A Fair Shot for Every Child: The Nuts and Bolts of Baby Bonds

This article is the second in a three-part series—Building Wealth for the Next Generation: The Promise of Baby Bonds—a co-production of NPQ and the Institute on Race, Power and Political Economy at The New School for Social Research in New York City.

In recent years, baby bonds—publicly funded trust accounts created to provide children born into low-wealth families with a guaranteed financial foundation upon reaching adulthood—have evolved from idea to movement. As of July 2024, 20 states had introduced or seriously considered baby bond legislation. Connecticut, California, and Washington, DC, have already passed and funded baby bond initiatives.

State treasurers have been key advocates, starting with Connecticut State Treasurer Erick Russell and his predecessor Shawn Wooden. Beyond Connecticut, treasurers in New Mexico, Nevada, Washington, California, Vermont, Rhode Island, and Massachusetts have also been advocates for baby bonds over the past two years. This state momentum is also fueling federal baby bond legislation, led in the most recent session of Congress by US Senator Cory Booker (D-NJ) and US Representative Ayanna Pressley (D-MA).

The growth of a movement centered on the idea that every American can have a nest egg set aside for them is inspiring. But what does implementation look like? As programs begin to be enacted, we are learning more about making baby bonds work and what is required to sustain political support for the long haul.

The First Baby Bond Baby

Addressing immediate needs alone will never break the cycle of intergenerational poverty.

On July 1, 2023, Nolan Ramirez was born in New Britain, CT—a small city with big dreams for its next generation. Nolan’s birth was more than a personal milestone; he was the nation’s first “baby bond” baby. Nolan’s future will be built on a unique financial foundation that children born before that day in Connecticut lack.

Through Connecticut’s baby bonds program, Nolan and more than 16,000 other children born into families covered by Medicaid received $3,200 in the fiscal year 2024. With investment growth, each account will be worth between $11,000 and $24,000 by the time the children reach age 18. These funds can be used to attend college, buy a home, or start a business—all critical to building wealth.

Balancing Immediate Needs and Long-Term Solutions

 Baby bonds highlight a fundamental tension in social policy: addressing immediate needs versus investing in long-term solutions. It’s hard to ignore the prevalence of poverty and near poverty in the United States, with many living paycheck to paycheck, forced to make choices like paying rent or buying food—or covering medical expenses and childcare. While these short-term financial pressures are real and severe, they require short-term support. However, these measures cannot address the root causes of the racial wealth gap.

Critics like Matt Bruenig of the People’s Policy Project denounce baby bonds because they do not meet immediate needs. However, what critics like Bruenig overlook is that addressing immediate needs alone will never break the cycle of intergenerational poverty. As Sendhil Mullainathan and Eldar Shafir discuss in their book Scarcity: Why Having Too Little Means So Much, financial hardship often creates tunnel vision, forcing people to focus on short-term fixes at the expense of long-term solutions. The goal of baby bonds is wealth building rather than short-term relief, allowing them to directly confront the racial wealth gap—something that immediate cash support cannot achieve on its own.

State programs…create a patchwork of approaches. A universal federal program would provide more consistent support.

Baby bonds are designed to ensure young adults have a genuine opportunity to invest in their future through higher education, homeownership, creating a long-term retirement account, or forming a business. The power of compound interest over 18 years means that even relatively modest initial public investments can grow into significant, even transformational sums that change the trajectory of a young person’s life.

Moreover, the psychological and health impacts of baby bonds should not be underestimated. Knowing that a child has access to a substantial capital endowment can positively influence family planning and aspirations from birth. It changes the narrative around what’s possible for low-income families, potentially affecting health, educational, and career aspirations from an early age. This shift can have ripple effects throughout a child’s development well before the funds become available.

Universal Versus Means-Tested Approaches

Before discussing the details of baby bonds, it’s important to highlight our preference for a universal, nationwide approach with progressive funding. This federal model, as proposed in the American Opportunity Accounts Act, ensures that all children benefit, with more resources directed to low-income families.

In contrast, state programs that have been enacted to date, such as in Connecticut, have implemented means-tested programs due to budget constraints, aligning with existing initiatives like Medicaid. While these state programs focus on low-income children, they create a patchwork of approaches. A universal federal program would provide more consistent support while still prioritizing those most in need.

Dissecting the Nuts and Bolts

Let’s examine how the program works in practice across various states.

Connecticut: Connecticut accessed nearly $400 million set aside in a reserve fund to guarantee at least 12 years of funding for its baby bonds program. Connecticut’s baby bonds program provides an initial investment of $3,200 for each child born on or after July 1, 2023, whose birth is covered by HUSKY (the state’s Medicaid program), with the funds expected to grow significantly by the time the child reaches adulthood.

Recipients must be between 18 and 30 to access the funds, and must complete a financial literacy course and remain Connecticut residents when claiming the funds. These measures ensure that young adults use the funds as intended, to build wealth.

Washington, DC: Washington, DC’s baby bonds program will provide up to $25,000 to children born to families on Medicaid with incomes below 300 percent of the federal poverty line (approximately $83,250 for a family of four). This initiative, funded by revenues from the city’s expansion of sports betting, aims to narrow the wealth gap and provide financial opportunities for eligible children. On reaching adulthood, funds can be used for education, investing in a business, making a down payment on a home, or maintaining the funds in an investment account for long-term purposes like retirement savings. 

California: California has approved a baby bonds program focused on children orphaned due to COVID-19 or in the foster care system. The state has appropriated $100 million for this initiative, showcasing how baby bonds can be adapted to meet the needs of specific vulnerable populations. While the California program has been approved, further details about eligibility and restrictions are still being worked out.

Program Challenges

The targeted nature of baby bonds addresses a critical gap in current social and economic policy. By focusing on children born into low-income families, these programs directly tackle the root of intergenerational poverty and wealth disparities. While means testing at birth isn’t perfect, it’s an administratively efficient way to reach those most likely to lack family wealth. The program’s universal application within this target group also avoids stigmatization and ensures broad coverage.

Baby bonds face challenges due to their long gestation period, making them vulnerable to political and economic shifts.

While state-specific baby bond programs vary, they face several shared challenges:

1. Funding Sustainability: Ensuring long-term funding is one of the biggest hurdles for baby bond programs. While states like Connecticut have guaranteed funding for at least 12 years, future administrations or economic downturns could jeopardize the financial support for these programs. This is not merely a hypothetical threat. In Washington, DC, for the last two years, the city’s mayor has sought to eliminate program funding. The city council, however, has maintained support each time.
2. Eligibility Criteria: States typically use Medicaid eligibility or income thresholds to identify low-wealth families for baby bond programs. However, these criteria could exclude certain groups who still face significant financial hardship, such as children of immigrants, families slightly above the income threshold, and those eligible for but not enrolled in Medicaid. Moreover, historically, universal programs (like Social Security) have proven to be more efficient and more politically sustainable than means-tested programs.
3. Account Structure: States must design baby bond accounts to maximize growth potential while maintaining flexibility and ease of administration by using diversified investment strategies, minimizing administrative costs, implementing automatic enrollment, providing substantial initial endowments, and balancing restrictions with flexibility for wealth-building purposes.
4. Use Restrictions: Most baby bond programs limit the use of funds to specific wealth-building activities. There’s an ongoing debate about whether recipients should have more flexibility in how they use their baby bonds once they reach adulthood.
5. Financial Education: Several states require recipients to complete a financial literacy course before accessing funds. However, there is mixed evidence on the long-term effectiveness of financial education programs.
6. Long-Term Impact: The full benefits of baby bond programs won’t be realized for many years, so it will be decades before we have good data on effectiveness.
7. Political Risks: Programs requiring long-term commitment are vulnerable to budget cuts before delivering measurable results.

Protecting Baby Bonds from Political and Economic Uncertainty

Baby bonds face challenges due to their long gestation period, making them vulnerable to political and economic shifts. The principal concern is that budget cuts or changing priorities could undermine the program before it matures. As noted above, this has already been seen in Washington, DC, where political battles threatened program funding, requiring the city council to reinstate it. While the immediate challenge has been resolved, it highlights the vulnerability of these programs to shifting political priorities.

To address these risks, Connecticut illustrates one effective approach. By establishing a dedicated trust fund, Connecticut helps ensure that funds are insulated from future political changes and budget reallocations. This model provides a framework for other jurisdictions to secure a dedicated long-term funding source to avoid program disruptions.

Additionally, applying legal frameworks like those that protect Social Security could further ensure the resilience of baby bonds. Social Security, created during the Great Depression, has become a cornerstone of financial security for older Americans. Baby bonds could play a similar role by ensuring all Americans can enjoy a modest foundation of personal wealth to support themselves.

By implementing these protections, baby bonds can develop the resilience to withstand political and economic uncertainties. As public support grows, baby bonds, like Social Security and Medicare, may become a lasting tool for reducing wealth inequality and fostering economic opportunity for future generations.