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The Transformational Potential of “Baby Bonds”

An analysis of the ​American Opportunity Accounts Act


In America, wealth equals opportunity. While income helps working people cover the
basics--putting food on the table and covering the month’s rent--wealth helps them get

But decades of discriminatory policy and an upside-down tax code has left a massive gap
between the haves and have-nots: In 1963, the wealthiest 10 percent of families had $6
in wealth for every $1 held by those in the middle; in 2016, ​the ratio was 12:1​. The
wealth gap is even more striking along racial lines: As of 2016, the typical White family
had a net worth of roughly $171,000, 10 times that of the average Black family. A 2015
report by the Federal Reserve Bank of Boston ​estimated the median net worth for White
households in the Boston area at $247,000, compared to just ​$8 f​ or
black households.

The American Opportunity Accounts Act,​ or “Baby Bonds,” creates a new American
birthright. The proposal would establish a federally-funded Opportunity Account for
every child -- seeded with $1,000 at birth and up to $2,000 every year thereafter
through age 17. Individuals already born at the time of enactment would receive annual
supplemental payments, but not the initial $1,000 endowment.

Beginning at age 18, account holders could access the accumulated capital for eligible
uses, including higher education, homeownership, certain entrepreneurial activities,
and retirement -- the kinds of investments that create wealth and change life

Every year, we spend upwards of $634 billion through the tax code, subsidizing
wealth-building through homeownership, retirement savings, and higher
education--most of which accrue to the already-wealthy. Just as Social Security has
redefined the golden years for retired Americans, Baby Bonds would give ​every young
adult a leg up and a stake in our economy. It would also make historic inroads in
narrowing government-abated racial disparities; a recent ​study by Columbia University
found that an intervention similar to Baby Bonds would nearly close the racial wealth
gap among young adults.

This report highlights the transformative potential impact of Baby Bonds. It is

conducted by staff based on longitudinal income and family data collected in the Panel
Study of Income Dynamics (PSID).1


Following enactment of the ​American Opportunity Accounts Act​, a ​ pproximately 4

million 18-year olds each year would gain access to an Opportunity Account. While
every young American would benefit from Baby Bonds, account size would range from
just over $1,700 for individuals growing up in affluent households to nearly $50,000 for
individuals raised in very low-income households. According to staff analysis, at age 18,
half of all accounts would contain more than $15,000, and one in 10 accounts would
contain more than $44,000. Since accounts would continue to accrue interest after the
account holder turns age 18, the median account would contain nearly $22,000 by age
30, assuming no prior withdrawals. Accounts for individuals growing up in the
lowest-income households would contain more than $66,000 by age 30.

Note on methodology: ​The analysis begins with a cohort of people aged 18 to 25 in 2016, the last year for which income data
is available in the PSID. The PSID contains historical family income records for many years for this population, and we
interpolate missing years. Using income and poverty line measures in the PSID, we calculate the value of the baby bond for
each child, each year, and then calculate the final value of the bond in real 2018 dollars. We assume the contribution payments
adjust with inflation and we assume that the Opportunity Accounts grow at an annual 3 percent real rate of return. Finally, we
display the percentile estimates using longitudinal weights, to account for the cohort that reached age 18 in the sample. As a
robustness check, we also applied cross-sectional weights, and found very similar results.
Higher education

Higher education--whether a 4-year institution, community college, or vocational

training--is perhaps the greatest pathway to higher incomes and economic security.
According to a Georgetown University education ​report​, individuals receiving an
associate’s degree or a bachelor’s degree​ add​ $400,000 and $1,000,000, respectively, to
lifetime income compared to those without postsecondary education. Parental wealth is
highly predictive of children’s educational attainment--further perpetuating existing
inequality. 77percent of young adults in the top quartile receive bachelor’s degrees by
age 24, ​compared​ to just 9 percent of individuals from the bottom quartile. For
low-wealth individuals who do pursue higher education, they often graduate with
crippling financial obligations; the graduating class of 2018 had an average student loan
debt of nearly $27,000.

Baby Bonds would flip the script: ​More than 1 in 7 account holders--those
growing up in the poorest households--would have sufficient funds to cover
4 years of tuition and fees at the average public university. ​Nearly 7 in 10
accounts could fully cover two years of community college.
In 35 states, the 10 percent of 18-year olds growing up in the poorest
households--roughly 400,000 individuals each year--would have had
sufficient funds to pay for all four years of in-state tuition and fees without
taking on any debt. That’s before accounting for existing forms of financial aid, such
as Pell Grants.

Homeownership, too, is out of reach for low-wealth Americans. The disparity between
the haves and have-nots is increasingly along racial lines--a legacy of decades of
discriminatory housing policies and a tax code that reinforces existing wealth. The
nearly 30 percentage point gap between Black and White homeownership rates is the
widest it’s been since World War II.

Here again, Baby Bonds would be transformative: ​our analysis found that ​62 percent
of account holders--disproportionately people of color--at age 30 would
have sufficient funds for a 10 percent down payment on a national median
starter home, and 44 percent would have sufficient funds for a 20 percent
down payment.2

Calculations assume that individuals do not withdraw from their accounts prior to age 30 for other eligible uses.
Additional uses

Account holders may use funds for a number of eligible uses beyond higher education
and homeownership, including entrepreneurial activities and retirement. For the vast
majority of aspiring entrepreneurs, debt is the only source of seed capital. The Small
Business Administration’s microloan program, for example, makes loans of up to
$50,000 and averaging $13,000 for certain planning and startup costs associated with
getting a small business off the ground. Baby Bonds would empower entrepreneurs to
take a chance on new ventures without taking on debt.