Baby Bonds: A New Public Investment Tool For Building Intergenerational Wealth

April 25, 2024
Policy Snapshot

Baby Bonds (formally known as the Child Trust Fund Program) is a new District program intended to address how children from marginalized communities are disadvantaged by a legacy of discriminatory policies that have locked them out of access to intergenerational wealth and created stark racial wealth and opportunity gaps in the District and nationally. Through the program, public money will be invested in a savings and investment account when a child is born whose birth is covered by DC Medicaid. The account then grows annually through both interest and additional annual contributions from the District as long as the family income remains below eligibility cutoff (see addendum). As originally passed, only children in families with incomes less than three times the federal poverty line – $77,460 for a family of three as of 2024 – are able to remain eligible for continued investments. Once an eligible  child turns 18, they can use the funds for education, starting or investing in a business, buying a home in the District, or saving for retirement. It’s important to note that allowable expenses for Baby Bonds extend beyond traditional college savings plans in order to open additional pathways to prosperity for young people in the form of home ownership and entrepreneurship. The legislation creating the program wisely made enrollment nearly automatic for any District resident born as of October 1, 2021, whose birth was covered by Medicaid, and who has a valid social security number or other acceptable form of identification. 

The DC Council passed the Child Wealth Building Act of 2021 in December 2021, and funded the legislation in both the 2021 and 2022 budget packages. The Office of the Chief Financial Officer (OCFO) is responsible for implementing it. As of April 2024, the OCFO invested initial funds in a trust to begin collecting interest, but has not yet begun enrolling any children for their individualized accounts. The OCFO shared in a February 2024 hearing that they expect to start enrolling children within 6 to 8 months. 

The Potential Impact of Baby Bonds

The DC Council’s news alert about the Baby Bond legislation notes that white District households have 81 times the wealth of Black households and 22 times the wealth of Latine households. Research shows that greater wealth (not just greater income) tends to correlate with better health and longer lives, and differences in parent and grandparent intergenerational wealth lead to differences in their grandchildren’s income prospects. Baby Bonds—because they provide public seed funding for the accounts and do not rely on family contributions, automatically enroll children (unlike the opt-in model of matched savings accounts), and expand allowable uses beyond education—add to the wealth-building policy landscape in ways that show promise for reducing long-standing racial economic inequities. A 2020 simulation found that a national policy instituting Baby Bonds could reduce the wealth disparity between young white and Black Americans from 16 times the wealth to 1.4 times the wealth, which would be a massive shift. 

Funding and Estimated Participation

The District is working with an IT and banking vendor to set up Baby Bonds account portals to be able to start enrolling children, so there are not current enrollment numbers yet. However, the OCFO estimates the original 2021 legislation would benefit approximately 44,350 participants by 2040. The District currently has roughly 124,475 children and youth under 18, so if the population stays stable, that means roughly one in three young District residents will be enrolled in Baby Bonds. While we do not have racial demographic data yet, the Baby Bonds legislation calls for reporting the race of program participants. Given that roughly 93% of District children enrolled in Medicaid are Black or Latine, this program is likely to be targeted in a way that helps narrow the racial wealth gap.

Recommendations

  • Fully fund this program, allowing the intended population to benefit, at the levels intended when the DC Council passed the legislation. The Mayor’s proposed FY25 budget significantly reduces the scope of the program. See our April 2024 testimony and the addendum below for more details.
  • Amend the legislation to allow especially marginalized children to benefit. Specifically:
  • Clarify through regulation how program processes will actually work. Specifically, explain how:
    • Enrollment will occur for those born between October 2021 and whenever the vendor has a system set up, as well as for newborns, once there is a portal.
    • The vendor will adapt policies and procedures based on feedback from participants regarding user-friendliness, customer service, and transparency.
    • Agencies will work together to maintain contact information for–and communication with–enrollees, establish District residency for children and youth no longer enrolled in Medicaid, and create greater transparency through public reporting.
    • Enrollees who reach age 18 will be able to access their funds in practice 
  • Outreach
    • Many of the benefits of the government funded college savings programs on which Baby Bonds builds are because families know the money is there. These funds have been shown to help sustain high parental expectations about children’s education, as well as help children develop a college-bound mindset, increase concrete communication about postsecondary plans between caregiver and child, and prompt greater hope for the future. If families don’t know they’re in the program, they, and the District overall, will lose out on some potential benefits. We recommend robust outreach, particularly in wards 5, 7, and 8 where we know the overwhelming majority of District children likely to be eligible for this program reside. Raising awareness of the Baby Bonds program is a way for the District to show its residents that it’s investing in their future and success.

Addendum: Comparing Baby Bonds Legislation’s and the Mayor’s Proposed Changes

In spring 2024 Mayor Bowser presented a budget that, if passed, will make major changes to the Baby Bonds programs. A comparison between the program as established in the original legislation and the Mayor’s proposed version is below.

Original Program (2021 law) Mayor’s Version in the FY25 Budget Support Act 
Eligibility criteria upon birth Family resides in DC and is enrolled in Medicaid  Family resides in DC and is enrolled in Medicaid
Income eligibility criteria 300% FPL (no more than $93,600 annually for a family of four) 100% FPL (no more than $31,200 annually for a family of four. By contrast, a 4-person family needs roughly $100,600 just to cover basic necessities)
Estimated enrollment by 2040 44,353 18,185
Annual contribution Currently $600 to $1,000 – a progressive contribution model where families with lower incomes receive higher annual contributions in the child’s account, increasing over time with inflation Maximum of $500. No adjustment for inflation. 
Amount a young person can expect to receive at age 18 $31,635, if a child received the  maximum contributions throughout their enrollment period $13,609
Allowable uses of Baby Bonds College education, starting or investing in a DC business, buying a DC home, retirement savings  College education, starting or investing in a DC business, buying a DC home, retirement savings 

We recommend that the DC Council reject the Mayor’s FY25 proposed changes to the law because:

The original legislation was right to propose a substantial, progressively structured annual contribution model. $13,609 is hardly enough for a single year of in-state tuition at many universities, underscoring why the Urban Institute’s principles for baby bonds programs include the need for substantial account sizes to catalyze a child’s future economic stability.