Politics and Your Wallet – Baby Bonds

While many writers in the personal finance community shy away from politics, we should instead be spending more time understanding and explaining politics to our readers. The decisions that politicians make directly impact our lives, so it is important to understand what politicians stand for and what they will do if elected.

Understanding politics gives you the power to advocate for politicians and policies that will improve your life and the lives of those around you.

With our Politics and Your Wallet series, we’re working on looking at different economic policy proposals and how they will affect you. Our last investigation was into Kamala Harris’s LIFT Act, which would send monthly checks to 80 million Americans.

Today, we’ll be looking at Cory Booker’s “baby bonds” plan, which would fund an investment account for every child in the United States.

Even if Booker does not win the presidency, he will still be in the Senate and will keep advocating for this plan. It has even recently picked up a champion in the House in Ayanna Pressley. So while Booker’s prospects in the primary look remote at this point, this policy is still worth a closer look.

Wealth Inequality

While much of the conversation surrounding middle class money has focused on income – stagnating wages and income inequality – Cory Booker is looking instead at wealth inequality. More specifically, he’s looking at the effect that wealth inequality has on the opportunities of children.

Like income inequality, wealth inequality has gotten exponentially more drastic over the last few decades. Two-thirds of all wealth in America is owned by the top 5%. The three wealthiest Americans own more wealth than over half of the country combined.

In addition to a widening gap between the rich and the middle class, there is also a massive racial wealth gap. As of 2016, the median white family had a net worth of $171,000. Meanwhile, the median Hispanic family had $20,700 and the median black family had a net worth of only $17,600. This is a gap that has been widening for decades.

Inequality and Capitalism

Some level of inequality is inherent in a capitalist system. The prize of being wealthier and better compensated than your fellow Americans is a carrot to incentivize hard work, creativity, and meeting the needs of others in the marketplace. That’s all fine.

But a functioning society requires that gap to stay within reason. And accepting such a massive racial wealth gap is unconscionable. Unless you believe that somehow white people happen to work ten times harder than people of other races, then this gap is not based on the proper functioning of capitalism.

Plus, what of the children? Children of the wealthy have more opportunities to succeed than children of the middle class, who have more opportunities than the children of the poor. If we truly want to be the land of opportunity, then we need to make sure every child has the opportunity to reach their full potential.

Even from a raw capitalistic perspective, giving every child a more equal start allows for a more meritocratic system that rewards true talent and hard work. As one professor said in discussing Booker’s plan, “If you don’t have capital in a capitalist society, all that does is lock in inequality.”

But how do you get that capital? How do you get that equal start?

Enter baby bonds.

The American Opportunity Accounts Act

Booker’s American Opportunity Accounts Act would start as a universal benefit. Every child born in the United States receives an investment account seeded with $1,000 invested in low-risk treasury bonds with an estimated 3% annual return.

The next year, an additional amount ranging from $0 to $2,000 is added to the account. If your household income is below the poverty line for that year, you’ll receive the full $2,000. If your income is over 500% of the poverty line, you won’t get any money added to your account. Incomes in between those two points result in payments at different points along that spectrum.

This process repeats until the child turns 18 and is given access to the money in the account. At that point, the money can be spent on wealth-building investments like paying for college, buying a house, starting a business, or saving for retirement. The idea is that this money should be used on anything that “provides long-term gains to wages and wealth.”

Essentially, this is seed money. The government is giving children a bit of capital to use as a springboard to build their own wealth.

Cashing Out

So how much capital are we talking?

Depending on how much your family makes, the estimates range from a low of around $1,700 to a high of more than $46,000. The following chart from Vox gives a good illustration of how these numbers vary based on household income.

Of course, investment growth may vary and families will likely jump between the different tiers during a child’s 18-year journey, but this chart gives an overview of the wide range of potential outcomes.

An analysis found that 1 in 7 kids would have a large enough account balance to cover four years at the average public university, while 70% would be able to cover two years at a community college.

If people choose to let their accounts grow for a while rather than cashing them out for college, the analysis found that by 30 years old, 44% of people would be able to put 20% down on a median-priced home, while 62% could put 10% down.

That’s a solid foundation on which to build.

Costs

Any expansion of federal spending always leads to two questions: How much does it cost? And how will you pay for it? Booker has answers.

The baby bonds proposal is surprisingly inexpensive. On a relative scale, of course. I don’t know what other situation allows for saying that $60 billion a year is inexpensive.

But it is!

The tax bill that Republicans passed in 2018 cost around $200 billion per year. Same for Kamala Harris’s LIFT Act. The reduced tax rates for dividends and long-term capital gains alone were a $127 billion expenditure this year.

This bill could do a lot of good for a relatively small price tag.

Where’s the Money?

To find this $82 billion in the couch cushions, Booker plans to fiddle with the estate tax.

This year, the first $11.4 million of an individual’s estate can be passed on to heirs tax free. Booker would return that exemption amount to the 2009 level of $3.5 million. He would also add a surtax on estates over $10 million and a higher surtax on estates over $50 million.

The other adjustment that Booker would make has to do with the step-up in basis. Under current law, I have to pay capital gains taxes on the sale of stock (or other assets) based on the difference between the price when I sell it and the price when I bought it. If I buy $100 of stock and sell it for $150, I have to pay taxes on my $50 profit.

The step-up in basis means that if I die and pass that stock along to my kids, they are taxed as if they bought it at $150, rather than the $100 that I actually paid for it. If I sell it the day before I day, I pay taxes on $50. If they sell it the day after I die, they pay no taxes as if they made a $0 profit.

Booker would eliminate the step-up in basis. Under his plan, the sale of my stock would be taxed based on a $50 profit whether it is sold the day before or the day after I die.

Economic Populism vs. Racial Equality

Given that this plan ultimately comes down to taxing the wealthiest estates to give money to the poorest kids, it is easy to imagine this plan being pitched as a Bernie Sanders style economic populism.

Income inequality is out of control! The 1% is hoarding the American Dream! It’s time that we make them pay their fair share and use that money to lift up everyday Americans!

But that’s not how Booker has chosen to frame this bill.

Instead, Booker is pushing this plan as a way to close the racial wealth gap.

Closing the Racial Wealth Gap

Baby bonds are facially race neutral. You don’t get higher or lower payments based on your race. The only factor is your family income.

However, people of color are more likely to be raised in a lower-income household than white kids, and thus are more likely to receive more funding for their investment accounts. While the program is directly targeted at helping the poor, the biggest demographic effect will be a large increase in wealth for young people of color.

But will this baby bonds proposal actually close the racial wealth gap?

It’ll come pretty damn close.

At least for young Americans.

A study found that the median white person aged 18 to 25 had a net worth of $46,000, while the median black person had a net worth of $2,900. Young white adults had almost 16 times more wealth than young black adults.

If Booker’s baby bonds had been in effect when these young adults were born, the median white person would have had a net worth of $79,159, while the median black person would have had a net worth of $57,845. There is still a gap between the two, but that gap is 1.4x rather than 16x.

While this bill doesn’t completely close the wealth gap for young adults, it is a massive leap in that direction.

A Boost for Everyone

So that’s one way to pitch this bill. And it’s the way Booker has chosen to frame it for this Democratic primary.

But take a look back at those numbers.

The median young white adult would have a net worth increase from $46,000 to $79,159. That’s an increase of 72%!

This is a plan that gives kids of every race a platform from which to launch their careers. It provides a boost in the direction of wealth building for everyone who needs it.

Limited Criticism

Baby bonds would address the racial wealth gap while also helping poor people of all races.

The privilege discussion often gets stuck on the “But what about poor white people” question. That stumbling block is easily sidestepped here. Poor white kids will get the exact same amount as poor people of color. This should help the proposal avoid some of the sharper criticisms from the right that doom other progressive plans.

I went searching for conservative critiques of the plan, and they were all rather weak.

There is, of course, the standard “government spending is bad” argument, which is popular with conservative intellectuals but meaningless to voters.

This was coupled with the standard argument that we need to make poor folks work harder rather than giving them more benefits. But even this was muted, as we are dealing with children rather than working-age adults. Instead, this argument focused more on the idea that the program should have some mechanism that teaches poor kids how to save money and defer consumption.

Another argument was that this would act as a subsidy for home-buying, college tuition, and retirement. But these are all already subsidized through our tax code, so there is no real heft to that argument either.

Maybe if this bill starts gaining steam and looks like it will become law some new arguments will come out of the woodwork, but at this point it appears that there won’t be much for opponents of baby bonds to use to rally voters against it.

Seed Capital

Overall, this seems like a surprisingly powerful proposal.

Capitalism requires capital, and giving some to young adults who lack it would be a great step towards equality of opportunity. Regardless of your race, your gender, or your parents’ economic standing, you would have a little bit of seed money to start your adult life.

Maybe you want to go to college. This can help you avoid or minimize the student loan burden that haunts young adults these days.

But maybe you don’t want to go to college. This is one of the few proposals aimed at young adults that specifically aims to lift you up, as well. You can use that money to start a business. You could use it to put a down payment on a house, which is the primary way that most Americans build wealth.

If nothing else, you could use it to give yourself a nice head start on saving for retirement.

All of this for a low enough cost that it can be paid for with some tweaks to the estate tax. What’s not to like?

Join the Conversation!

So what do you think? Do you support Booker’s baby bonds proposal? How would you have used your money? How would it have affected your life? Let us know in the comments!

One thought on “Politics and Your Wallet – Baby Bonds”

  1. Thanks for the insightful explanation. I support Booker’s idea because without such acts, we risk entrenching an Indian like caste system where kids of the poor have no hope of breaking the system. The high estate tax bracket is one major factor perpetuating control of wealth by a few and it should come down.

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