Baby Bonds: A Worthwhile Step To Reduce the Racial Wealth Gap

Baby bonds—government-funded accounts established at a child’s birth that provide money for future asset-building investments—have the potential to make a significant dent in the racial wealth gap and give people more access to economic security, opportunity, and mobility. The universal goal of instituting baby bonds is wealth building for all children. The policy of baby bonds would target the unique challenges of families and households that struggle with being excluded from economic opportunities, face obstacles to saving money, and are trapped in a cycle of financial insecurity passed down from one generation to the next. Baby bonds would also allow for the inclusion of racial groups, such as African American and Latino households, that are often excluded from wealth-building and economic opportunities.

Wealth—the difference between what people own and what they owe—is crucial for economic security and mobility. Money in savings accounts, home equity, and retirement accounts, among other forms, can serve as a financial buffer in an emergency such as a health shock or layoff. Wealth is also critically important for people who hope to create and take advantage of economic opportunities. People can use their wealth to support their education, start a business, or put a down payment on a new house. Having wealth also allows people to choose whether to keep working or to retire in dignity when they reach the end of their careers. Having wealth feeds into many aspects that make up a secure middle-class standard of living. At the same time, greater economic security, opportunity, and mobility help to build a more dynamic and stronger economy.

Yet many households have little to no wealth, with few opportunities to gain it.¹ Furthermore, wealth and wealth-building opportunities have historically been unequally distributed along racial and ethnic lines. Many Black, Latino, Native American, Pacific Islander, and Native Alaskan households have a lot less wealth than white households. For example, in 2022, the typical Black household had $44,100 in wealth and the typical Latino household had $62,120 in wealth, while the typical white household had $284,310.² (see Figure 1) Importantly, the racial wealth gaps remain wide across all ages. (see Figure 2) By instituting federally funded baby bonds, the U.S. government could help Americans build wealth for years—and possibly decades—to start addressing the savings shortfalls among nonwhite households.

Professors Darrick Hamilton and William “Sandy” Darity Jr. originally proposed such an approach to reduce the massive wealth gap between Black and white households.³ Under their proposal, state, local, and federal governments would invest a fixed amount for each child every year from birth until they turn 18. The amount would vary depending on a household’s income or wealth, so that higher-income or wealthier households would receive less per child than lower-income and less wealthy households. This money would grow over time, based on the performance of the investment funds. Once the children become adults, they could then theoretically use the money however they see fit. Implementing a federal baby bond proposal would give people—especially Black households—much-needed economic security and access to economic mobility and opportunity.⁴

Making baby bonds a national reality would require congressional action. In the 118th Congress, Rep. Ayanna Pressley (D-MA) and Sen. Cory Booker (D-NJ) reintroduced the American Opportunity Accounts Act in both the House and Senate.⁵ The bill aimed to create a federally funded savings account of $1,000 for every American child at birth, with the goal of addressing economic mobility and reducing the racial wealth gap. The bill died when the 118th Congress ended and would need to be reintroduced during the current Congress in order to be considered. Meanwhile, state and local governments are pioneering baby bond programs that demonstrate both the feasibility and the transformative potential of this policy.

Baby bonds are gaining momentum as state and local governments introduce legislation to implement them. The bonds build on the concept of child development accounts (CDAs), which are long-term savings vehicles designed to help families build financial assets for a child’s future.⁶ CDAs are typically created when a child is born and grow through contributions from parents and potential government matches until the child reaches adulthood. CDA withdrawals are generally restricted to specific approved purposes such as buying a home, starting a business, and, most commonly, pursuing postsecondary education.

Baby bonds operate in a similar way. At a child’s birth, the government deposits money into a trust fund on their behalf. The funds are professionally managed and invested in diversified portfolios, similar to how state and local government employee retirement benefits are handled. This approach ensures cost-effective management while maintaining relatively safe returns. Moreover, depending on their laws, states may exclude baby bonds when determining household eligibility for public benefits.

When children turn 18, they gain access to their account’s full value—the initial deposit plus accumulated interest, dividends, and capital gains—though most states restrict the funds’ use to specific purposes. For example, these funds can be used to buy a home, cover school-related costs, start a business, or pursue other opportunities to build wealth.

States and localities can look to various revenue streams to fund these programs sustainably. For example, some jurisdictions already dedicate specific revenues—such as transit fees, lottery proceeds, and graduated income taxes—to education and transportation. In 2022, Massachusetts approved a more progressive millionaires’ tax that has generated more than $1 billion annually for education and transportation.⁷ Similar progressive funding approaches could help expand baby bond programs either by increasing initial deposits or by enabling ongoing contributions until children reach 18. Dedicated funding approaches would ensure baby bonds can make a meaningful impact on reducing the racial wealth gap while creating a stronger, more equitable economy.

While it is too early to gauge the actual impact of baby bond policies,⁸ research has shown three key findings:⁹

1. Baby bonds help reduce the wealth gap between Black and white households.
2. Baby bonds are better at raising the wealth of typical families than other proposals targeted at narrowing the racial wealth gap.
3. Baby bonds are effective at reducing the wealth difference between Black and white households, as well as the gap between Latino households and white households.¹⁰

Baby bonds have not yet been implemented at the federal level because they lack widespread political support and require significant government investment at a time when debates about federal spending and wealth redistribution are deeply polarized. Rather than waiting for federal action that could be years away, state and local governments are filling a critical void in the policy landscape to address wealth inequality for their residents. State and local governments are increasingly piloting and implementing similar programs, providing real-world evidence of their potential effectiveness.

Policymakers, researchers, and other experts recognize the importance of wealth for economic security, mobility, and opportunity. They have also realized that the massive wealth gap persists over time and will not shrink without large, targeted, and sustained policy interventions. States and localities have both the opportunity and responsibility to create their own policies to raise wealth levels for those who otherwise would not have a secure future. When people have enough savings to feel financially secure, they are more likely to invest for the longer term.¹¹ This could mean that they invest in a business instead of leaving the money in a low-interest savings account, pursue additional training and higher education, or start a small business—all of which help create a stronger economy for everyone.

Although some researchers and policymakers may question whether state and local governments can afford baby bonds, the more pressing question is whether states can afford not to address wealth inequality. Even households with decent incomes¹² often lack the savings to handle an emergency room visit for a sprained ankle or an air conditioner repair during a heat wave, creating ripple effects that burden both communities and local governments.¹³ To put it clearly, households that struggle to cover such expenses often do not have the means to build wealth, and baby bonds could give young adults a much-needed chance to do so.

Several states and some localities have started to consider or have already enacted baby bond legislation. By early 2024, Connecticut and the District of Columbia had passed baby bond legislation. California created Hope, Opportunity, Perseverance and Empowerment (HOPE) accounts—a limited baby bond program aimed in part at reducing the racial wealth gap—for children who had lost a parent to COVID-19 and for long-term foster children in 2022.¹⁴ Legislation has been introduced, but not enacted, in Massachusetts, Nevada, and Vermont.¹⁵ In 2022, Massachusetts established a Baby Bonds Task Force to provide comprehensive recommendations on program development and implementation. That same year, the task force published a report that set out criteria for eligibility, purpose of the funds, access to the funds, and management of the funds.¹⁶ Policymakers have proposed baby bonds for consideration and debate in Louisiana, Maryland, and Washington during the past few years.¹⁷ Proposals are also appearing at the county level: In Montgomery County, Maryland, Councilmember Will Jawando introduced legislation for a child investment fund, which is akin to baby bonds.¹⁸

Governments’ pursuance of these steps speaks to the importance and popularity of baby bonds as a way to create more wealth for everybody.¹⁹ This is especially noteworthy since state and local governments face some constraints in enacting new measures to build wealth. They often operate under balanced budget rules, which require that all spending matches their revenue. Creating and sustaining baby bonds requires that governments identify key strategies to pay for this wealth-building measure.

As efforts to reduce wealth inequality through baby bonds are underway, it is crucial to consider key aspects that make for the most effective policies.

Baby bonds need to start with a meaningful amount

Given the persistence and size of the racial wealth gap, governments should commit substantial initial investments at birth—preferably $1,000 to $2,000 per child or larger. Several state and local governments are already demonstrating this approach: The Montgomery County, Maryland, proposal plans to invest $1,800 at birth, growing with interest to about $4,850 by the time the child reaches age 18.²⁰ Connecticut’s law provides $3,200, which, with interest, would amount to about $8,600 when the child reaches age 18.²¹ A larger up-front investment at birth is more feasible than a series of smaller annual contributions for state and local governments, which often face resource constraints and might reduce or completely forgo ongoing payments unless the program has a dedicated funding stream. Furthermore, the amounts that governments envision for baby bonds are particularly meaningful when compared with typical savings today: Black and Latino households had only about $2,000 in liquid savings on average in 2022.²² (see Figure 4) While these initial investments cannot close the racial wealth gap entirely, they would ensure that eligible children begin adulthood with more financial resources than many mid-career professionals have now and would provide crucial benefits such as emergency savings. They would also reduce financial stress and allow young adults to focus on long-term financial planning. These programs represent an important step toward building economic security for the next generation.

Baby bonds can provide larger amounts to those with fewer resources

To make baby bonds most effective at reducing wealth gaps, governments should provide larger benefits to families with fewer resources. Some programs, such as Connecticut’s, already use income information from Medicaid eligibility determinations to establish benefits.²³ An analysis of Federal Reserve data suggests that using either income or wealth to determine benefits may work similarly well, as both approaches tend to reach the families who most need support.²⁴ This means governments can choose income-based approaches to effectively target help to those with the greatest needs.

Some income-based proposals include means-testing requirements that limit eligibility to families below certain income and assets thresholds. However, receiving and using baby bond money would not affect a family’s eligibility for other government assistance programs in states that have protected these benefits in their laws.²⁵

Governments should identify dedicated funding streams to stabilize and grow baby bonds

Baby bonds require secure, long-term financial management. Governments should establish separate, secure long-term trust funds for baby bond investments—similar to how other government bonds, such as public employee retirement funds, are managed. This separation from general government assets provides transparency and assurance to parents and guardians that funds will be available when their children turn 18. This approach is similar to the earlier example of the Massachusetts millionaires’ tax that has generated more than $1 billion annually for education and transportation.²⁶

Baby bond policies should emphasize flexibility and peace of mind

When children with baby bonds turn 18, they should have broad flexibility in how they use their funds—whether to pay for education, start a business, buy a house, or handle unexpected expenses. Current baby bond programs typically allow young adults to use the money only to pursue education, buy a home, or start a business. These restrictions exist because some policymakers worry young people will not make good financial choices and believe taxpayers prefer knowing exactly how their money will be used. However, research shows that when given flexibility, adults in need make smart spending decisions based on their unique situations, and that rigid rules about how to spend the money can prevent young people from meeting their most urgent needs or pursuing opportunities that would best help them build wealth.²⁷

Baby bonds with flexibility are based on a simple truth: People know what they need for their own financial security best. Without restrictions, account holders would not feel pressured to spend their money immediately, allowing their assets to potentially grow while they plan their future. For example, a person should not have to go into debt for an emergency car repair just because their baby bond money is restricted to use for education only.

This freedom of choice creates powerful ripple effects. When young people have a financial cushion and are not constantly worried about day-to-day survival, they can think about the long term and take positive steps such as pursuing additional training, planning a business venture, or participating in their employer’s retirement plan. Some programs, such as California’s HOPE accounts, allow people to keep their money invested for up to eight additional years after turning 18, encouraging continued saving.²⁸ The key insight is that giving young adults control over their baby bond funds both provides them immediate help and encourages them to build longer-lasting financial stability through saving and investing.²⁹

Many households—especially those with individuals who are Black, Hispanic, or are multiple races and ethnicities—often live with tremendous financial precarity and lack the means to pursue economic opportunities that could lead to upward mobility. Baby bonds present an opportunity for wealth building for all children, offering a transformative approach that acknowledges both Americans’ shared aspirations and diverse starting points. Instituting federally funded baby bonds would represent not just an economic intervention, but a profound commitment to equity, recognizing that true opportunity requires understanding and addressing the unique challenges faced by different communities.

Baby bonds would be a crucial down payment toward meaningful economic security and opportunity for the next generation. States and localities should step forward now with bold policies such as baby bonds to begin building wealth and economic security for their residents and to build a strong case for similar interventions at the national level.³⁰