The growing conversation about inequality on the 2020 campaign trail has sparked an idea for shrinking the wealth gap: Make every baby a trust fund baby.
Based on a progressive social policy concept known as “baby bonds,” it’s a centerpiece of Sen. Cory Booker’s (D-N.J.) economic platform. He calls it “opportunity accounts” for newborns. It involves granting every baby an interest-bearing federal account worth $1,000, which the government tops up annually, with higher amounts for low-income families. The money only becomes available when the child turns 18, but from the start, it aims to lay a path toward a more level playing field.
The fund is “intended to provide some seed capital for everyone regardless of their race, or … the economic position of the family in which they’re born,” said Darrick Hamilton, executive director of the Kirwan Institute for the Study of Race and Ethnicity, a key proponent of baby bonds. Opportunity accounts would be established for all children born, or legally residing, in the U.S. (including those brought to the U.S. as children by undocumented parents, also known as Dreamers).
Hamilton is an informal adviser on Booker’s proposal, introduced as legislation in December. He sees the program as a young-adult version of Social Security.
“We don’t want our elderly to be economically insecure in the twilight of their lives,” Hamilton told HuffPost. “This is intended to be something where the government is providing security for all adults,” by providing a leg up for young people just getting started.
Unlike conventional welfare programs, such as food stamps, baby bonds directly target the wealth gap by giving young people a fund to hedge against future economic insecurity during an especially precarious period in life, when heavy student debts or a weak job market can cause long-term financial setbacks. About two-thirds of working millennials have nothing saved for retirement — and that figure is as high as 80% among Latinx millennials.
Under Booker’s proposal, the money could only be spent on certain major expenses, primarily education, buying a house, or any other investment that “provides long-term gains to wages and wealth.” However it is ultimately spent, the mini-windfall could be life-changing — financing a mortgage or a family’s first college degree, no strings attached.
Managed by the Treasury Department through a low-risk federal trust, the accounts would accrue annual interest of about 3%. In addition, the government would make annual deposits, on a sliding scale based on household income, generally ranging up to $2,000. The deposits would be deliberately weighted toward poorer families.
By age 18, kids in the richest income brackets would receive a modest fund of under $1,700, while those in the lowest bracket would have access to more than $46,000.
The intersection of inequality and racism
By addressing the roots of wealth inequality, it may be possible to narrow structural racial disparities as well.
While gaps in day-to-day wages are a major driver of inequality, much of the wealth gap is linked to low assets — simply starting out life with less. The typical black family in 2016 had about $17,000 in assets, while white families had around 10 times that much. Black families are also disproportionately likely to have zero or negative net worth.
Since the recession in 2007, black households have hemorrhaged on average about a third of their real net wealth, compared with just over one-tenth for white households. Today, the 400 richest people in America own more wealth than all black households and a quarter of Latinx households combined.
With a baby bond, the average black child would, by their 18th birthday, have accumulated more than $29,000, and the average Latino child more than $27,300, according to Booker’s proposal. An average white child would receive just over half that amount, $15,800.
Researchers estimate that had baby bonds been granted to people born in 1979, by 2016 the median white-black wealth gap among them would have shrunk by 82%, and the median gap between white and Latinx beneficiaries would have closed completely.
As an “economic birthright” for historically disadvantaged groups, baby bonds could extend their ripple effects across communities. A kid growing up in a working-class neighborhood might no longer have to move to a faraway city to escape poverty. Instead, with enough financial security to have a choice of career and where to settle, they could return from college debt free, and pay it forward by reinvesting in the community that raised them — perhaps by buying their first home or starting a business.
“When black neighborhoods are on the decline, it’s often because they lack capital for investment,” said Hamilton. That leaves them vulnerable to predatory lenders and property developers. The security of baby bond, he said, “would leave them less vulnerable … and also empower them so that they can have development, because [they would provide] greater resources going to those communities.”
A long overdue remedy?
The baby bond idea has been floating around since the 1990s, when economists suggested it as a way to strengthen assets among the poor. But it has never been established as a universal federally run program.
The U.K. under a Labour Party government ran a similar scheme beginning in 2002, albeit much smaller in scale than Booker’s proposal, but the program was cut in 2010 shortly after the Conservative Party took power and austerity took over. In the U.S., many state governments have administered 529 savings accounts to help parents save for children’s college tuition.
Booker’s scheme shares the same financial framework. As a direct wealth transfer, baby bonds could be compared to universal basic income’s no-strings-attached cash payments ― another proposal that has gained support among progressives.
But baby bonds are deliberately aimed at building individual assets in children’s early years, rather than subsidizing their earnings as working adults. “Unlike many wealth related public policies which seek to change individual saving behavior,” a baby bond “envisions a substantial government investment to tip the scales to the poor,” said Andrew Stettner, senior fellow at the Century Foundation.
The wealth divide ultimately will only be leveled through widespread redistribution of assets, said Hamilton. “If you don’t have capital in a capitalist society, all that does is lock in inequality.”
How much would it cost?
Some might criticize the trust for basically giving households something for nothing, and even the richest families – the kids of Kim Kardashian and Kanye West, for example – would get something.
But making a benefit universal, instead of just targeted toward poor people, tends to reduce the stigma around receiving it. And Booker’s proposal is designed to adjust automatically each year in response to a household’s income – raising the payment for a family during an especially tough year, for example.
Moreover, said Hamilton, framing the program around babies strategically eludes the tricky politics around welfare entitlements, including perennial debates around whether beneficiaries are “deserving.” Conservatives might find it more palatable to invest in an infant than, for example, their unemployed parent.
Another common criticism is the cost of a universal program the government would be committing to in perpetuity. According to the National Asset Scorecard for Communities of Color, the program would cost around $80 billion for an estimated 4 million newborns per year. But Hamilton said concerns about long-term solvency are largely “rhetorical,” and the trust would remain sustainable in a securely managed federal fund.
Hamilton points to Social Security and Medicare, two bedrock federal entitlements. These were initially controversial but have since become pillars of the economic security net. He hopes this will happen with baby bonds. “Once it gets into fruition, and people start receiving [it] and seeing how life-changing it is, I think it would become one of those political programs that would be hard to roll back … Once government starts doing good, it’s hard to take it back.”
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