Giving Compass' Take:
- Baby bonds are child trust accounts, which are publicly funded, that target children from low-wealth or low-income families and can help address racial wealth inequities.
- When children with baby bonds grow up, they can tap these funds for wealth-building. How can these programs help sustain generational wealth for those who might not otherwise have it?
- Read more recommendations on closing the racial wealth gap.
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For policymakers at the federal, state, and local levels, the relationship between public policy and racial wealth inequity is top of mind. Recently, momentum has grown behind one policy with the potential to reduce the Black-white wealth gap: baby bonds, the publicly funded child trust accounts that target children from families with low wealth or low incomes. When the children reach adulthood, they can use the funds for wealth-building activities such as purchasing a home or starting a small business.
Versions of the baby bonds program currently exist and are in the early implementation stages in Connecticut and Washington, DC. A pilot program also exists in California for children who lost a primary caregiver to COVID-19 or have long-term stays in the state’s foster care system. But the distribution amount is yet to be determined, and there are no current use restrictions.
Because baby bonds are a nascent policy, no empirical studies on their effects have been published. However, we provide a literature review of three simulation studies that model the potential effects of baby bonds in our recent brief, finding that all three show reductions in racial wealth inequities.
These simulations are promising, as all the studies indicate that the policy would reduce Black-white racial wealth inequities by more than half. But for any early life wealth-building policy to influence racial wealth inequities, the following principles are key:
- Policy design. For baby bonds to be most effective in reducing racial wealth inequities, six design features are particularly important: automatic enrollment and universal eligibility, financial progressivity, flexible use of funds, public funding, substantial initial endowments, and individual account holders.
- Federal implementation. To date, baby bonds have been implemented at the state and local levels. A federal program would provide a larger investment and even greater potential to help young people with lower wealth enter adulthood on a strong footing.
- Holistic income and wealth approach. Baby bonds will be most effective when they’re coupled with other policies aimed at supporting short- and long-term economic well-being, including cash assistance, guaranteed income, and child care supplements. Coupling baby bonds with systemic change and antidiscrimination policies could ensure people of color reap the same benefits from their assets, and reparations could begin to address the decades of wealth stolen from Black Americans.
Read the full article about policies on baby bonds by Madeline Brown, Marokey Sawo, and Ofronama Biu at Urban Institute.