WASHINGTON — Sen. Cory Booker (D., N.J.) this weekend launches a policy tour as he tries to jump start his presidential campaign, with one major proposal already at the center: “baby bonds.”
The plan would give every U.S. newborn a government-funded savings account, with more money going to those from the poorest families. When they turn 18, recipients could use the money for college tuition, a home, retirement savings, or other approved use.
The idea is to narrow the vast wealth gap between white families and black and Hispanic families.
“We’ve got to confront the systemic … inequalities in our country, and I’m proposing a bold solution to do just that by investing in every child from the day they are born,” Booker wrote in an email to supporters ahead of Saturday’s event.
Here is an explanation of how his plan would work, what it would cost, who it would help, and what criticisms it faces.
What’s the goal?
Statistics show that the wealth gap Booker decried is real, and growing.
In 2016 the average white family had $919,000 in wealth, compared to $140,000 for black families and $192,000 for Hispanic families, according to data analyzed by the Urban Institute, a think tank. Black and Hispanic families were left with fewer retirement savings, more student loan debt, and lower rates of home ownership.
The plan to address those differences by giving newborns a nest egg was first developed by professors William A. Darity, of Duke University, and Darrick Hamilton, of the New School.
“Its real intent is to provide every young person with an asset that could enable them to actually build or accumulate wealth over the course of their adult lifetime,” Darity said in an interview. “It would not bring about the equalization of wealth but it certainly would improve [on] the degree of inequality that we’re experiencing now.”
How would it work?
Booker’s proposal calls for giving every newborn child a $1,000 “American Opportunity Account” funded by taxpayers. Additional deposits would follow every year, on a sliding scale based on income. The maximum amount, $2,000 a year, would go to children in a family of four making less than $25,100, for example. In a four-person family with income of $81,575, the children would receive $250 that year. There would be no annual deposits for a family of four with income of $125,751 or more.
“This would be a universal program, but the amounts would not be uniform,” said Darity, who consulted with Booker’s staff on the senator’s bill.
The money would sit in an account managed by the federal government, with Booker’s office assuming a 3-percent average annual return on low-risk investments.
By the time children from the lowest income families turned 18, they would have $46,215 in their government savings accounts. Children from high-income families would have $1,681, according to estimates from Booker’s office.
The money could be used for education, retirement savings, home-buying, or other expenses approved by a panel of experts.
What would it cost?
The plan would cost an estimated $60 billion per year, according to Booker’s office.
Booker says his bill would be fully paid for by raising taxes on the wealthiest estates and heirs. He would return to the 2009 standard of exempting estates worth $3.5 million or less from the estate tax. Currently, estates worth up to $11.2 million are exempt. The plan also would add surcharges on estates worth $10 million and $50 million and change a law that allows people to sharply reduce their capital gains taxes on inherited stocks or property.
Would it accomplish its goal?
In emails and speeches, Booker has cited a Columbia University study to argue that his plan would “virtually close the racial wealth gap." The study, though, wasn’t on Booker’s bill, it was on the version pushed by Darity and Hamilton.
The professors’ plan, while similar in methods, framing, and intent, would cost more, and offer more generous amounts to the poorest children. Their proposed accounts would have been worth up to around $65,000 by the time children could access them, nearly $20,000 more than Booker’s projected maximum..
The professors’ plan would cost about $80 billion per year, estimated Naomi Zewde, a researcher at Columbia’s School of Social Work. That’s 33 percent more than Booker’s. And their proposal would give out the savings accounts based on family wealth (assets vs. liabilities), rather than annual income.
Still, the overall idea — providing savings to newborns, with more for people who are poorer — is the same.
Zewde, analyzing what would have happened to today’s young adults if the professors’ plan had been in place in the late 1980s and early 1990s, found a drastic shift. Instead of young white adults having 16 times more wealth than their black peers, it would be 1.4 times as much.
“Giving a newborn $50,000 is kind of a life-changing sum,” Zewde said.
She assumed a 2-percent rate of return, and that the savings would sit untouched for about 20 years after birth.
Booker’s plan, Zewde said, would move the wealth gap “in the same direction,” and cut the disparities, “but most likely not by as much.”
What are the criticisms?
Ryan Bourne, an economist at the libertarian Cato Institute, has criticized Booker’s plan as wealth redistribution dressed up as a savings mechanism.
The program wouldn’t encourage personal saving, since it doesn’t involve families investing their own money, he said. And he argued that the government already has programs to help with the cost of college and housing, and offers Social Security as a retirement safety net.
“Saving is about deferring your consumption, self sacrificing your consumption today for greater returns tomorrow,” Bourne said. “By making this a purely public scheme I don’t see how that encourages people to save for their children."