Baby bonds
Baby bonds are a government policy in which every child receives at birth a publicly funded trust account, potentially with more generous funding for lower-income families. Economists William Darity and Darrick Hamilton proposed the policy in 2010 as a mechanism to reduce the racial wealth gap in the United States. A 2019 analysis of the proposal by Naomi Zewde projects that baby bonds would reduce the median racial wealth gap between white and black young Americans from a factor of 16 to a factor of 1.4.
One example is the now-defunct child trust fund in the United Kingdom.
In American English, the term "baby bond" can alternatively refer to a bond with a par value of $1,000 or less.
In the United Kingdom
In Hungary
In Hungary, babies born after December 31, 2005 receive a tax-free savings bond with a value of approximately 40,000 forints, which is kept in a special bank account until the child turns 18. Children in need receive an additional payment at age 7 and 14. Parents in Hungary can make additional tax-free deposits.In the United States
Baby bond plans have been proposed in the United States to reduce the racial wealth gap.Background
A one-time $5,000 baby bond plan was introduced by U.S. presidential candidate Hillary Clinton during the 2008 Democratic Party presidential primaries, but the plan was later removed from her platform. Darity and Hamilton then published their article "Can 'Baby Bonds' Eliminate the Racial Wealth Gap in Putative Post-Racial America?" in the Review of Black Political Economy in 2010, which reinvigorated the consideration of baby bonds.Racial wealth gap
The racial wealth gap in the United States is well-documented: a 2020 study by Ashman and Neumuller found, based on Survey of Consumer Finances data from 1989–2016, that the median net worth of white families was seven times greater than the median net worth of black families. Wealth begets wealth: wealthier families are more likely to finance education for their children, build ownership and stock portfolios, and bequeath wealth, which continues the cycle. A 2017 Urban Institute report quantified these impacts: among people whose parents did not attend college, those from high-wealth families were 26% more likely to attend at least two years of college than those from low-wealth families.Explanations of the racial wealth gap
The root cause of the racial wealth gap is debated within the academic literature, with income inequality and differences in savings and homeownership rates being offered as potential causes. Even among quantitative studies, the percentage of the racial wealth gap attributed to any one of these causes varies widely. A 2016 analysis by Herring and Henderson which used data from the Survey of Consumer Finances, drew a dichotomy between cultural factors, such as savings rate, and structural factors, such as housing discrimination. Herring and Henderson found that structural factors explained more of the racial wealth gap than cultural factors, but that even if all factors between White and Black Americans were equal, the mean racial wealth gap would remain at around $155,000.Maury Gittleman and Edward Wolff, in a 2004 study that analyzed wealth accumulation over the period of a decade, found that once income is controlled, there is not a significant racial difference in savings. Instead, Gittleman and Wolff found that the racial wealth gap would decrease if Black Americans inherited and earned at similar levels to White Americans. Multiple studies, including articles authored by Darity and Hamilton, have cited intergenerational money transfers and inheritances as the largest contributors to the racial wealth gap. In contrast, recent studies by Ashman & Neumuller and Aliprantis & Carroll took independent approaches but concluded that income disparities between racial groups, over time, formed the largest cause of the racial wealth gap. Both studies suggested focusing on policies that would reduce income disparities, but recognized the importance of multiple interventions.
Active plans
Connecticut
On June 30, 2021, Connecticut became the first state in the United States to enact a baby bond program. The plan establishes an initial $3,200 for each baby born in Connecticut who's enrolled in the Medicaid program. They'll then have access to the money once becoming adults for a qualified expense, such as college or mortgage down-payment.Proposed plans
Darity and Hamilton's proposal
Darity and Hamilton's initial 2010 proposal was framed as a scaled-up version of the now-defunct United Kingdom's child trust fund program, which provides each newborn a trust ranging from £250 to £500, based on family resources.Darity and Hamilton proposed that the trust amounts be adjusted on a sliding scale with a starting value of $50,000-60,000 for newborns whose families are in the lowest quartile of net family wealth. Under this proposal, the trust would garner a return of 1.5-2% through federally managed investments and would be accessible only once the child turned 18. Darity and Hamilton projected that if three-quarters of newborns were eligible and the average trust amount was $20,000, the program would cost $60 billion annually.
American Opportunity Accounts Act
introduced Senate Bill 3766, which called for the creation of American Opportunity accounts, in the 115th Congress. AO accounts would be provided to each newborn child upon their birth, as well as to children who had not yet turned 18 as of the bill's introduction.Each American Opportunity account would be seeded with an initial $1,000 from the proposed American Opportunity Fund operated by the U.S. Treasury Department, with a variable amount added each year depending on the child's household income level, as seen in table 1. The funds would be invested in 30-year Treasury bonds, which is projected to accrue around 3 percent interest annually. In the proposal, the account could not be withdrawn from until the holder of the AO account turns 18, and use of the funds in AO account would be restricted to higher education, home ownership, or "other investment... that provides long-term gains to wages and health". Notably, the bill explicitly states that amounts in AO accounts could not be considered when determining eligibility for any federal benefit or service, including financial aid for education.
The estimated annual cost of this program is $60 billion, which would provide AO accounts to the approximately four million newborns in the U.S. annually. Booker has proposed funding the program by raising estate taxes and closing a capital-gains loophole.
In an examination of the American Opportunity Accounts Act, Morningstar determined that "Baby bonds would cut the racial wealth gap in half in terms of resources available per child at age 18".
| Income | Supplemental annual payment amount | Estimated account balance for 18-year-old |
| less than 100% FPL | $2,000 | $46,215 |
| 125% FPL | $1,500 | $35,081 |
| 175% FPL | $1,000 | $23,948 |
| 225% FPL | $500 | $12,815 |
| 325% FPL | $250 | $7,248 |
| 500% FPL | $0 | $1,681 |