Democratic presidential candidate Cory Booker wants to help Americans with their personal finance.
Black Americans, in particular.
Booker’s so-called baby bonds proposal, which has quickly become a centerpiece of the New Jersey senator’s campaign, would provide every child born in the U.S. with a $1,000 savings account. Each year, the government would automatically deposit up to another $2,000 into that account, depending on family income.
People would not be able to dig into the funds until they hit 18, and the uses of the money would generally be limited to paying for college, buying a house and saving for retirement. The U.S. Treasury Department would manage the accounts and the annual rate of return would be around 3%.
Booker lags in the polls behind presidential hopefuls Bernie Sanders and Joe Biden, yet his call to give every American a savings account has been praised for its specificity and potential effectiveness at narrowing racial wealth inequality in the U.S.
The median wealth for young white Americans is $46,000, compared to $2,900 for young black Americans.
And that gap has only been getting worse.
In 1983, the median wealth of white families overall was $105,369, compared with $13,324 for black families. By 2016, the divide had widened to $171,000 for white families and $17,409 for black families.
Today, the average white family has $157,884 saved for retirement, while the average black family has just $25,212.
Many advocates and academics say black Americans have so little wealth because they’ve historically been excluded from the country’s asset-building programs, including F.H.A. home loans and the G.I. Bill.
Debt is another problem. Researchers describe that while black Americans have benefited from increased access to homeownership and college, they have done so on terms called “predatory inclusion.”
For example, more black students than white students attend for-profit colleges, many of which fail to adequately prepare their students for employment and charge high tuition rates. Black students also borrow more private loans, which often come with fewer consumer protections and higher interest rates than federal loans. As a result, black young adults take on 85% more student debt than their white counterparts.
Booker calls his proposal, “the most ambitious ever Congressional effort to combat wealth inequality.” The average payment to black children under his plan would be $1,193 a year, compared with $628 for white children.
In a recent analysis of a baby bonds program, Naomi Zewde, a postdoctoral research scientist at the Center on Poverty and Social Policy at Columbia University, concludes it would “considerably narrow wealth inequalities by race.”
Zewde found the median wealth among young black Americans would swell to $57,845 from $2,900. Young white Americans would see their net worth rise, as well, to $79,159 from $46,000.
“Income inequality is pretty stark, but asset inequality is unbelievable,” Zewde said. “The baby bonds idea addresses that by bringing up the bottom.”
The program would cost $60 billion a year. Booker says it would be funded by increasing taxes on the richest Americans.
He would restore the estate tax exemption to its 2009 level of $3.5 million per person, which would expand the number of households subject to the levy. Currently, the exemption is $11.4 million per person. He would repeal the so-called step-up in basis at death, which means heirs could be on the hook for higher taxes if they sell inherited assets. And he would add another tax on the largest estates.
“Booker’s proposal is sensible in that the infrastructure for the tax exists, the legal change is pretty simple, and it would still leave us with an estate tax affecting rather few,” said Edward J. McCaffery, a scholar at the University of Southern California.
The idea that a savings account should be an American birthright is not entirely new. During the 2008 presidential election, then-candidate Hillary Clinton proposed providing newborns with a $5,000 payment that they could later use for college or a house.
Booker’s proposal already has critics.
“It’s clearly lovely to think about serving up every kid with some money at birth, but it’s not the role of the government,” said Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University.
Daniel Hemel, a law professor at the University of Chicago, worries the relief would arrive too late in life for most struggling Americans.
“If I were to spend $60 billion a year addressing poverty and inequality, I would want some or all of it to go toward addressing child poverty,” Hemel said. “Booker is instead using that money to address the needs of adults who were once children in low- or middle-income families.”
The consequences of poverty on children, Hemel said, are lifelong. “Let’s address those problems early in life rather than later down the road.”
Yet there would also be significant benefits to making children more hopeful about their future, Zewde said.
“It will be really useful to a lot of kids as their growing up to know that this nest egg would be there when they become an adult,” she said. “It could really change a lot of people’s lives.”