American States Are Quietly Embracing the ‘Baby Bonds’ Revolution to Fight Inequality

Quietly, another revolution in the social innovation space is taking place in the United States, where a new policy, “baby bonds,” is being embraced to tackle the challenge of ballooning inequalities, at a time when wealth is increasingly accumulated through inheritance rather than entrepreneurship.¹

While baby bonds were tried and later abandoned in the UK between 2002 and 2011, in the US they are currently gathering steam. Up to a quarter of US states are currently showing interest in a program that aims at endowing US citizens turning 18 with a grant worth dozens of thousands of dollars. This grant can be used to start a business, purchase a home, save for retirement, or pursue a college degree.

While not new (the policy has been discussed since the 1789 French Revolution), the idea arrived in US political circles about 15 years ago. Campaigning with the African American community during the Democratic primaries, Senator Hillary Clinton spoke about baby bonds in 2007. A breakthrough, however, came with the publication of a seminal report under the Obama presidency by the economists Darrick Hamilton and William Darity Jr.² They suggested setting up baby bonds of amounts of $50,000 to $60,000, which they stated could reduce the wealth gap between affluent whites and less affluent African Americans: “rather than a race-neutral America, the ideal should be a race-fair America,” the authors wrote then.

Ever since, the study has inspired many. The Senator and former presidential candidate Cory Booker proposed “American Opportunity Accounts” in 2018.³ In 2021, Senator Booker reintroduced a baby bond proposal offering up to $50,000, an idea that garnered the support of no fewer than 15 US Senators. The policy is making its way more widely in Democratic circles. In the fall of 2020, the Governor of New Jersey, Philip Murphy, pushed for but failed to include a similar proposal in the State’s budget.

While ways to fund it still need to be found, the District of Colombia has made some progress on the matter.⁴ The state of Massachusetts has published an extensive report addressing ways to implement such a proposal, and legislation or studies are under way in one form or another in Delaware, Iowa, Louisiana, New Jersey, Nevada, New York, Vermont, Washington, and Wisconsin.⁵

Connecticut Is Now Leading the Way

None, however, has come closer to implementing the idea than the state of Connecticut. Led by Governor Ned Lamont, the state was the first in the US to pass legislation in 2023 effectively enacting a baby bonds program.⁶

Connecticut State Treasurer Erick Russel observes that “it was a process — the objective of which was to address the generational cycle of poverty.”⁷ Endowing the poorest with some capital to start adulthood was seen as key. Since July 1, 2023, eligibility is automatic if the newborn is covered by HUSKY, the State’s Medicaid program: the State invests $3,200 in the Connecticut Baby Bonds Trust on behalf of each child born in poverty. This will concern an average of 15,000 babies every year.⁸

The proposed endowments will range between $11,000 and $24,000. The initial grant will be invested in the financial markets and the later it is claimed the more it is likely to yield. The individual can then cash their baby bond anytime between the ages of 18 and 30 to fund projects such as the launch of a business, the acquisition of a post-secondary degree, the purchase of a home, or to save for retirement. To claim their benefits, citizens must have demonstrated that they acquired a modicum of financial literacy by completing some dedicated training.

Elected officials in Connecticut were inspired by the work of Darrick Hamilton and the energy demonstrated by Senator Booker from the neighboring State of New Jersey in his proposal through Congress.

The Connecticut proposal already has $400 million set aside in a trust, including funds made available in 2019 from restructuring the Teachers’ Retirement Fund. The trust is funded for 12 years, which protects it from political turmoil. It is meant to be a long-term investment, including for the state that counts on the fact that resources will be re-invested locally — whether in its housing sector, its economy, or in its universities. To remain eligible, individuals need to be Connecticut residents. Regulations are being designed to develop a claim process.

“There is no perfect way to do this,” notes Treasurer Russel, asked about individuals who might try to circumvent the rules, while adding that “people want to change their circumstances” and are likely to use their endowments for the original goals. To maximize opportunities, the state is also looking at ways to partner with philanthropies and non-profits, to address the challenge of cumulative adversity in a holistic manner. Treasurer Russel also notes that children born in poverty may re-invest their future funds in their own, often impoverished, communities, which would provide a welcome boost to lift many boats, not just one.

California Is Experimenting an Alternative

Haunted by the tragedy of the Covid pandemic, during which 32,500 children and teens lost a caregiver, the State of California set up the $100 million Hope, Opportunity, Perseverance, and Empowerment (HOPE) for Children Trust Account Program to offer predominantly Black and Brown minors from the foster-care system a better head start through an endowment that can be claimed at the age of 18.⁹

While the legislation was backed by strong grassroots efforts and passed by a Democratic supermajority in 2022-2023 and the implementation plan was completed in January 2024, funding will be accessible as early as 2025 to any beneficiary turned 18, much sooner than in Connecticut. HOPE does not follow the baby bonds formula per se; it is an endowment of $4,500 for the oldest ones, and slightly more for younger ones, which won’t yield much. This is not the case in Connecticut.

It is also not earmarked. “They are not going to waste money,” says Kasey O’Connor, HOPE’s Executive Director, who oversaw the development of the initiative in her previous role as Treasurer’s legislative director.¹⁰ She notes that a youth panel of experts (including foster youth) has been set up to advise on its implementation, and members insist funding would be used for basic necessities such as buying food. Financial incentives, however, will be put in place for beneficiaries to have a financial mentor and take financial literacy classes.

Outreach efforts, including through the youth panel and social media are currently being made to identify individuals who are eligible, an estimated 58,000, so that they activate their accounts. HOPE will eventually be evaluated, and lessons will be learned. “The aim of our program is sustainability,” notes O’Connor, who keeps an eye on its potential scalability. Covering all children from low-income families would cost California $3 billion a year. Philanthropy is eligible to donate.

A Capital Endowment to Support the Capability Approach

 A capital endowment appears to be a truly innovative tool to tackle poverty and inequality. It fits squarely within the “capability approach,” a contemporary framework that has helped modernize the way we assess poverty – i.e. through one’s ability to fully realize their potential in each era.¹¹ According to philosopher Martha Nussbaum, the capability approach raises a simple question: “what is each person able to do and to be. […] It is focused on choice or freedom.”¹² The framework itself was conceived by economist and Nobel Laureate Amartya Sen, and has been instrumental, for instance, in equipping the United Nations Development Program with its Human Development Index, which goes beyond the simple measure of economic growth to assess how a country performs with regards to its people’s capabilities, such as longevity, education, and income, to achieve their potential. “Capabilities are the real freedoms that people have to achieve their potential doings and beings. Real freedom in this sense means that one has all the required means necessary to achieve that doing or being if one wishes to. That is, it is not merely the formal freedom to do or be something, but the substantial opportunity to achieve it.”

A capital endowment can truly improve access to higher education, to free markets, or to housing opportunities. For it is not just enough for the poor to have ‘formal’ access to higher education; they should be free to devote all their time to studying without having to earn their subsistence with a side job that limits their potential to absorb all the knowledge that a college degree can offer. It is not enough to have the formal right to compete on free markets that are protected by the rule of law, if competitors get a head start with inherited capital while the poor struggle to kickstart their business idea. And so forth.

In turn, to the extent that higher education, a business or a house can help one enjoy real freedoms, a capital endowment equally distributed is a missing instrument in the capability approach that can grant individuals the opportunity to realize themselves irrespective of the conditions they were born into.

As inequality rises because of the combined curse of growing inherited wealth and the perpetuation of the generational transmission of poverty, baby bonds appear to be a powerful tool to tackle one of the major challenges of the 21st century.

1. UBS, “UBS Billionaire Ambitions Report 2023: The Great Wealth Transfer,” News Release, November 30, 2023, file:///Users/sly/Downloads/news-release-billionaire-ambitions-report-en.pdf. ↩︎
2. Darrick Hamilton and William Darity, Jr., “Can ‘Baby Bonds’ Eliminate the Racial Wealth Gap in Putative Post-Racial America?” The Review of Black Political Economy 37, no. 3-4 (September 2010): 207-16. https://doi.org/10.1007/s12114-010-9063-1. ↩︎
3. Cory Booker, “Booker Announces New Bill Aimed at Combating Wealth Inequality,” Senator Cory Booker, October 22, 2018, https://www.booker.senate.gov/news/press/booker-announces-new-bill-aimed-at-combating-wealth-inequality. ↩︎
4. Martin Austermuhle, “D.C. Officials Admit They Defunded an Anti-Poverty Program by Mistake, Sparking Anger in D.C. Council,” dcist, April 12, 2023, https://dcist.com/story/23/04/12/dc-officials-defunded-baby-bonds-by-mistake/. ↩︎
5. Office of Economic Empowerment, “Baby Bonds Task Force Findigns Report,” 2022, https://www.mass.gov/doc/baby-bonds-task-force-findings-report-0/download. ↩︎
6. Briceyda Landaverde, “Connecticut Reaches Dael on $3,200 Baby Bonds,” NBC Connecticut, May 16, 2023, https://www.nbcconnecticut.com/news/local/connecticut-reaches-deal-on-3200-baby-bonds/3033314/. ↩︎
7. In an interview with the author on November 28, 2023. ↩︎
8. Office of Treasurer Erick Russell, “CT Baby Bonds,” State of Connecticut, https://portal.ct.gov/OTT/Debt-Management/CT-Baby-Bonds. ↩︎
9. California Senate Bill 242, “California Hope, Opportunity, Perseverance, and Empowerment (HOPE) for Children Trust Account Program, https://legiscan.com/CA/text/SB242/id/2813885. ↩︎
10. In an interview with the author on February 23, 2024. ↩︎
11. Ingrid Robeyns and Morten Fibieger Byskov, “The Capability Approach,” The Stanford Encyclopedia of Philosphy (Summer 2023 Edition), Edward N. Zalta & Uri Nodelmans (eds.), https://plato.stanford.edu/archives/sum2023/entries/capability-approach/. ↩︎
12. Martha C. Nussbaum, Creating Capabilities: The Human Development Approach (Cambridge: Harvard University Press, 2013). ↩︎