like 529 college savings plans, Achieving a Better Life Experience Act programs for certain people with disabilities, or even a low-fee mutual fund or brokerage account.
States are seeking to balance ease of administration, the growth potential of the underlying investment vehicles, and flexibility of funds. US Treasury bonds are at historic lows, meaning that a true baby “bond” investment wouldn’t necessarily grow to a substantial balance over time.
Consumer protection is another dimension of account management states are considering. Most state legislation includes language about investing baby trusts in the interest of the account holders, typically referring to standards of care established for other state-sponsored, privately managed accounts like 529 college savings plans. These standards don’t explicitly limit fees and other monetary penalties for account holders, which deserve further consideration.
3. Should there be spending restrictions on account holders? If so, what are appropriate requirements?
As with many publicly funded programs, some policymakers feel a duty to restrict the use of the funds at the time of disbursement (usually when a young person turns 18). Given the policy’s focus on growing wealth for families, some baby bonds proposals explicitly limit the use of the accounts to human capital- and wealth-building investments, including higher education, home purchase, or business investment.
California’s legislation is agnostic on the use of funds, since wealth building can encompass a wide range of activities. Another approach included in legislation in six states would require young people to enroll in financial education or coaching as a condition of withdrawing their funds. States are eager for guidance on what types of financial education could fulfill this requirement because evidence on the topic is mixed.
4. How can legislation ensure funding sustainability?
Unlike other wealth-building policies like matched savings accounts or 529s, baby trusts require the state to proactively seed the initial funding amount for every child. The systems approach fails if the policy allows the state to be reactive to individual families’ decisions. Thus, sustainable funding is imperative to ensuring children are enrolled year over year and legislation remains effective in cases like DC, where there are annual deposits made by the state based on a family’s current income.
Though states are tapping into a range of funding sources—annual state-issued bonds (Connecticut), annual appropriations (DC and New Jersey proposed), sales and use taxes (Iowa proposed), dedicated state funding sources (New York proposed and Wisconsin proposed), an existing wealth tax (California proposed), and the general fund (Washington proposed)—most aren’t set up for long-term sustainability. When speaking at the roundtable, state representatives and researchers alike noted that wealth taxes would be one ideal way to sustainably pay for a policy like this.
The racial wealth gap is systemic and long-standing and will require bold policies to address. Many policymakers agree that baby bonds have a lot of potential to help close the gap, but need guidance to enact laws that will make a difference. Expanding the evidence base and tools at policymakers’ disposal are urgently needed amid today’s economic climate.