Negotiating the state budget last September, Gov. Phil Murphy proposed — then quickly abandoned — plans to grant $1,000 savings accounts, also known as baby bonds, to future children born in New Jersey. His critics had railed against the idea, arguing that such spending during a once-in-a-century pandemic was fiscally irresponsible.
While Murphy’s timing was indeed poor, his idea wasn’t. Baby bonds would make terrific policy. Pennsylvania should consider them now.
Baby bonds gained mainstream attention in 2019 as part of New Jersey Sen. Cory Booker’s presidential campaign platform. They are a simple concept with a potentially profound long-term effect: The government deposits an initial sum of money into the bank account of a newborn and promises a certain return over time. Eighteen years later, when that child becomes an adult, he or she can access the account.
The goal of baby bonds is to provide a meaningful cash transfer to children of lesser means as they enter adulthood. Not surprisingly, young people — particularly young people of color — typically have the least amount of wealth.
Imagine a graduating high school student, about to begin full-time employment or enter a two- or four-year college program. Today, she’s broke. With a baby bond, she could ease a difficult transition by tapping resources she’s watched grow over her childhood.
Unsurprisingly, according to preliminary research, the lifetime benefits to her could be extraordinary, as this seed capital functions the way inheritance does for wealthier Americans. This could mean less debt or more education, allowing her to build wealth years ahead of schedule.
But baby bonds will only achieve such ends if handled correctly.
Gov. Murphy proposed baby bonds that offered returns at least equivalent to 30-year U.S. Treasury bonds. This policy has significant drawbacks. First and foremost: Treasury securities are, for a wide variety of reasons, at historical lows. At the current rate of a 30-year bond, $1,000 would yield only $1,500 at high school graduation — hardly enough to buy a used car, pay the rent, or help cover the cost of college tuition.
Instead of offering a fixed rate of return — safe but not sufficient — Pennsylvania should allow parents to choose how to invest the funds, similar to a 401(k). It doesn’t have to be complex; call the limited options A, B, and C, with each offering a different risk and reward. Playing it safe, $1,000 invested in a balanced Vanguard index fund, a mix of stocks and bonds, would yield roughly 7% returns if following historical trends. That grows to $3,400 after 18 years. (For context, the median net worth of an American under the age of 35 is $14,000.)
This market-based approach would drastically lower the program’s cost by keeping the state off the hook for interest payments every year. It would also teach parents and their children how to invest, which could help narrow the racial wealth gap.
How much would baby bonds cost Pennsylvania? In New Jersey, Murphy capped the benefit at a certain household income level and estimated that three-quarters of newborns would receive a savings account.
At present, Pennsylvania already offers $100 to newborns to use toward their postsecondary education. Let’s provide more money and require young adults to graduate from high school in order to access their savings accounts. We can follow Murphy’s lead by also mandating they be Pennsylvania residents. That way, even if some 18-year-olds spend the money in a way that doesn’t build wealth, it could still benefit the state economy. We have a crawling population growth rate and can’t afford to lose more people. Who knows? Maybe we can get a few more people to move to the Keystone State (instead of move away).
This issue shouldn’t be politically divisive. Baby bonds would help most Pennsylvanians born in the state and would provide a nest egg to those who need one most. Here we should just let good policy do the talking. Investing in our kids isn’t a hard sell.
Matthew Jeffrey Vegari is a writer and economics researcher who previously worked for the City of Philadelphia as a policy associate.