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Proposed “Baby Bonds”—Viable Incentive for Long Term Personal Savings or Panacea?

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Stephen R. Rolandi
May 16, 2021

Economists, tax accountants, financial planners and others often like to debate whether Americans tend to be spenders or savers. My late parents were big believers in always putting some money aside for unforeseen moments in life or emergencies which required quick outlays of cash; or to invest funds for college or a new house. The concept of saving is all about deferring consumption—sacrificing today to fulfill personal goals in the future. On the other hand, Americans like to spend, particularly in times of great prosperity.

According to the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund, the USA and Peoples’ Republic of China (PRC) currently have the highest levels of Gross Domestic Product (GDP) at $21.9 trillion and $16.8 trillion, respectively, followed by Japan, Germany, France, the United Kingdom, India, Italy, Canada and South Korea.

Currently, the United States ranks 12th out of 27 OECD countries for percentage of disposable income saved, which puts us ahead of nations such as Canada, Australia and Poland, but behind nations such as Switzerland, Sweden, Germany and Norway.

So with this data in mind, I found it very interesting to read about a proposal initially advanced by U.S. Senator Cory A. Booker (D-NJ) during his candidacy for the 2020 Democratic Presidential nomination, and which was recently re-introduced in the United States Senate, along with U.S. House Representative Ayanna Pressley (D-Massachusetts).

The proposal, entitled The American Opportunity Accounts Act ( H.R. 835 and S.222) is popularly referred to as the, “Baby Bonds Plan,” and has 15 co-sponsors in the Senate and 22 co-sponsors in the House, including: Senate Majority Leader Charles Schumer; Senators Elizabeth Warren, Bernie Sanders, Amy Klobuchar; as well as House Members Eleanor Holmes Norton (DC); Grace Meng (NY); Barbara Lee (CA.); and Alexandra Ocasio-Cortez (NY).

The basic concept behind this proposed legislation is to create a federally–funded savings account for every newborn child in the United States. Actually, the concept is not new, and some version of it has been proposed in the past by presidential candidates Rick Santorum (Rep.) and Hillary Rodham Clinton (D).

A similar, but somewhat different measure has also been recently introduced in the United States Senate by Senator Mitt Romney (R-Utah). I should note that some states, such as New Jersey, are also considering similar-concept proposals for residents of their states. These are also referred to as, “ Child trust funds,” that exist in the United Kingdom (UK), Canada and other nations with varying degrees of success.

The basic features of Senator Booker’s American Opportunity Accounts (AOA) proposal include the following:

  • Create and seed a savings account of $1,000 at birth, with additional deposits of $2,000 each year, depending on household income.
  • The deposited funds would reside in an interest-bearing account (very likely 30 year U.S. Treasury bonds), which could be accessed by account holders at age 18 for allowable uses such as buying a home, paying for educational expenses, starting a business or acquiring a large ticket expenditure.
  • Such accounts would carry an annual interest rate of 3%. Recipients could begin making withdrawals at age 18; funds in these accounts would be tax-free.
  • Children whose families are at the designated Federal poverty level would receive additional annual deposits on a sliding scale. For example, a child whose parents earn between 175% and 225% of the Federal poverty line (currently $22,050 for a family of four) would receive $1,000.00 annually, while a child whose family lives below the poverty line would receive supplemental payments of $2,000 per year.

The cost to implement the Baby Bonds Plan would be approximately $650 billion over a decade, according to projections compiled by Senator Booker’s staff and the Committee for a Responsible Federal Budget.

To cover these costs, the legislation would, if enacted into law, increase the top tax income rate on long-term capital gains from 23.8% to 28%, as well as increase the estate tax on very large inheritances (over $5.5 million).   

Can Senator Booker’s “Baby Bonds Plan” pass this year in a Congress where bi-partisanship is increasingly difficult to achieve?

It is recognized that to the extent bi-partisan policy tax reform is possible, ideas must appeal to both conservative- and progressive-thinking lawmakers alike.

Senator Booker’s proposal appears to be a stroke of political genius. Establishing special accounts for newborn children, particularly those in minority families, which include means-tested government subsidies, is a way to narrow the racial wealth gap, as it distributes money and reduces wealth inequality. At the same time, the proposed AOA introduces children to the concept of saving with the goal of becoming more self-sufficient.

His proposal is commendable; in my view, the plan needs some refinements if it is to attract much-needed Republican support, as it appears to be heavily an income redistribution plan. Under this proposal, families would be prohibited from adding their own funds to government contributions to an AOA account. Proposed AOA accounts should be restricted to proven investments such as higher education and home ownership

One way to garner Republican Congressional support might be to meld the best features of Senators Booker’s and Romney’s proposals; another option might be to expand existing savings plans such as IRAs and Section 529 accounts. Hopefully, Congress will see fit to pass a worthy proposal that has wide appeal.


Author: Stephen R. Rolandi retired in 2015 after serving with the State and City of New York. He holds BA and MPA degrees from New York University, and studied law at Brooklyn Law School. He teaches public finance and management as an Adjunct Professor of Public Administration at John Jay College of Criminal Justice (CUNY) and Pace University. Professor Rolandi is a Trustee of NECoPA; President-emeritus of ASPA’s New York Metropolitan Chapter and past National Council Representative; he has also served on many other association boards in New York and Washington, DC. You can reach him at: [email protected] or [email protected]or at 914.536.5942 or 212.237.8000.

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