The Connecticut baby bond program began earlier this week. Baby bond proposals have proliferated across state governments over the last few years as a lot of philanthropic money has backed the policy on the premise that it is the great hope for reducing the racial wealth gap. But, like a lot of policy that gets philanthropic backing, the baby bond proposals are ridiculous.
In Connecticut, the way the program works is that the state Treasurer establishes a new fund that is invested at the Treasurer’s discretion, most likely by contracting with a money manager like Vanguard, Blackrock, or State Street. Starting this year, $3,200 will be deposited into the trust for each of the 36 percent of CT children whose birth is covered by Medicaid. Over the next 18 years, each account in the trust will be credited an equal portion of whatever investment return or losses the trust fund generates. Once a child turns 18, they will then be eligible to receive the money that is in their account.
Even at this high-level gloss, the policy is really bizarre.
If you think about the program as a literal benefit for poor babies, then it looks sort of like a baby bonus that you can’t actually spend. It’s kind of cruel: we have enough money to help you deal with some of the costs of a new child, but we aren’t going to give it to you. Practically speaking, “investing in kids” by making them less poor in their crucial developmental stages makes more sense, even from a future wealth-building perspective, than investing in kids by creating an account for them that they can’t access for 18 years.
I actually think the analysis in the prior paragraph is too harsh because, despite the fact that the advocates frame it this way, the program is not actually a benefit for poor babies. It is a benefit for 18-year-olds, sometimes called a demogrant. But if you want to give a lump sum of cash to 18-year-olds, you can do that right away. You don’t need to wait until 2041. Around 40,000 people will turn 18 in the next year in CT. Just give them the cash.
From a political perspective, waiting until 2041 to start paying out benefits is also very risky. A program with no beneficiaries is an easy target when the time comes to make state budget decisions. Already in CT, the governor has indicated a dislike for the program and a desire to divert state budgetary resources away from it. In the UK, a similar child trust fund program was enacted in 2002 and was repealed 9 years later before ever making a single benefit payout.
Means testing programs is a bad idea in general, but in this case, the means test is especially bizarre. The program gives money to 18-year-olds based on the point-in-time income of their parents 18 years ago. Obviously, the point-in-time income of someone’s parents when they were born is not a reliable indicator of how poor their family is when they turn 18.
There may also be constitutional law problems with the program’s design because kids who move to CT after they are born but prior to turning 18 are not eligible for the benefits. When Alaska created its dividend-paying social wealth fund in the 1980s, it paid out benefits to each person based on their years of residency in the state. The Supreme Court in Zobel v. Williams ruled that this was unconstitutional because it violates the equal protection clause of the 14th amendment. Specifically, the court held that “state apportionment of … benefits … according to length of residency … permit[s] the states to divide citizens into expanding numbers of permanent classes,” which is “clearly impermissible” under the equal protection clause.
It is impossible to say for sure whether the logic of Zobel would be used to also invalidate a benefit program for 18-year-olds that made someone eligible if they were born in the state but not if they moved there a year after they were born, but it certainly seems like it should. Of course, since the first benefit payment does not go out until 2041, nobody will have standing to sue until then, meaning we won’t know whether the program passes constitutional muster until then.
The program becomes even stranger when you move away from the high-level gloss and start digging into the details.
In addition to excluding from benefits any 18-year-old who is not born in Connecticut, the program also excludes from benefits kids who are born in CT but move away from the state prior to claiming their benefit. Specifically, the law states that for someone to claim the money from their account, they must be a “resident of the state at the time of such claim.” CGSA § 3-36g(c).
People are also not allowed to claim benefits from the program until they complete a financial literacy program. CGSA § 3-36g(b).
If you are born on the Medicaid program, manage to stay in the state for the next 18 years, and complete a financial literacy program, your money is still not made available to you as cash. Instead, you can only use the money in your account for education, buying a home in Connecticut, investing in a business in Connecticut, or, vaguely, for “any investment in financial assets or personal capital that provides long-term gains to wages or wealth.” CGSA § 3-36g(2). In practice, the last option is just an invitation for the CT Treasurer to create regulations that determine other uses for the money.
If you don’t want to go to college, don’t want to (or can’t) buy a Connecticut house or business, then the only explicit option in the statute is to put the money in an Individual Retirement Account (IRA). But IRAs are governed by federal law and have earnings requirements and contribution limits. So even if an 18-year-old wanted to put their money in an IRA, many of them would be ineligible to do so under federal law. Under the statute, they do have until their thirtieth birthday to claim the funds, and so perhaps they will manage to accrue enough IRA contribution eligibility under federal law in that period to allow them to successfully transfer all of their baby bond money to it, though that doesn’t sound like a whole lot of fun.
Anybody who fails to claim their benefits by age 30 forfeits them entirely. CGSA § 3-36g(c).
When you put it all together, this is an absolutely insane policy idea that, from what I can tell, is only gaining traction because of extremely deceptive branding of it as a racial justice thing. Democratic legislators are, in this moment, looking for something to do to deal with systematic racism and racial inequality and this checks the box without actually doing anything or costing very much. So it’s perfect.
If state legislators really are interested in providing some base of money to everyone when they become an adult, this is not that hard to do. Simply declare that, starting next year, your state will provide a lump sum of money to every kid on their eighteenth birthday or, perhaps, to all 18-year-olds on the June following their 18th birthday, as that is the month in which people typically graduate from high school. You don’t need all of this other mess that these baby bond programs are larded up with.