Cities and states are experimenting with trust fund accounts to narrow the racial wealth divide.
Someone once told me there are two types of people in the world: those in the Lucky Sperm Club and those who are, putting it frankly, not so lucky. The Lucky Sperm Club consists of those fortunate few born into economic privilege. There are ways to achieve prosperity without being in this club, of course, but membership indubitably offers an incredibly unfair edge.
One out of every 7 children in the United States, almost 11 million in all, are born into poverty. The reality of America’s wealth divide becomes even more alarming when race is considered: in 2016, the median household wealth for Black families stood at $17,600 while white families averaged $171,000.
Children whose families enjoy more wealth tend to have a higher college graduation rate and are shielded from economically traumatizing events, such as a major health problem or housing eviction. Wealthier children also tend to live in wealthier neighborhoods served by better resourced schools.
Not everyone can be born into the Lucky Sperm Club, but public policy offers a means of creating more opportunity for those who lack that sort of privilege. One of the most innovative approaches is “baby bonds,” government-funded trust funds for children that they can later use for wealth-creating investments.
Senator Cory Booker (D-NJ) first introduced a baby bonds bill, the American Opportunity Accounts Act, in 2018. Under his plan, the federal government would deposit $1,000 into an account for every child born in the United States. Each child would then receive an additional deposit of up to $2,000 annually, depending on their family’s income level.
While every child, regardless of race, would be eligible for the program, studies show that it would substantially narrow the racial wealth gap because of this sliding scale. According to Booker, the poorest children would accumulate about $46,200 in their trusts by age 18 while the wealthiest would have around $1,700. At this point, the child would gain access to their account and could put the funds towards a down payment on a house, higher education, or starting a business.
Although proposals like Booker’s have been discussed since the 1990s, they have faltered at the federal level. Hillary Clinton initially included baby bonds in her 2008 presidential platform, at one point suggesting a $5,000 deposit for each child, before dropping it entirely.
Booker promoted baby bonds during his own run for the presidency in 2019 before dropping out. His Senate bill currently has 15 co-sponsors. A House version, championed by Rep. Ayanna Pressley (D-MA), has 25.
With Congress failing to act on baby bonds, policymakers at the city and state levels are taking action on their own. In June 2021, Connecticut became the first state to pass baby bond legislation. Children whose births are covered by the state’s Medicaid program will have an estimated $10,000 nest egg by their 18th birthday thanks to this initiative.
In the fall of last year, the Washington, D.C. city council approved a new Child Trust Fund that will provide a $500 initial deposit for children born at or below the federal poverty line. Those who continue to fall below that income threshold will receive deposits of as much as $1,000 per year until they turn 18. New York City also introduced a baby bonds program, although a far more modest one, in 2021.
Most recently, the California state legislature allocated $100 million in July 2022 to seed trust funds for two groups of particularly disadvantaged children: kids from low-income families who lost a parent or primary caregiver to Covid-19 and those in long-term foster care. The details are yet to be worked out.
State lawmakers in Washington, Iowa, Wisconsin, and Massachusetts are also actively considering baby bonds programs. Experts at the New School and Prosperity Now are tracking this trend and have identified the essential elements for state- and local-level Baby Bonds legislation. Such evaluation and monitoring work will be vital so that well-run and effective baby bonds pilot programs can help build momentum for federal action.
Given the widening of our nation’s wealth gaps during the pandemic, baby bonds are likely to only increase in popularity. In 2019, the richest 1 percent of U.S. households owned 40 percent of the country’s private wealth. This gap is no doubt even wider today. As of May 2022, U.S. billionaires had seen their wealth rise by more than $1.7 trillion — an increase of almost 60 percent since the beginning of the Covid-19 crisis, according to the Institute for Policy Studies and Americans for Tax Fairness.
In the long-term, our goal should be to disband the Lucky Sperm Club that gives a tiny elite such vast economic and political advantages over ordinary Americans. For now, we should try to help as many children as possible to thrive without luck in the picture at all.
Rebecca Karpen is a Next Leader at the Institute for Policy Studies.