The immensity of the wealth gap in both developing and developed nations is a daunting and cyclical contributor to global poverty. Without an influx of capital, those who have lived in generational poverty lack the fiscal autonomy and security to climb upwards. However, trust funds can make a difference.
Statistics suggest that hard work and luck are not enough to escape generational poverty. In the United States (U.S.), for example, only 4% of poor Americans climb the rungs of the economic ladder toward wealth. The majority of Americans born into the lowest income bracket remain there for life. Economist Darrick Hamilton confidently stated in The Journal that “Wealth is the paramount indicator of economic security and wellbeing.” Accepting this philosophy, the key question becomes: How does a society accumulate and distribute wealth to people born into the throes of poverty? And the answer just might be establishing trust funds for babies.
Looking to Babies to Address Generational Poverty Through Trust Funds
In 2002, the United Kingdom (U.K.) piloted a long-term savings account for minors called the Child Trust Fund (CTF). CTF was a tax-free savings account parents could open for their kids without facing any decrease in government benefits or tax credits. The parents of any child born in the U.K. between 2002 and 2011 received a £250 voucher to launch a CTF — they could then contribute an additional £9,000 per year. Once the child turned 18, they could access the funds in their account for any combination of reinvestment and spending they saw fit.
The government knew this was a small step in the direction of addressing generational poverty — a £250 stipend would not be enough to solve the nation’s fiscal inequity — but the hope was that a tax-free savings account for children would promote the possibility of home ownership, higher education and healthy investment practices for many who never thought such would be attainable.
Beyond the UK: Child Trust Funds in Canada
In Canada, every family is eligible to open a Registered Education Savings Plan (RESP): a low-tax, long-term saving account to help guardians save for their child’s future education. RESP funds can go toward any post-secondary education including colleges, trade schools, universities and formal apprenticeship programs.
While Canadians from all income brackets are encouraged to open an RESP for their children, Canada provides direct capital to low-income families’ RESPs. Any Canadian child born into a low-income family after 2004 is eligible for the Canada Learning Bond (CLB). The Canadian government provides an initial payment of $500 in the child’s first year and continues to add $100 each year until the total governmental contribution hits $2,000.
The Canada Learning Bond, much like the U.K.’s CTF, aims to chip away at the generational wealth gaps that prevent low-income youth from actualizing their full intellectual and economic potential.
Extrapolating the Baby Bonds Model to the US
In Connecticut, nearly 15,000 children are born into poverty each year. To help close the state’s wealth gaps and encourage innovation, investment and long-term economic growth, Connecticut recently implemented a Baby Bonds program modeled on the U.K. and Canada’s previous successes.
Any child who is born into a family on Connecticut’s public health insurance — on or after July 1, 2023 — will be automatically enrolled in CT Baby Bonds. The government will contribute up to $3,200 to each child’s trust, and at 18, after completing a financial literacy course, the child can claim their capital. The funds are to be used for home ownership, business investment, education or retirement planning. Despite the program name, CT Baby Bonds, Governor Ned Lamont backed off of the original idea to fund the program using money from investors in exchange for bonds. He worried about debt accumulation. Instead, the state will be funding the program through a deposit of $381 million of state budget surplus — meaning there will be no inflated state debt or increased tax.
The Potential Impacts of CT Baby Bonds
While a leg-up of a few thousand dollars is certainly not the end-all-be-all for leveling the playing field, it is a powerful tool in revolutionizing saving philosophies in low-income communities. “You’re more focused on possibly going to college if you see a pathway, if there’s a fund,” Former Connecticut State Treasurer Shawn Wooden shared. “You’re more focused on one day owning a home, which some people in poverty never aspire to because they don’t think it’s ever achievable.”
Shondell Vann, a mother living in Bridgeport, Connecticut with a two-year-old daughter, sees earnest hope in the Baby Bonds program. “I feel like the program would give her a little bit more of a leg up,” she said of her daughter, Maria, in an interview with The Journal. “If she wanted to have a business just like me, she would be able to fund it with no problem. Just anything she wanted to do with that money to be able to be a little bit more successful than she was or just be a little bit better off than she was, is better than nothing.”
– Elena Unger