How Baby Bonds Can Narrow Wealth Inequality

What If the Government Gave You $1,000 to Kickstart Your Life?

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What if the U.S. government gave you $1,000 just for being born? And what if the government added to that amount each year until you were 18?

This would leave you with a sizable chunk of money as you enter adulthood. And for many policy wonks and politicians, this would go a long way toward addressing wealth inequality.

Many of these proposals call for a child to receive funds in the form of a bond from the U.S. Treasury Department. Others refer to the money as sitting in a “trust fund.” These bonds are often referred to as “baby bonds” because they are provided at a person’s birth.

What Is a Baby Bond?

Baby bond is a term used to describe a system in which the government provides money to an individual upon birth. Often, these systems are created as an anti-poverty measure, or a tactic to close the nation’s wealth gap. In many cases, money is provided to a person in the form of a trust, which they can access upon adulthood.

The premise behind baby bonds is that by receiving some basic level of income or a cash infusion early in life, a person will be more likely to avoid poverty, and will have a greater chance of achieving other financial goals over the course of their lifetime.

The term “baby bond” is also used to describe bonds with small denominations. They are unrelated to the “baby bonds” being discussed here.

How Do They Work?

Baby bonds are generally issued to newborns by the U.S. Treasury Department. That money cannot be touched until the child turns 18 years old. The money goes into an account or trust managed by the Treasury Department, which generates a return. The child receives regular payments into the fund, in an amount based on their wealth level. (A child in a poorer family could receive more, while a wealthier child may receive a smaller payment or even nothing at all.)

What Are the Proposals?

There have been a number of baby bond proposals over the years, but they have gained new attention recently in the run-up to the 2020 Presidential Election.

Sen. Cory Booker (D- New Jersey), who has entered the race for the Democratic nomination, unveiled a baby bonds proposal as part of his campaign. The proposal calls for a $1,000 bonded savings account to be given to each child at birth, with contributions added each year until the child turns 18. The contributions would be tiered according to a family’s income.

Booker’s published figures suggest that the poorest child would receive about $46,000 by age 18, with a child in the highest income bracket receiving about $1,700.

Under Booker’s proposal, the resulting funds would have restrictions on how they could be spent. Money could be used only for higher education or to start a business.

Another proposal by professors at Duke University calls for bonds averaging $25,000, rising to $60,000 for the poorest families.

Other countries around the world have dabbled in baby bonds. The United Kingdom launched a program in 2005, in which eligible children received a voucher of 250 British pounds, with additional payments by age 7. The country ceased the payments for babies born after 2010.

Addressing Wealth Inequality

Supporters of the plans explain that proposals such as Booker’s can address the gap between the rich and poor in America. There’s considerable evidence that those children who are born into wealthy families will remain rich, and in turn pass their wealth onto their children, and so on.

While few people argue that families should not pass money down through inheritance, this intergenerational wealth transfer is viewed as a large reason why the growth of our nation’s wealth has been concentrated toward the top in recent years. Researchers point specifically to a significant gap along racial lines. Black families have about 10% the net worth as white families, according to one study from researchers in Germany.

Another study by the Center on Poverty and Social Policy at Columbia University says that white families are three times as likely to receive an inheritance as black families. And a program like the one proposed by Booker could raise the net worth of young African-American adults to nearly $60,000, while closing the disparity of inheritance and gifts between wealthier and poorer families.

What Are the Pros and Cons?

Opinions about baby bonds vary. The main points of debate surround whether they will address the issue of wealth inequality, and how they will be paid for.

Supporters of baby bonds contend that an infusion of cash early in life can boost the odds of them avoiding abject poverty and increasing the likelihood of building wealth over time. Funds from baby bonds could, in theory, boost rates of homeownership and entrepreneurship, and reduce student loan debt levels.

Critics of baby bonds ask how such proposals can be paid for. Booker’s plan, for example, has a price tag of about $60 billion, according to figures from his office. This money would likely need to be raised through increases in taxes, particularly on the wealthiest Americans. These costs, as well as debate over who receives payments and who doesn’t, make baby bonds a hot button political issue.

Can Baby Bonds End Wealth Inequality?

Researchers into baby bonds note that these proposals are not a panacea. Instead, they suggest that the program would bring wealth distribution to “a more egalitarian position, at least relative to human history.”

Columbia University researchers say that a baby bond program would not entirely upend the unequal distribution of wealth in America. The top 10% would still own much more than the bottom 90%. However, by raising the lower and median net worths of Americans, the baby bond program could marginally consolidate more wealth in the middle.

The Bottom Line

The push for baby bonds comes as part of a broader discussion on inequality that includes discussion of “Universal Basic Income” for all Americans. Under these proposals, every citizen in America would receive thousands of dollars from the government each year, virtually no strings attached.

Some of these proposals are based on the notion that Americans can collectively benefit from the sale or lease of certain national assets, such as public land.

Such proposals are not unprecedented in America. Residents of Alaska already receive dividends from the Alaska Permanent Fund, which is funded by payments made by oil companies drilling on state land. Each resident received $1,600 from the fund in 2018.

During the campaign for President in 2016, Democratic nominee Hillary Clinton suggested the creation of a national wealth fund modeled partly off the Alaska system.