In 2019, white households had eight times the wealth of Black households and five times the wealth of Latinx households. Early-life wealth-building policies, such as baby bonds, have been gaining traction across the country as a strategy to reduce these persistent racial and ethnic wealth gaps.

The theory behind early-life wealth-building policies is simple—giving children from families with little wealth money early in life will ensure the funds accrue interest over time and leave recipients with capital to spend on a wealth-building asset when they reach adulthood.

The Urban Institute is hosting a learning community of state and local representatives, researchers, and financial institutions focused on early-life wealth building to share lessons jurisdictions have learned when standing up such programs and to elevate research to inform the design of these policies. As places move further into design and implementation, we’re exploring two key questions:

• How much money does each child need for these policies to reduce racial wealth inequities?
• How should jurisdictions invest funds to generate this amount?

Practitioners suggest there isn’t a one-size-fits-all approach—instead, policy designers can tailor amounts and investment approaches to their specific programs’ goals.

How much does each child need?

The learning community expressed consensus that for these programs to both support asset building and reduce racial wealth inequities in early adulthood, accounts must accumulate a balance sufficient to meaningfully expand a person’s life opportunities in young adulthood—for example, by providing them a median down payment on a home, one or two years of in-state tuition, or business startup costs. The federal baby bonds proposal would provide young adults from the lowest-income households with as much as $45,000 when they reach 18.

But state-by-state variation of expenses like home prices and tuition means reasonable minimum balances will vary by location. Policymakers can use tools like college cost estimators and housing market overviews to inform assessments for their geographies—though they may also have access to more robust local data. Small business costs are particularly variable because expenses range so much by industry, though 2019 US Census Bureau data suggest the median cost to start or acquire a company is about $25,000.

If the goal of these programs is to reduce racial wealth inequities, program designers and administrators should clearly state the ultimate dollar amounts they hope to generate per child, rather than starting with an arbitrary number of public dollars available and dividing by the number of children eligible. Public endowments often make up a big chunk of funding for these programs—but often provide an amount based on what the government has available. This means endowments may not always yield a sum large enough to reasonably move the needle on racial wealth inequalities. Clarifying the ultimate account value they aim to provide for recipients ensures program designers can mitigate the risk that beneficiaries bear the blame should an underfunded program not yield expected progress toward racial wealth equity.

What investment strategies will yield the necessary amount?

Once jurisdictions have determined the amount necessary to reach their program’s goal, they must quantify the initial investment size and identify the vehicle of investment.

The range of proposed initial investments across state and local baby bonds proposals currently ranges from $500 in Iowa (proposed) to $3,200 in Connecticut (passed, PDF), Washington State (proposed), and Nevada (proposed). In Connecticut, any child whose birth is covered by the state’s Medicaid system automatically receives a $3,200 endowment. In Washington, DC, since October 1, 2021, every child whose birth was covered by Medicaid is endowed $500, with additional annual deposits, for families who “continue to have income below the ceiling (three times the poverty level).”

In our learning community, participants weighed the pros and cons of using existing vehicles versus creating new ones. Many child savings accounts programs use 529s, or state education savings accounts, as the vehicle for saving. These accounts provide tax incentives for postsecondary education saving. Some stakeholders prefer using preexisting programs, like 529s, to administer baby bonds for the sake of administrative efficiency, while others point out that in their current form, 529s are not appropriate for programs like baby bonds because funds can only be used for education.

Meanwhile, new or adjusted vehicles could provide more flexibility. Many jurisdictions, including Connecticut and DC, have implemented or proposed baby bond programs that include a retrieval window from age 18 to 30 and expand use options beyond education. Baby bonds programs could follow the investment path of most retirement target-date funds, which consist of a diversified portfolio of stocks and bonds. Target-date funds invest more in relatively risky products to grow returns when the account first opens and become more conservative over time to ensure beneficiaries receive a sizeable amount of savings.

Regardless of investment vehicle, state representatives in our learning community expressed support for up-front investment, as opposed to allocating funds annually. Kevin Alvarez, deputy chief of staff and director of policy for the Connecticut State Treasurer’s office, noted, “Funding the Baby Bond Program up front guaranteed that in future years, the funds couldn’t be clawed back, and that for more than a decade going forward these funds would be guaranteed to be there for Connecticut’s children.” He added, “In addition to creating stability and certainty within the program, funding Connecticut’s program up front created considerable savings to the state.” By contrast, DC’s Child Wealth Building Program relies on annual appropriations, but the mayor’s fiscal year 2024 budget, released in April 2023, didn’t include the necessary funding for the program, and the city council had to push to restore it.

Grounding account targets in target sums can most effectively narrow the racial wealth gap

As long as the policy momentum for early-life wealth-building continues at the state level, no one-size-fits-all approach will yield the endowment size necessary to reduce racial wealth inequities. State representatives, financial institutions, and researchers alike agree that to achieve this goal, the account amount and the investment vehicle matter to narrow inequities through these increasingly popular programs.