Baby bonds proposal in Congress could provide some children with over $46,000 when they turn 18

"It is a race-neutral intervention that has the potential to address the racial wealth gap."

Senator Cory Booker, a Democrat from New Jersey, and Representative Ayanna Pressley, a Democrat from Massachusetts, listen during a news conference unveiling policing reform and and equal justice legislation at the U.S. Capitol in Washington, June 8, 2020.
Al Drago | Bloomberg | Getty Images

In January, Congresswoman Ayanna Pressley, D-M.A., and Senator Cory Booker, D-N.J., urged President Joe Biden to include the American Opportunity Accounts Act into the next economic recovery package. If passed, it would make baby bonds government policy, meaning that U.S. children would receive a set amount of money at birth.

The American Opportunity Accounts Act calls for children to get $1,000 at birth and then between $0 and $2,000 each year, depending on family income, until the child turns 18. The money would sit in a low-risk, federally insured savings account managed by the U.S. Treasury Department.

The impact would be "transformative," Pressley and Booker wrote in their letter. By their estimates, a child who receives $1,000 at birth and $2,000 every year after that would receive a little over $46,000 when they turn 18, given an annual interest rate of 3%.

Progressive economic programs like baby bonds were a longshot during the Trump administration, experts say, but under Biden, and with a Democrat-controlled House and Senate, there is actually a chance they could become a reality.

Baby bonds could narrow the racial wealth gap

Though the idea of baby bonds had arisen in the past, the idea was brought back into the conversation in a serious way by economists William Darity and Darrick Hamilton in 2010 as a way to narrow the racial wealth gap. In 2019, the median household wealth for White families was $188,200, almost 8 times higher than that of Black households, according to data analysis by the Brookings Institute.

The American Opportunity Accounts Act, if passed, could reduce the racial wealth gap between White and Black household by 40%, according to a Morningstar report.

That said, baby bonds aren't specifically intended to help children of color, says Ian Rowe, a resident fellow of domestic policy studies at the American Enterprise Institute, so the AOAA could have a better chance in Congress than a proposal more directly tied to racial equity, such as reparations. "I think it's increasingly plausible, primarily because it is a race-neutral intervention that has the potential to address the racial wealth gap," he says. "Those who would benefit most are children of low-income families."

Those who would benefit most are children of low-income families.
Ian Rowe
resident fellow of domestic policy studies, American Enterprise Institute

How baby bonds can be used

Under the proposed American Opportunity Accounts Act, baby bond recipients can only use the funds for "wealth-building activities," which include buying a home, continuing their education, or enterprise.

An extra $50,000 would go a long way toward achieving these milestones, says Mark La Spisa, a certified financial planner and president of Vermillion Financial Advisors. However, guidance is necessary when giving 18-year-olds large sums of money. For example, $50,000 put towards school might be a better idea than $50,000 put toward a house as the money would stretch further, La Spisa says.

"Education is going to pay off more over their lifetime rather than allowing them to buy a house," he says, because you're graduating without debt and hopefully getting a degree that will boost your earning potential.

Explain money to your kids with this video

Video by Euralis Weekes

"The bigger issue is, there is a financial literacy problem," La Spisa says. "If you give people money, it usually doesn't change who they are. If you give money to someone who is controlling, they are going to be unbearable. If you give money to someone who likes to spend, they'll spend it all."

Rowe agrees that while the program has "promise," it needs to be coupled with a campaign that alerts people to what he calls the "success sequence."

"If a young person finishes their education, gets a full-time job of any kind, and then has children after marriage — if they do those steps in that order — 97% of the time they will avoid poverty," he says.

The pros and cons of baby bonds vs. child tax credits

Not everyone might support baby bonds, though, not even progressive lawmakers. "Some people don't like [baby bonds] because it is long term," Rowe says. "It's a future orientation." Critics would prefer a policy with more immediate benefits to families, such as child tax credits, which Biden is interested in expanding.

The president is calling to raise the child tax credit to $3,000 for kids under age 17 and $3,600 for kids under age 6. Currently, its value is up to $2,000 per qualifying child. Biden also wants to make the child tax credit fully refundable, which means that taxpayers would get a refund even if the credit exceeds their tax liability.

One draft of the stimulus bill requires the IRS to send out recurring payments of $300 per month for every child younger than age 6, as well as $250 per month for every child ages 6 to 17.

Although this plan only calls for payments to be dispensed for one year, Democratic lawmakers hope this will become a permanent fiscal policy.

The bigger issue is, there is a financial literacy problem. If you give people money, it usually doesn't change who they are.
Mark La Spisa
certified financial planner and president of Vermillion Financial Advisors

In total those monthly payments would cost $120 billion a year, according to The Washington Post — double what the American Opportunity Accounts Act costs.

Baby bonds wouldn't offer that immediate assistance to families. However, in the long run, baby bonds would also help more Americans, Rowe says.

"Child tax credit accrues to people who are paying taxes, almost by definition," he says. "The people who get the credit are paying at least a few thousand dollars in taxes, as opposed to the lowest income people who may not pay any taxes at all. With baby bonds, 100% of the people who are low income would get that benefit."

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