A ‘baby bond’ bill to give every child $1,000 at birth has been reintroduced in Congress. How it would work

Democratic lawmakers in Washington are renewing a proposal to give every American child $1,000 at birth.

The “baby bond” funds, called American Opportunity Accounts, would then be topped off with up to $2,000 per year, depending on a family’s income.

The accounts would be federally insured and managed by the U.S. Department of the Treasury.

Account holders would be able to access the funds once they turn 18 to pay for eligible uses, such as higher education or homeownership.

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The bill, called the American Opportunity Accounts Act, was re-introduced last week by Sen. Cory Booker, D-N.J., and Rep. Ayana Pressley, D-Mass.

For a family of four with less than $25,100 in income, the accounts may reach $46,215 by the time a child reaches 18, based on 2019 estimates. Those sums would be reduced for families with higher incomes, as annual supplement payments gradually phase out. For a family of four with income of $125,751, a child turning 18 would see an estimated account balance of $1,681, with $0 annual payments.

The legislation calls for making the changes fully paid for by raising inheritance and estate taxes. A 2019 analysis by the Committee for a Responsible Federal Budget found the bill’s proposed revenue increases would more than offset the cost of the legislation.

“‘Baby bonds’ would fix our broken tax code by providing every American child with start-up capital for their life, and helping to drive down the wealth inequality that holds American families back from their full potential,” Booker said in a statement.

The policy is aimed at narrowing the wealth gap, which has grown dramatically in the past 50 years, according to the lawmakers. It may also help the persistent racial wealth gap.

In 2016, Black households had a median wealth of $17,100 and Hispanic households had $20,600, while white households’ wealth was a median of $171,000, according to the Pew Research Center.

The idea of baby bonds is getting traction in some states.

Baby bond legislation has passed in California, Connecticut and Washington, D.C. Another eight states have introduced legislation, according to the Urban Institute, including Iowa, New Jersey, New York, Wisconsin, Washington, Delaware, Nevada and Massachusetts.

The terms for how much funds would provide, as well as permitted uses for the money, varies. The total endowments by adulthood start from $3,000. The federal proposal, which would provide almost as much as $50,000 to the lowest income families, is the most generous.

The reintroduction of the federal proposal provides an opportunity for a more universal program, rather than a state-by-state approach to baby bonds, noted Madeline Brown, senior policy associate at the Research to Action Lab at the Urban Institute.

A national policy may reduce the wealthy disparity between young white and Black Americans to a ratio of 1 to 4, according to the research. Estimates have found young white Americans have 16 times the wealth of young Black Americans, based on median incomes.

“Wealth isn’t just for the wealthy; it really is a component for financial health,” Brown said.

“If the goal is really to address wealth inequity, programs like baby bonds that are starting early and thinking about how do you actually grow dollars long term are really exciting because they can be an important tool in this whole financial security toolbox,” she said.

To date, the support behind the federal bill comes from the left side of the aisle, including Sens. Chuck Schumer, D-N.Y.; Elizabeth Warren, D-Mass.; and Bernie Sanders, I-Vt.

However, there is more bipartisan support at the state level, according to Brown. Part of that is due to residency requirements, Brown said, which may encourage young people to stay and join the workforce, buy homes and start families and businesses in the states.

In order for baby bonds to successfully address wealth gaps, the policies should have six components, according to the Urban Institute. That includes universal eligibility for all children; deposits that are progressive, or based on household wealth; terms that allow for flexible use of the funds for wealth-building activities like tuition, home purchases or starting a business; financing provided by the government; substantial endowments that would protect the principal while earning a return on the money; and making the young people the ultimate beneficiaries of the money.