A baby bonds bonanza

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0:12Oh, Adrienne, look at all these precious sleeping babies. These newborns are just snoozing away in the hospital nursery their whole lives stretching before them. Aw, it's a lovely scene, Waylon. But wait, I think I see something peeking out from one of those bassinets. Looks like a piece of paper that says, this baby is entitled to a trust fund from the U.S. government. And not just that baby, all the babies. That's right, look under your bassinets, babies. You get a trust fund, you get a trust fund, and you get a trust fund. This is The Indicator from Planet Money. I'm Oprah Winfrey. And I'm Adrian Ma.

0:57Here on the show, we've been looking at different parts of President Trump's huge tax and spending act. Today, we're looking at investment accounts for newborns. For the next four years, babies born in the U.S. will get$1 ,000 from the government. The state of Connecticut already does this. that the state and federal programs have different aims and potentially different outcomes. Today on the show, we'll look at how these policies could increase generational wealth for all and potentially shrink the country's racial wealth gap. Support for this podcast and the following message come from Mint Mobile.

1:33At Mint Mobile, their favorite word is no. No contracts, no monthly bills, no hidden fees. Plans start at$15 a month. Make the switch at mintmobile.com slash indicator. That's mintmobile.com slash indicator. Upfront payment of$45 required, equivalent to$15 a month. Limited time new customer offer for first three months only. Speeds may slow above 35 gigabytes on unlimited plan. Taxes and fees extra. See Mint Mobile for details. This message comes from NPR sponsor, Capella University. Learning doesn't have to get in the way of life. With Capella's game-changing FlexPath learning format, you can set your own deadlines and learn on your own schedule.

2:18That means you don't have to put your life on hold to earn your degree. Instead, enjoy learning your way and pursue your educational and career goals without missing a beat. A different future is closer than you think with Capella University. Learn more at capella.edu. On July 1st, 2023, at 1.25 p.m., a baby boy named Nolan was born at the Hospital of Central Connecticut. He weighed 7 pounds, 13.6 ounces. Now, every baby is special, of course, but Nolan was a history-making baby. He was the very first participant in Connecticut's baby bonds program. That means when he was born, the state government invested$3 ,200 on his behalf.

3:03Did you get to give that baby a huge novelty check like Publishers Clearinghouse? I did not. I did not. But he got a prominent post on our social media. That's Eric Russell. He is Connecticut's treasurer. His state was the first one in the country to fully fund a baby bonds program. And here's how it works. Every child whose birth is covered by the state's Medicaid program automatically gets$3 ,200 put into an investment account. Medicaid provides health care to low-income families. Eric says almost half the children born in Connecticut every year are expected to be eligible for baby bonds. And that$3 ,200 is projected to grow to at least$11 ,000 by the time those kids turn 18.

3:46The money can then be spent on things like post-secondary education or buying a house in Connecticut. Eric says he believes these baby bonds can help close the state's wealth gap. Wealth is all the assets a person or family has. Bank accounts, real estate, stocks, minus their debts. The ability to accumulate wealth and pass it on to future generations can make a huge difference for homeownership and higher education. When I think about the neighborhood that I grew up in, you know, folks that worked really hard to get by, to put food on the table for themselves and their families. And the difference between them paying rent like my family did my entire life versus owning a home was having some access to capital to put down on that home.

4:26And we know that in the United States, it's how so many families have built wealth over time. It's owning real estate that people have been able to leverage and refinance to help pay for their children to go to school. Connecticut has set aside around$400 million to fund 12 years of baby bonds. And the state got the idea for its program from two economists, Derek Hamilton and William Darity. Over a decade ago, the researchers argued that these government-funded investment accounts could help close the racial wealth gap. Data shows that despite overall increases in wealth in the U.S., black households have just$15 in wealth for every$100 held by white households.

5:05The proposal from the two economists was universal, meaning every baby in the U.S. would get some money. So it has that in common with the Trump administration's new policy. Of course, it's too early to see the impact of the Trump accounts. But researchers have run simulations for how Hamilton and Darity's original proposal might play out. Naomi Zodi is one of those researchers. She's a professor in health policy at UCLA who has studied disparities in wealth. Wealth is the kind of thing where when you need to dip into a large sum of money, not necessarily the amount that you have left over at the end of the month, you know, that's income.

5:41So just even accessing health care wealth can really matter for that. But it also determines, you know, where you're going to buy a house and are you going to live near a freeway or near a park. huge implications for your health. A few years ago, Naomi set out to quantify the potential impact of baby bonds. So she took data from a long-running study of American households. Naomi zoomed in on a group of people who were born in the late 1980s and early 90s. And she ran the numbers to see what would have happened if these millennials had these government-seeded investment accounts from the time they were born.

6:17In this simulation, the children got different amounts depending on how much wealth their families had at the time. The way that I did it was from like$500 to$50 ,000. That's such a range. Yeah. Because, I mean, the ones who are getting$500 are the ones who have trust funds. And the ones who are getting$50 ,000, this would be the only opportunity for them to have an asset and to make a big life investment. Naomi assumed these investment accounts would grow at a modest 2 % a year above inflation. Then she fast forwarded to 2015. That's when these babies became young adults. Now, in real life in 2015, the median white young adult had around 16 times more wealth than the median black young adult.

7:02In Naomi's simulation, though, where these young adults had received money at birth, that wealth disparity shrank from 16x to just 1.4x. What did you think when, you know, your spreadsheet spit out that number? I was like, I was pretty surprised. I was like 1.4. I mean, because one would be equal. Of course, this is just one simulation. Other researchers have run the numbers on baby bonds and found smaller levels of improvement in the racial wealth gap. But Naomi says that for families, just knowing their children will have some money waiting for them in the future can really change things. They can make more concrete plans around, for example, for your college or trade school.

7:43When those choices become more realistic in the future, then you can invest in yourself today. The Trump administration's new investment accounts for babies start with$1 ,000 for every child born between this year and 2028. But after that initial deposit, it's up to families to contribute. And they can kick in up to$5 ,000 after-tax dollars per year until a child turns 18. The really good thing here is that they are putting in$1 ,000. And that's a great precedent. It's just a really small step in the right direction. Naomi points out that$1 ,000 by itself will grow to around$2 ,500 in 18 years.

8:25$2 ,500, that's not enough for a down payment. So she thinks of the money from these new Trump accounts as closer to income than wealth. For his part, Connecticut State Treasurer Eric Russell says there's a key difference between baby bonds in his state and the Trump accounts. The president's program is not about closing the wealth gap. And in Connecticut, that is actually an explicit goal of the policy. Individuals that have resources are able to park funds on an annual basis into these accounts to benefit their children, which is great. But if you're talking about closing the wealth gap, individuals that don't have resources are not going to get the benefit of that.

9:02And so you essentially are creating a tax shelter for individuals with resources to continue to amass wealth for future generations while folks living in poverty continue to get left behind. Both Naomi and Eric say that baby bonds are just one piece of the policy puzzle when it comes to tackling wealth inequality and the racial wealth gap. They also talk about the need to address the rising costs of health care and education. And that is something for the grownups to worry about. We'll see what the world looks like by the time little Nolan in Connecticut is ready to cash out. And become a boss baby.

9:39This episode was produced by Julia Ritchie with engineering by Debbie Daughtry. It was fact-checked by Cooper Katz-McKim. Kate Kincannon is the show's editor and The Indicator is a production of NPR. Come see Planet Money live in Brooklyn on August 18th at the Bell House. We will dress up as Adam Smith. We will crown a valedictorian of Planet Money Summer School. and tape a little graduation ceremony you can join in on. There will be storytelling, costumes, a tribute to some unsung economic heroes, and a little trivia. Click the link in the show notes to get tickets. Monday, August 18th at the Bell House in Brooklyn.

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