Connecticut just took an unprecedented step: on June 30 it became the first state in the country to create baby bonds, or trusts for low-income children in the state. Starting July 1, the government will invest $3,200 in an account for any baby whose birth is covered by the state Medicaid program, which will then accrue interest. When they turn 18, the children will be able to use the money—at least $10,635, according to the state’s estimates—for educational expenses, buying a home, investing in a business, or saving for retirement.
“This is one of my favorite bills this year,” said Elizabeth Fraser, policy director at the Connecticut Association for Human Services. “It really begins to address the wealth inequality in Connecticut.”
Connecticut may be known for being home to lavish golf clubs and wealthy finance workers. But it ranks at the top of the nation for its level of income inequality. “We have some of the wealthiest families in the country, and we also have some of the poorest,” Fraser said. “The wealth gap has just been widening.”
The legislation creating the state’s baby bonds was introduced and passed at record speed, all in the same year, due to the collision of a variety of factors.
This is the very problem baby bonds are meant to address by giving low-income children more of a head start. “The lack of net worth and liquid assets leaves families unable to make ends meet, let alone have the ability to pass some measure of wealth down to the next generation,” Fraser said. And therefore the wealth gap becomes self-perpetuating. But with the baby bond money saved up and ready to be tapped at age 18, it will allow the recipients “to make decisions that they would like to make for themselves,” Fraser said.
“Connecticut is ground zero for wealth and income inequality. For us to be the first in the nation to tackle generational poverty and advance racial equity with the enactment of CT Baby Bonds is powerful and a testament to our values and our shared belief that everyone should have the opportunity to experience the American Dream,” Connecticut Treasurer Shawn Wooden said in a statement after Governor Ned Lamont signed the legislation into law. “I hope that the federal government and other states follow our lead.”
The legislation creating the state’s baby bonds was introduced and passed at record speed, all in the same year, due to the collision of a variety of factors. This legislative session was “unique,” said Merrill Gay, executive director of the CT Early Childhood Alliance. Because the capitol building was closed due to the pandemic, most of the legislative deal making was done “behind the scenes,” he said. Advocates credit Treasurer Wooden for sponsoring the legislation and putting the idea on the agenda, then pushing it through. There was no public campaign around it on the outside. “We love the idea of baby bonds, but we were frankly surprised that it happened the first year it was introduced,” Gay said. Fraser agreed. “It sort of came out of the blue for advocates,” she said. “But when it did we were really excited.”
Wooden has said he was inspired by efforts to create baby bonds at the federal level. In 2018, economists Darrick Hamilton and William Darity put forward a plan that would create these accounts for all American families, with the poorest receiving $50,000 and the richest getting $500. Senator Cory Booker took the idea and created legislation based on it, which would give every American child $1,000 in a trust at birth, and the government would deposit up to $2,000 each year depending on household income.
Booker’s plan has yet to move forward. But the timing in Connecticut was, in many ways, perfect for such a policy. The pandemic helped to push the issue along. Many wealthy state residents saw their fortunes increase with a rising stock market even as so many lost jobs and income—its 14 billionaires accumulated an extra $12.6 billion in wealth. That led to a budget surplus thanks to increased tax revenue on their holdings, while it also highlighted the inequality baby bonds is meant to address. Then the state got federal rescue money from the American Rescue Plan. “It was this weird time, we sort of had money to spend,” Gay said.
The idea of baby bonds also got a boost from last summer’s mass racial justice protests in the wake of the murder of George Floyd, a black Minneapolis resident. In Connecticut, Black households make just 57 percent of what white ones make. That’s one part of the reason that over half of Latino families and over a third of Black families have zero or negative net worth, compared to just over 10 percent of white ones. A nationwide baby bond program, on the other hand, would significantly narrow the racial wealth gap.
The state took some other social justice measures this session, such as becoming the first to make prison phone calls free. This was part of that agenda. Wealth and white privilege begets more wealth and white privilege. Gay, who is white, can trace it in his own family. His ancestors in the United States “were never held in slavery, they never faced restrictive covenants to keep them from buying a house or loan discrimination,” he noted. “They didn’t face Jim Crow laws.” As far back as his great-grandparents, every generation has owned a house, a farm or a small business, and that meant that by the time Gay wanted to go to college or buy a house, there was family money to help him do it. “That intergenerational transfer of wealth [is] completely normal in white families,” he said. But Black families have been kept from stockpiling income through employment discrimination and held back from accumulating wealth.
“It was a moment in time that Treasurer Wooden jumped on,” Fraser said. “It was the right thing to do at the right moment.”
The money will have a big impact on children in Connecticut who are eligible—both when they are young and when they grow up and have children of their own. One analysis suggests that child development accounts—savings or investment accounts opened for children by governments when they’re young—increase educational attainment by making those children more likely to think of themselves as one day going to college, as well as making their families more financially ready for tuition when the day comes. Indeed, a recent study found that such accounts in Oklahoma made parents much more likely to start saving for college on their own and that they were more likely to think about sending their children to college. They “create more positive outlooks and actions in the family, while also enabling families to grow assets for children’s higher education,” one of the authors said.
The money from Connecticut’s baby bonds will give a parent “a sense of hope that there is a future for her child,” Gay said. That can help her raise her expectations for her child, helping foster the dream of going to college or starting a business without feeling like it’s an empty promise. “It gives them a little bit of optimism for their future,” Fraser said. “Optimism is a great thing.” And it could allow “the children to dream a little bit, too,” she said.
Baby bonds won’t radically solve major issues like racial wealth gaps and financial instability all on their own. Children won’t be able to access the money until they turn 18 and pass a financial literacy course, leaving their parents still scrambling to afford quality child care and education in the short term. “Those immediate needs are real,” Gay said, “but also doing something that addresses a big problem we never address is important.”
“It is one solution that we need to add to the toolkit of many,” Fraser agreed. She argued there is still a need to invest in housing, education and child care for parents. “We need to take care of the present as well,” she said. “But we also need to look to the future.”
And the cushion baby bonds create for children who receive them when they grow up, and potentially become parents of their own, may be meaningful. “Wealth is really security for families,” Fraser pointed out. It allows families to contribute to retirement, or save for college, buy homes or start businesses. That flows to the next generation. “If you have this wealth, it often transfers to the children and feeds their opportunity,” she said. “What this will start doing is seeding the next generation.”
“Maybe the next generation will be just that little bit better off, and we can start to turn the tide of generational poverty and economic instability for families in Connecticut,” she added.
Bryce Covert is an independent journalist writing about the economy. She is a contributing op-ed writer at the New York Times and a contributing writer at The Nation. Her writing has appeared in Time Magazine, the Washington Post, New York Magazine, the New Republic, Slate, and others, and she won a 2016 Exceptional Merit in Media Award from the National Women’s Political Caucus. She has appeared on ABC, CBS, MSNBC, NPR, and other outlets. She was previously Economic Editor at ThinkProgress, Editor of the Roosevelt Institute’s Next New Deal blog, and a contributor at Forbes. She also worked as a financial reporter and head of the energy sector at mergermarket, an online newswire that is part of the Financial Times group.