Baby Bonds: Saving for America’s Future

Abstract

Child Development Accounts are government-established and maintained savings accounts for children born to qualifying, generally low-income, families. Often seeded with a cash grant from the government, the savings account can be accessed when the child turns 18 for specific purposes such as financing education, buying a house, or opening a business. While Child Development Account policies have been implemented by some local and state governments, the American Opportunity Accounts Act (AOAA) proposes to establish a Child Development Account for all American children at birth. The sponsors of the AOAA believe that the legislation will reduce income inequality and reduce the racial wealth gap in the United States. An economic analysis of the AOAA predicts that the proposed legislation would incentivize middle-income families to have more children than they otherwise would while also reducing the private saving levels of middle-income families for future child-related expenses. Similar effects are not expected in low- and high-income families. Finally, the results of the analysis demonstrate that if policymakers wish to achieve the maximum possible reduction in the income and racial wealth gap, then AOAA benefits should be limited solely to low-income families.