A trust fund for every American child

In 2015, more than half of American households had spent more than they earned or had zero savings.

For households with incomes less than $40,000 a year, 68 percent spent more than or the equivalent of their incomes. That proportion fell to 44 percent for households with incomes from $40,000 to $100,000, and dropped further, to 32 percent, for households with incomes greater than $100,000.

The Federal Reserve Board figures show how both the share of savings and the amount of savings out of personal income rise as individuals’ income and wealth increase. They also help illustrate why U.S. economic inequality is continuing to grow.

In our country, savings activity leads to an uneven spiral where those who start with more wealth initially attain greater wealth over time. And their initial endowment of wealth is a consequence of transfers of resources across generations — from parent to child and from grandparent to grandchild.

People who receive larger intergenerational transfers are better able to accumulate assets that outstrip their debts. The decisive factor in their advantage in acquiring wealth is their favorable luck of the draw with respect to the family into which they were born.

Wealth matters because it yields a much wider range of opportunities and options than income. Wealthier families can have a greater impact on the political process, purchase homes in higher amenity neighborhoods, and provide kids with higher quality education. Wealthier families have assets they can draw on to handle emergencies like the loss of a job or a serious medical condition, emergencies that can devastate families with no assets. And, of course, wealthier families can leave bequests to the next generation, often in the form of trust funds.

To confront the outrageous American distribution of wealth, every child should be given a trust fund, not just the children of the rich. Each newborn should receive a “baby bond,” financed by the federal government, giving him or her a foundation for asset-building and economic security.

The program we envision would be universal, but not uniform. Children born into the nation’s richest families would receive a $50 trust fund, while children born into nation’s least wealthy families would receive trust funds ranging from $50,000 to $60,000. Guaranteeing the accounts a return of 1 percent above inflation, young people could access the funds when they reach adulthood.

If there are about 4 million U.S. infants born each year and the average amount of the trust fund is $20,000 to $25,000, the annual cost of the program would range from $80 billion to $100 billion — or 2 percent of the now $4 trillion federal budget. Plus, the first payouts of baby bonds would not have to be made until at least 18 years from the birth of the first cohort, providing time to build a reserve to support the program. The program could be funded out of general revenues without jeopardizing other budgetary commitments.

In turn, we could have baby bonds without engaging in confiscation of anyone else’s wealth. And even if the decision were made to tax the very rich to finance baby bonds, it would be less than 0.5 percent of the top 1 percent’s total wealth.

By giving every child a trust fund to activate when he or she reaches adulthood, we would vastly widen choice and opportunity, empower our young people and greatly weaken the link between a child’s family of origin and his or her destiny.

William Darity Jr. is a professor of public policy at Duke University and Darrick Hamilton is an associate professor of economics and urban policy at the New School.