Earlier this year, reports suggested the Trump administration was considering a $5,000 “baby bonus” in the reconciliation package making its way through Congress — a nod to the party’s so-called “pro-family” agenda aimed at encouraging childbirth. In the months since, the proposal has shifted significantly: Rebranded as “Trump accounts,” it is now a tax-advantaged investment vehicle that allows families to contribute up to $5,000 of their own money per year. But is it a good (or good-ish) policy?
While many (rightly) raised concerns about the pro-natalist framing of the earlier “baby bonus,” a lump-sum cash transfer at birth can deliver much-needed aid during a child’s crucial first year. A tax-advantaged savings account whose funds can be accessed after the child turns 18, on the other hand, is a very different beast. Each account opened includes a publicly funded $1,000 initial deposit. And the money invested can be used to help pay for educational expenses, be put toward a down payment, or help start a new business.
In this, Trump accounts bear some similarities to so-called “baby bonds” such as those proposed by Sen. Cory Booker and Rep. Ayanna Pressley. But the likeness between that good policy idea and the “Trump accounts” are purely superficial.
Economists have taken interest in baby bonds because of the bonds’ potential to close the racial wealth gap created by structural racism.
Baby bonds are wealth-building instruments. Though the idea has been around for a while, it has recently received attention from stratification economists, who study the causes and consequences of racial and gender inequality. Economists like the Roosevelt Institute’s Sandy Darity and Darrick Hamilton have taken interest in baby bonds because of the bonds’ potential to close the racial wealth gap created by structural racism. This gap plays an important role in diminishing the life chances and economic mobility of Black, Hispanic and Indigenous people in the U.S. because wealth accumulation is necessary to buy a home, pay for college, start a business, pay for long-term care and retire in comfort. Income support programs like the child tax credit and the earned income tax credit, though necessary, will never be enough to close that gap.
Baby bonds are meant to complement generous income support policies like child allowances, which are regular cash payments to support families throughout childhood. They bear some similarities to other wealth-building instruments like 529 college savings accounts, but are structured to ensure that working-class people, who are disproportionately Black, Hispanic and Indigenous, derive the most benefit.
Researchers have already laid out the features necessary to create a successful baby bond program and significantly reduce the racial wealth gap. Effective baby bonds should be universal, with automatic enrollment. They should be exclusively publicly funded, and not rely on family contributions, so the well-off can’t further widen the advantages their own wealth gives their children. They should be financially progressive so working-class families receive the additional support (e.g., through a larger initial deposit, yearly deposits scaled by income, or both) they need to build wealth. And they should, upon maturity, generate an endowment substantial enough to, for example, cover a down payment on a home or at least a year of college tuition.
Trump accounts are not quite universal — they require both the child and parents to have Social Security numbers. While they employ automatic enrollment, they lack the other features of an effective baby bond program. They are much closer to a (poorly designed) 529 college savings account.
With a single, flat $1,000 deposit, working-class families with no other savings to invest will not be able to build a substantial endowment. After 18 years, that single deposit would likely only grow to $3,000 or $4,000. And they certainly won’t close the racial wealth gap or reduce wealth inequality if richer families can use them to invest $5,000 of their own money each year (though it’s such a poor option compared to other savings accounts that it would mostly only be used by those families already maximizing their tax sheltering).
The federal government should absolutely take steps to help families build wealth. But the working class deserves better. As Hamilton, the economist, and Pressley recently wrote, Trump accounts are not a serious solution to wealth inequality. Receiving $1,000 in a savings account “for free” is nice, but it certainly won’t build substantial wealth for working-class families. And it won’t compensate them for the reconciliation bill’s savage cuts to SNAP and Medicaid, for that matter. The GOP may present itself as pro-worker and pro-family, yet its legislative agenda is anything but. And Trump accounts do little to change that.
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