Can Baby Bonds Put Disadvantaged Kids on the Path to Prosperity?

Thanks to legislation approved on Wednesday, every year over 15,000 Connecticut infants born into low-income families will receive $3,200 government-funded savings accounts. The accounts are designed to provide qualifying children with an estimated $10,600 when they turn 18. The returns are based on a projected average rate of return on investment over 18 years of 6.9 percent, the same assumed rate of return for public pension plans in the Nutmeg State. 

Under the bill, awaiting signature from Governor Lamont, $50 million a year will be directed toward providing accounts of $3,200 for about 15,600 children whose mothers are receiving insurance through HUSKY A, the state’s Medicaid program. 

Connecticut is the first state in the nation to pass such a program.

While Connecticut has the highest annual income per capita in the country, it also has one of the highest rates of income inequality in the nation. The U.S. Census Bureau ranked Connecticut in 2018 as having the third-highest level of income inequality in the country, behind New York and Washington D.C, according to a report from Connecticut Voices for Children.  

Once the qualifying children reach adulthood, they have until age 30 to decide what to do with the money.

The state gives recipient four options:

1. Pay for higher education.
2. Purchase a house within the state.
3. Start a business within the state
4. Put the money into a retirement account. 

According to the legislation, beneficiaries must be CT state residents and must complete a basic financial literacy course (curriculum and passing grade still TBD) in order to access to the funds between the ages of 18 and 30. Allowable expenses include education, purchasing a home in the state, investing in a Connecticut-based business or “investing in financial assets or personal capital that provides long-term wage or wealth gains.”

There aren’t many other stipulations on the young adult beneficiaries.

It appears a recipient could use the money to flip houses rather than stay in the neighborhood and contribute to the community.  Yes, they could start a risky venture without having mentorship, a business plan or good banking relationships. They could trust unscrupulous partners, financial advisors or jealous spouses with the money. They could also invest in crypto or other “alternative assets” on the premise of generating outsize returns for their retirement.

Some will argue that doling out the money without sufficient oversight is too much for young adults to handle—young adults who haven’t received much in the way of financial literacy training from their schools or families. But you could also argue that they may earn valuable life lessons from financial mistakes made with the Baby Bond money—the same as trust fund kids do.

Then of course there’s the question of how to pay for the Baby Bond program.

CT State Representative Geoff Luxenberg—a leading proponent of the program-- said a likely scenario is a “slightly higher tax on the wealthiest people.” No surprise there since CT is already one of the highest-taxed states in the nation. Shawn Woodson, Connecticut State Treasurer, said the state would also issue debt, since interest rates are at “historic lows”—but what if rates keep rising, as the Fed has hinted, down the road?

Not only could the state’s highest earning residents resent the program, but so might middle class and working-class families—who could narrowly miss out on the program while potentially strapped with student loans and other debt. Also, what happens if a family’s fortunes change for the better and a Baby Bond recipient is no longer in poverty at 18? On the flip side, suppose a family not born into poverty at the child’s birth falls into poverty a few years later and stays there?

“One of the most effective ways to narrow the racial wealth gap and break the cycle of poverty is for the State to establish saving accounts that directly invest in children born into poverty,” said Wooden in a press release. “By taking bold action now, we can change the life trajectories of thousands of Connecticut residents while also enhancing the economic trajectory of our State.”

Conclusion

We salute the bold thinking by the Nutmeg State to close the wealth gap. But why not take it a step further? Phase in the program gradually so you can make midcourse correction and set up smaller bonds for children who are born just above the poverty line. That way a child’s future is not so heavily dependent on their family’s financial footing (or healthcare choices) exactly on the arbitrary day they are born.

The Full Version of today’s post has more.

What’s your take? I’d like to hear from you.

#wealthgap, #financialliteracy, #babybonds, #inequality