The racial wealth divide between white and Black families in the U.S. is more of a chasm than a gap.
In 2019, the median household wealth for white families was nearly $190,000, almost eight times higher than that of Black households, according to Federal Reserve data.
"Baby bonds" are one proposal to help close the divide. Unlike regular bonds, they are not a debt instrument traded in the public markets. Instead, the proposal would create a federally funded trust fund account for every newborn baby in the U.S.
"I support this idea called baby bonds," Sen. Cory Booker, D-N.J., told CNBC. Booker has proposed a baby bonds policy called the American Opportunity Accounts Act, which has been co-signed by many of his Democrat colleagues.
The bill, if passed, would create a savings account for every child with at least $1,000 in it.
"Depending on the wealth of your family, every child will get a deposit annually up to [age] 18 into that account, upwards of $2,000 for the lowest income children," Booker told CNBC.
When the child turns 18, depending on the families' income, they could have nearly $50,000 in this account. If the child comes from a well-off family, they'd end up with just over $1,600 by age 18 since they wouldn't be getting annual payments.
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According to investment firm Morningstar, Booker's American Opportunity Accounts Act could reduce the racial wealth gap by 40%. Plus, baby bond recipients would only be able to use the funds for wealth-building activities, including buying a home, continuing education or starting a business.
According to analyses from Booker's office and from the City University of New York, a baby bonds program could cost the U.S. government $60 billion to $80 billion.
"It's a little bit more than food stamps," said Naomi Zewde, an assistant professor in CUNY's Graduate School of Public Health and Health Policy.
However, baby bonds cannot close the racial wealth gap alone, and conservative policy experts argue that baby bonds could reduce incentives to save or to pursue higher education.
Watch the video above to learn more about how baby bonds could work, the economics behind the proposal, and what may be next for these policies on the federal and state levels.
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