'Baby bonds' bill aims to give children up to $50,000 to start adulthood

Sen. Cory Booker (D-NJ) and Rep. Ayanna Pressley (D-MA) want to address racial and wealth inequality by giving upwards of $50,000 to the country’s poorest children by the time they turn 18 and become adults.

Dubbed the “baby bonds” bill, the American Opportunity Accounts Act aims to reduce the wealth gap, which disproportionately impacts families of color by starting each American child off with money that can be used to finance their education or buy a home, among other wealth-building activities. The proposal was first introduced in 2018 under the previous Congress — it went nowhere. But the bill is being reintroduced and with Democrats in control of the House, Booker is more hopeful the bill will receive more support, and will eventually pass.

“I’m very confident that this will get through the Senate over time,”Booker said. “Obviously, not with [Senate Majority Leader] Mitch McConnell here right now,” he added. “I think especially in the House that this is the kind of bill that will get a lot of attention and support.”

Tackling the wealth gap

The wealth gap in America has continued to widen throughout the years, driven by disparities in education, investment, and income inequality. A report from the Federal Reserve says “significant wealth concentration and a clear increase in wealth concentration since 1989.” More to the point, the study notes, “in 2018, the top 10% of U.S. households controlled 70% of total household wealth, up from 60% in 1989.”

Democratic presidential hopeful Cory Booker addresses the Presidential Forum at the NAACP's 110th National Convention at Cobo Center on July 24, 2019, in Detroit. (Photo by JEFF KOWALSKY / AFP)

Black Americans have particularly suffered, thanks to inequities in the criminal justice system, employment, education, and healthcare. While the baby bonds bill is race neutral, it is designed to impact children of color, who disproportionately live in poverty compared to their white counterparts. According to the Economic Policy Institute (EPI), in 2016, roughly 31% of black and 27% of Hispanic children lived in poverty. That’s compared to 11% of white children.

Unemployment rates for African-Americans are twice as high as that of white workers, while adult black poverty rates are more than double that of their white counterparts. According to the EPI, the black poverty rate was 22% in 2016; the same year, it was 8.8% for white Americans. The national poverty rate, by contrast, was 12.7%.

And racial wealth inequality has only gotten worse over time. In 2016, according to the Inequality Project at the Institute for Policy Studies, the U.S. median wealth — or the total of all assets — for white families was just under $150,000, compared to the national median wealth of $82,000. In 2016, the median figure for African-Americans stood at roughly $3,500. That’s less than half the median black wealth 35 years ago.

But that’s a composite sketch across the United States. If that picture is bleak, it gets worse for people living in cities like Boston, which Rep. Pressley represents.

According to a study from the Federal Reserve Bank of Boston, white families in the city had a median net worth (the value of all assets minus any debt) of $274,000. Black families had only $8.

Pressley says many people find that figure staggering. “They can’t wrap their brains around the findings,” she said. “But if you live in Boston, you see this up close and personal and you know it’s real.”

“The median white family has 40 times more wealth than the median black family, and 22 times more wealth than the median Latino family,” she added, citing statistics from the Institute for Policy Studies.

An American birthright

So how exactly would baby bonds even work?

As a “birthright,” the bill proposes, every child would be given a $1,000 savings account. Each year, the government would deposit as much as $2,000 into the account, depending upon the family’s income level. The poorer the family, the more money the child would get.

Funds would be deposited into “low-risk” accounts managed by the Treasury, which the bill assumes would see roughly 3% returns a year. By age 18, America’s poorest children — those from families with incomes of less than $25,100 for a family of four, would receive $46,215 (in 2019 dollars). The richest — those in families with incomes over $125,751 — would only get $1,681 at time of maturity.

The children wouldn’t be able to access the account until they’re 18. After that, the funds could only be used for purchases that can help build future wealth, such as buying a home, tuition, or classes to develop new skills.

According to the proposal, baby bonds would cost approximately $60 billion each year, and would be paid through a variety of tax measures on America’s wealthy. The bill would require restoring the 2009 estate tax rules, which taxes estates at 45% with a cap on exemption at $3.5 million. It would also impose a surtax on what it calls “extremely large” estates, and closes the “step up basis” loophole in the tax code that eliminates an heir’s tax liability on capital gains of property value made during a decedent’s lifetime.

Using the tax code in this way isn’t a new idea, Booker says.

“We already use our tax code right now to move hundreds of billions of dollars to give people of wealth more wealth,” he said. “This is in line with something we already do, and now we are doing it for people that don’t have much overall.”

He says he knows that we have a “serious issue” of paying for this bill amid other domestic needs. But, he added, he doesn’t think the “Donald Trump tax gift to the wealthy” will hold, referring to the Tax Cuts and Jobs Act (TCJA).

Not reparations

According to a study, this bill could dramatically reduce the racial wealth gap while boosting net worth for all groups. The report, from Columbia postdoctoral researcher Naomi Zewde, shows that the impact of baby bonds would cut the racial wealth gap to a ratio of 1.4.

This means that while a white young adult would have a median net worth of just over $79,000, a black young adult would have $58,000. Currently, according to Zewde’s research, young white adults hold $46,000 in median net worth, while their black counterparts only have $2,900.

Despite the drastic impact on the racial wealth gap Pressley, a sponsor of the HR 40 bill to study reparations, makes clear that this bill is “not reparations.”

“This is a universal race conscious program that will benefit all children with families in the lowest bracket,” she said. “So the program will inevitably have a positive disparate racial impact that will impact black and brown adults. Because they are disproportionately the most disadvantaged.”

Barely make a dent

Some believe that while this bill is a great first step, its impact will be far smaller than Zewde outlines in her research.

Most statistics on wealth inequality focus on median wealth, and not mean (or, average) wealth. Matt Bruenig at the People’s Policy Project argues that when discussing wealth gaps, mean wealth is a much more useful statistic. When analyzing average wealth in America, wealth inequity grows from a gap to a chasm.

When looking at mean wealth instead of median wealth, the wealth gap increases from $146,200 to $760,700 between black and white Americans.

U.S. Rep. Ayanna Pressley, D-Mass., addresses a crowd during ceremonies before the start of the Roxbury Unity Parade, Sunday, July 21, 2019, in Boston's Roxbury neighborhood. (AP Photo/Steven Senne)

In his report, Bruenig writes “the total wealth gap between the black and white population is over $15 trillion. A program that annually pays out $80 billion of race-neutral grants is not going to nearly close it.”

Booker acknowledged the criticism, but said that this bill would give “a tremendous leg up to children in this country.”

“Giving someone upwards of $50,000 impacts their wealth creation. This is a significant step,” he said. “This is creating a foundation of wealth for all Americans and it will go a significant way in addressing the grievous wealth gap in this country. So I’m very bullish.”

But this isn’t the only criticism of the bill. Bruenig points out that without tackling all the other drivers of racial wealth inequality, the effect of the bonds over time would lessen.

Both Pressley and Booker say this bill can’t be viewed as a panacea for overall racial injustice and that issues of criminal justice reform, education, and more also need legislation.

“I see this as enhancement and companion legislation,” Pressley said. “The reality is that these are systemically embedded and entrenched inequities. There is not going to be a one stop solution.”

A socialist solution?

The proposal has become one of the core parts of Booker’s platform as he hopes to become the Democratic presidential nominee. And with the election cycle heating up, he shrugged off any questions that this bill might be branded “socialist,” saying that he’s “not worried about that charge at all.”

Pressley was more pointed. “I feel the labels and charges of socialism put me in pretty good company,” adding, “they called Dr. King socialist.”

Kristin Myers is a reporter at Yahoo Finance. Follow her on Twitter.

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