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An enhanced tax credit for children that will start hitting parents’ bank accounts next month is expected to cut child poverty by almost half. But experts say another proposal could help families build wealth right from the cradle, as well as reduce economic inequities among racial groups in the U.S.: “baby bonds.”
Support for baby bonds is growing among some lawmakers, with New York City earlier this month announcing a program for kindergartners that will put $100 into a 529 plan for each student. Lawmakers in Connecticut this month also proposed providing $3,200 for each child born to mothers on Medicaid, the health insurance program for low-income people, according to the Hartford Courant.
But the biggest effort could come at the federal level, with a proposal from Democratic lawmakers including Senators Cory Booker and Tammy Baldwin to introduce baby bonds for every child born to low- and middle-income families. The plan would cost about $60 billion annually, according to an estimate from Booker, akin to the annual spending on food stamps before the pandemic. Another analysis by the Committee for a Responsible Federal Budget pegs the cost at $650 billion over a decade.
Government efforts to spark the economy over the past year, including giving stimulus checks directly to families and the expanded Child Tax Credit that will offer up to $3,600 per child starting in July, may also help open the door to a comprehensive baby bond program, experts say.
“We are in a point in society where these big, bold initiatives are gaining steam,” Darrick Hamilton, an economist at the New School and one of the architects of the baby bond concept, told CBS MoneyWatch.
“It’s pushback from the paradigm of the last 50 years, which was an emphasis on markets, deregulation and that poverty needed to be sanctioned by markets,” added Hamilton, who as an adviser to advocacy group NinetyToZero is also interested in ways of narrowing the wealth gap between White and Black Americans.
Economists point to the historical imbalance in wealth in the U.S. as a roadblock for Black and other minority children, as well as a drag on the economy as a whole. White families held more than seven times the wealth of the average Black family in 2019, according to the most recent Survey of Consumer Finances from the Federal Reserve.
Proponents of baby bonds underline that they would amount to an investment in all low- and moderate-income children, regardless of race. But because Black, Latino and Asian children are more likely to live in poverty than White children, the plan would help narrow the racial wealth gap.
With a buffer of savings and other financial assets, experts note, wealthier families are better able to afford a college education and other academic enrichment that helps create a foundation for success.
“Wealth provides resources that give you financial agency — wealth gives you the ability to accumulate more wealth,” Hamilton said. And “With baby bonds, it provides every individual a pathway to have at least some resources when they start their life.”
Here’s what to know about baby bonds.
Are baby bonds actual bonds?
Under Booker’s proposal, the government would create a savings account of $1,000 at each child’s birth. After that, the program would provide annual deposits of up to $2,000 per year.
The plan would invest money in 30-year Treasury bonds, a stable investment but one that doesn’t typically offer the same returns as stocks.
Who would qualify for the program?
Children who are born after December 31, 2018, and who live in low- and middle-income families would be eligible for baby bonds, according to the bill introduced by Booker and other co-sponsors.
The income cap would cut off annual payments for families who earn more than 325% of the poverty line. The current federal poverty line (FPL) for a family of four is $26,500, which means that families of four earning more than $86,125 wouldn’t qualify for the additional annual payments.
How would the payments work?
After the initial seed investment, the government would provide annual deposits based on a family’s income. The poorest families, or those earning below the FPL, would receive the full $2,000 annual investment, while families with incomes above that would get smaller amounts each year.
Families earning between the poverty threshold and up to 125% of the FPL would receive $1,500 per child. Those earning between 125% to 175% would get $1,000 annually per child, while those between 175% and 225% would receive $500 each year. Those earning up to 325% of the FPL would receive $250 annually, while those above that level wouldn’t be eligible for the bonds.
How much could kids save?
Assuming an annual compound interest rate of 2%, an 18-year-old from a family living below the poverty line today would end up with $42,253 if they had received baby bonds throughout their life, according to the Urban Institute, a centrist think tank.
Children from middle-income families would end up with much less because they would receive smaller investments. For instance, children from families earning up to 325% of the FPL would end up with $7,248 by the time they turn 18, according to the Committee for a Responsible Federal Budget.
How would this narrow the racial wealth gap?
A far greater share of Black, Latino and Asian children would qualify for the payments compared with White children because they are more likely to live in families with low or moderate incomes, according to the Urban Institute. For example, 28% of Black 18-year-olds live in families below the federal poverty level, more than double the share of White 18-year-olds.
“Baby bonds would cut the racial wealth gap in half in terms of resources available per child at age 18,” according to Aron Szapiro, head of policy research at investment advisory firm Morningstar.
The median Black family in the U.S. has 96% less in wealth per child compared with White families. Baby bonds would shrink that gap to 56%, Shapiro estimated. The program wouldn’t entirely erase the racial wealth gap because of the greater share of home equity among White families compared with Black families, he noted.
How would baby bonds be paid for?
Funding would be through tax increases on capital gains and inherited assets. Booker’s plan would increase the top rate on long-term capital gains and dividends from 20% to 28%, and eliminate the step-up basis of capital gains at death, according to the Committee for a Responsible Federal Budget.
Together, those tax hikes would raise $700 billion in new revenue over a decade — more than enough to pay for the plan, the analysis found.
What’s the downside?
Opponents of higher tax rates say they would discourage the rich from saving and investment, which could hurt the economy. There’s also concern that baby bond accounts would provide an incentive for colleges and other educational institutions to increase tuition costs, increasing the college affordability crisis.
How likely are baby bonds to become a reality?
Booker’s plan has support from other Democrats, but it is unlikely to draw support from Republican lawmakers. Currently, the Biden administration is focused on initiatives such as an infrastructure deal and also expanding the enhanced Child Tax Credit beyond December.
Yet “baby bonds are gaining momentum” thanks to programs like the expanded Child Tax Credit, Hamilton said. “The reality is the tax code is one of America’s biggest fiscal tools, and it reflects our values.”
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