Baby Bonds: A Great Provision In A Disastrous Budget Bill

Trump’s child trust funds could reduce wealth inequality while promoting economic mobility and positive parenting. Liberals and conservatives alike should applaud it.

Mother lies with her newborn baby. (Credit: Jane Fader)

Albert Einstein purportedly once declared that compound interest was the Eighth Wonder of the World: “He who understands it, earns it; he who doesn't, pays it.” Whether he really did or did not say those words, the wisdom is there. For those with the savings and know-how, stock and bond investing allows for better preparation for retirement, home purchase, or their child’s college education. Given compound interest and a long enough time horizon, investors can expect to receive several times their initial investment.

However, Einstein’s quote identifies a key dilemma: wealth begets wealth, and those who start without it are left exponentially further behind. In America, the problem is especially acute. The top 1% has done spectacularly; they alone hold 30.8% of household wealth. The upper middle class has benefited significantly, too. The entire bottom half, meanwhile, possesses a mere 2.5% of household wealth.

Author’s representation of wealth inequality. Source: Federal Reserve

There is a wide wealth gap by race, too: a typical white family has six times the wealth of the average Black or Hispanic family. Of course, none of this should surprise us. Families living paycheck-to-paycheck generally don’t have funds to invest. Black and Hispanic Americans have historically had their wealth seized and been restricted from wealth-building opportunities.

There is one addition to the “Big Beautiful” budget bill that could actually alleviate this wealth inequality: baby bonds, or as the bill dubs them, “Trump Accounts.” Under this proposal, every child born between 2025 and 2028 would receive a $1000 government-funded trust at birth, which would be invested in a diversified index of US stocks. The funds couldn’t be withdrawn until age 18, at which point up to half of the balance could be used (minus capital gains taxes) on “qualified” purchases like education, small business expenses, or home purchases. By age 25, the full amount could be spent on qualified expenses, and at 31, there would be no withdrawal restrictions.

There are three reasons why these “Trump Accounts” are a smart idea. First, because they are invested at birth by default, the accounts will eventually be worth far more than their initial investment. The Milken Institute projects that by age 20, children will likely have $8300 in their account. Or, if they choose to rollover the funds to a retirement investment account, they could have $574,000 by age 60. Although there are certainly benefits to immediate poverty alleviation, baby bonds will provide much more assistance in adulthood than one-time cash transfers.

Second, empirical research suggests that baby bonds improve wellbeing and stability for low-income families. A pilot of child development accounts in Oklahoma found that, when similar baby bonds were promised to the children of low-income parents, maternal depressive symptoms decreased and parenting practices became less punitive. Parents also expressed higher hopes for their kids’ educational future, understanding that the funds would be available by the time their kids reached college age—a unique advantage of baby bonds relative to other assistance programs.

Third, these investment accounts will bolster economic mobility. Baby bonds were first proposed in the 2010s as a solution to racial wealth inequality. Simulation methods have found that baby bonds would increase college attendance and homeownership among minority groups. For someone born into a low-wealth family, receiving thousands of dollars in their 20s can make the difference for affording a degree or vocational training, putting a down payment on a first home, or creating a retirement nest egg.

Now, there are plenty of valid criticisms of the plan. First, as an invested asset, Trump Accounts will lose value during a stock market downturn. Second, social policy experts are concerned that banks will find these trusts’ small balances unappealing to manage. Third, the program may disproportionately benefit the wealthy, since it would allow those families to contribute up to an additional $5000 annually. Finally, the plan also adds $3.6 billion per year in government spending to a bill that will already expand the deficit.

On balance, though, I think the benefits outweigh the drawbacks. While market downturns occur, long-term investment remains among the surest ways to build sustainable wealth. Nor would banks’ willingness to participate be an obstacle; most investment accounts today allow small-dollar holdings, similar to what Trump proposes. Although I’d prefer baby bonds to be means-tested—providing more money to poorer people—offering equal funds to everyone is a reasonable compromise to get bipartisan support. Besides, the fact that rich families will benefit from extra contributions to Trump Accounts isn’t unique: those families are investing more to begin with. And a few billion dollars per year is a very small cost for the potential to give every child access to wealth mobility.

Now, in case the title didn’t make it clear, let me emphasize that I am not a fan of the current budget bill overall, as it would worsen inequality and reduce economic dynamism. Projected SNAP cuts would cause over two million American children to lose food assistance. Changes to Medicaid would leave at least seven million people uninsured, largely due to onerous work requirements which might disqualify even working adults. Rollbacks of clean energy incentives and an effective block of state regulation of AI would worsen the threats of climate change and automation. This is all being done alongside an extension of tax cuts that primarily benefit the wealthiest corporations and individuals.

It is not easy to look at a bill that is 90% bad for disadvantaged Americans and praise the 10% that is good. But if we want to be honest brokers for positive change – and I certainly do – then we have to call a smart move when we see one. While Trump Accounts aren't the perfect solution, I am hopeful that they will expand access to the “Eighth Wonder” of compound interest investing to Americans who can’t afford to participate now.