‘Baby Bonds’ Could Remedy the Racial Wealth Gap

Not since the early 20th century has the country’s economy been so strategically engineered to move wealth, opportunity, and prosperity away from lower-income families and toward the wealthier few.

Whether it’s deducting some of the cost of buying first and second mansions, paying lower taxes on passive income and other capital gains, or having the resources to hire wealth managers to exploit complicated loopholes, wealthier Americans have myriad ways to keep, preserve, grow, and pass on their riches in ways unavailable to the 40 percent of adults in this country unable to pay an unexpected $400 bill. One proposal for closing the pernicious wealth gap between rich and poor (and between whites and everyone else) are so-called “baby bonds.” More accurately described as child trust funds, the idea is simple: set up publicly funded, interest-accruing accounts for newborns that could be used when children become young adults, exclusively to pay for college, buy a home, convert into a conventional retirement savings account, or even start a business. The size and scope of these trust fund proposals vary, but the general idea has garnered support over the years from progressive political leaders and inequality-focused economists, including former UK Prime Minister Tony Blair and Ray Boshara, director of the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. The UK Labour government briefly had a Child Trust Fund program until conservatives rose to power in 2010 and scrapped the use of public funds to seed these tax-free savings accounts. During her presidential campaign in 2007, former Secretary of State Hillary Clinton proposed a more generous program to give every newborn in America a $5,000 interest-accruing account that the child could cash out at age 18 to help pay for college.

The most popular versions of this proposal make the trusts a birthright for all newborn citizens, but most of them include a means test so that the children of the poorest families would accumulate much higher sums of money than children from the wealthiest households who don’t need this money. The means test makes sense because it would help all “left behind” Americans, including minorities who disproportionately bear the brunt of the widening chasm between the rich and the poor.

The median Black family in the US has less than a tenth of the wealth of the median white family, making it harder for such minority households to accumulate and grow wealth compared to the typical white household.

Other groups, notably Native Americans, are also far behind white households and would benefit from publicly funded child trusts. So far, Senator Cory Booker (D-N.J.) is the only Democratic presidential primary candidate to have a detailed version of a child trust program. In a bill the senator presented last year, children of families earning above a certain threshold would receive a $1,000 trust that would accumulate nearly $700 in compound interest over 18 years. At the bottom end of the economic ladder, the poorest households would receive additional annual supplementary deposits of up to $2,000 (based on income level) so that when the child turns 18, there would be a trust of about $46,000, including interest, based on a reasonable and safe annual growth estimate of 3 percent. Some argue that children from wealthy households should not be eligible for these proposed trusts. “I would go further than what Booker is proposing,” Mayra Rodríguez Valladares, managing principal of banking and capital markets consultancy MRV Associates, told The North Star. “I don’t think it’s appropriate for my husband and I to get $1,000 per child because we already get tax deductions per child.” But Darrick Hamilton, a professor at the John Glenn College of Public Affairs at The Ohio State University and an early proponent of these baby trusts, said including everyone in the program rather than targeting exclusively low-income households would make the program more politically feasible.

“In addition to the political reasons, there’s also a philosophical reason that there’s some notion of collective wealth that the country owns, and that would include rich and poor individuals--just like Social Security,” Hamilton said. “There are social benefits to having something that’s universal, that leads to a better civic society.”

Hamilton, who served as an advisor to the Booker plan, estimated that his initial version of the proposal would cost up to $100 billion a year to create an average baby trust of $25,000, rising to $60,000 for the poorest children. This money, he said, could be raised by reducing what he calls “asset subsidies” enjoyed by wealthier households, such as the mortgage interest rate tax deduction and the lower tax rate paid on income from capital gains. Although the mortgage interest tax deduction was lowered last year, wealthier borrowers can still write off interest on home loans of up to $750,000, which is nearly three times the average new mortgage balance last year and more than twice the national median home sale price. Furthermore, this mortgage interest deduction applies to buying second homes; a tax benefit wealthy Americans don’t need. “You could cap mortgage interest deductions on things like a second home worth over a million dollars and that would more than pay for the program,” Hamilton said. “We already subsidize assets for Americans, the question is to whom?” Critics of “baby bonds” dismiss the idea with the usual arguments that have been used in the past to decry safety net programs that are popular today, like Social Security, Medicare, and Medicaid. Similar rhetoric is used to decry baby bonds as an elaborate leftist attempt at wealth redistribution. “It is really just a whole new entitlement — an elaborate scheme, with a raft of new bureaucracy, which masks its effect: pumping $100 billion per year toward the same old usual liberal ambitions,” Ryan Bourne, an economist at the Libertarian Cato Institute, wrote in a column for the Washington Examiner. The political pushback a “baby bonds” program would receive from conservatives is just one of the big challenges to this program. Another is how it would be administered. Federal and state governments are notorious for raiding or under-funding public trusts, and it would be easy to envision government officials “borrowing” money from a baby bonds program. “What we don’t want is these funds shifted to cover a gap in defense spending or something else,” Rodríguez Valladares said, pointing to states like Kentucky that have accumulated crippling unfunded public pension obligations. “We could end up with money that’s used for something else, saying, ‘You know, these kids are only 2 years old, or 5 years old,’ and then by the time they turn 18 the money isn’t there.” Any baby bonds program would require strict guidelines, regular independent audits, and publicly available annual reports in order to protect these trusts, she added. If history is any measure, increasing economic disparities can eventually reach a breaking point, leading to class- or race-based social upheaval, a rising police state to quell unrest, or transformative (but not usually peaceful) revolutions. Everyone who has a stake in this country, rich or poor, should be very concerned about the country’s inability or unwillingness to fix the inequality problem. “This country is not going to be socialist, but there are other forms of running an economy,” Rodríguez Valladares said. “Clearly, aggressive capitalism has worked for some people marvelously, but it hasn’t worked for everybody, and if you don’t help people at the lowest rungs it’s going to come back to haunt us.” Indeed, transferring some of the benefits of America enjoyed by the wealthy to the poor, whether it’s through baby trusts or other forms of rebalancing the distribution of national wealth, would be a much smaller price to pay than the disruptions caused by amassing most of the nation's wealth into the hands of the few.

About the Author

Angelo Young is a NYC-based reporter, editor, and writing coach who enjoys pondering world events and idle chatter on the subway. He has more than a decade of news editing experience with bylines in Newsweek, International Business Times, Salon, Arab News, The Daily Star (of Lebanon), Mexico Business magazine, The News (of Mexico City) and The Oklahoma Daily.