Panel Paper: Universal Baby Bonds Reduce Racial Wealth Inequality, Improve Net Asset Position of Young Adults

Friday, November 9, 2018
8216 - Lobby Level (Marriott Wardman Park)

*Names in bold indicate Presenter

Naomi Zewde, Columbia University

The distribution of wealth in the United States has grown increasingly unequal over the past half- century, according to the Congressional Budget Office (2016), especially along racial lines. Law makers and researchers have proposed to address the issue by introducing universal “baby bonds,” paid to each new born in the United States and preserved until the individual reaches young adulthood. The proposed bond value is based on a sliding scale up to a $60,000 maximum investment for babies born to families with the lowest net worth. By tying bond values to net worth rather than income, as has alternatively been proposed, the proposed scheme intends to better address the more extremely unequal racial disparities in net wealth.

This study uses longitudinal data from the Panel Study of Income Dynamics on the assets of young adults currently and at birth to simulate contemporary racial inequalities under a counterfactual policy environment in which the U.S. had instituted a baby bond program when the current cohort of young adults were newborns. Young adults in the study are between 18 and 24 years of age between 2011 and 2015. The initial value of the bond is defined categorically by quintiles of net household wealth observed between 1989 and 1994, then smoothed into a linear equation as a function of the inverse hyperbolic sine of parents’ net worth at birth. Initial bond values are assigned in constant 2013 US dollars, and assumed to grow at a 2% rate for the number of years since the young adult’s birth.

I find that without the baby bond program, median wealth among young Caucasians is approximately fifteen times that of the young African Americans ($45,000 vs. $3,005). The baby bond program raises median wealth for both groups and reduces the disparity to a factor of 1.6, where Caucasian young adults hold $86,827 and African Americans $54,585 at the median. A baby bond program would considerably narrow wealth inequalities by race while simultaneously improving the net asset- position of young adults.