Everyone Needs A Trust Fund

“Money is like manure; it’s not worth a thing unless it’s spread around, encouraging young things to grow.” — Thornton Wilder, “The Matchmaker”

We live in a time when wealth is more frequently accumulated through inheritance than entrepreneurship. In the last year alone, 84 self-made billionaires globally amassed $140.7 billion compared to $150.8 billion inherited by 53 heirs.

As a result, some countries like the U.S. are drawing on a potentially powerful social innovation to tackle growing poverty and inequality. Inspired in part by Marquis de Condorcet and Thomas Paine, its central idea is to distribute​​ start-up capital to young people — or, as Paine described it, “some means of beginning the world.”

So-called “baby bonds” aim to help spread the wealth by endowing citizens, once they and their government grants hit maturity at age 18, with what ranges from a few to many thousands of dollars that they can use on investments such as starting a business, purchasing a home, pursuing a college degree or saving for retirement. As of this spring, up to a quarter of U.S. state legislatures were looking at a version of this policy, and some, like Connecticut and California, are even implementing versions of it.

Wealth Inequality

Concerns about growing inequality have been on the rise among advanced economies for more than a decade, made particularly visible with the emergence of movements like Occupy Wall Street in the U.S. or, more recently, the Yellow Vests protests in France.

In the United States, the top 1% of the population owns roughly 30% of the nation’s wealth, and the top 10% controls nearly 67% of it; meanwhile, the bottom half of the population has less than 3%, according to the Federal Reserve Board. The Brookings Institution notes that Americans are quite unlikely to move far up (or down, for that matter) on the economic ladder during their life spans; their chances actually decrease with age. 

In France, the top 10% owns close to half of the nation’s wealth while the bottom 10% have virtually nothing, according to data released in 2023 by the Observatoire des inégalités, a French think tank. Is hard work a factor? Hardly. According to a 2021 article in the Financial Times, nearly 80% of French billionaires inherited their wealth, and a government analysis released in 2021 found that the top 1% of France’s billionaire “heirs” enjoyed a higher standard of living than the top 1% of those who worked for a living. The French Government’s “France Stratégie” — a body advising the Prime Minister — has even questioned whether it is possible to avoid creating an “inheritance society,” where a few ultimately inherit most of the wealth and others comparatively little, if any.

Great Britain also has massive wealth disparities. Government figures released in 2021 show that the top 10% of Brits owned nearly half of the nation’s total wealth while the bottom 30% of the population owned less than 2%; meanwhile, the poorest tenth had virtually zero wealth. In fact, across the UK, children of the wealthiest and poorest segments of society were more likely to remain in those brackets than to move out of them, according to a 2021 report by the Institute for Fiscal Studies. 

These statistics have forced policymakers in all three countries to look for new ideas. That brings us to the latest bold policy idea that tries to bridge the wealth gap and boost social mobility: baby bonds. In addition to the roughly dozen states in the U.S., several local governments in France are exploring such a scheme, and the United Kingdom actually ran a semi-successful version of the program from 2005 to 2010 until a new government came into power.

Connecticut Leads The Way

In the U.S., Connecticut was the first state to pass a law implementing a baby bond policy, in 2021. An estimated 15,000 children are born into low-income families annually in Connecticut; they are automatically eligible for the bonds if covered by HUSKY, the state’s Medicaid/Children’s Health Insurance Program. 

Legislators argued that providing the most precarious members of society with the capital to start their adult lives was key to tackling generational poverty. Beginning July 1, 2023, every time a child was born into poverty, the state invested $3,200 in a fund called the Connecticut Baby Bonds Trust.

Connecticut has nearly $400 million set aside in the trust, money secured by restructuring its teachers’ retirement fund in 2019; with this, it is funded through at least 12 years, shielding it from political uncertainty.

Each endowment will likely amount to between $11,000 and $24,000, depending on how soon the beneficiary accesses the funds once eligible at the age of 18, according to the state. The first disbursements are expected in the summer of 2041, but beneficiaries can cash out their capital until age 30; the initial grant will be invested in the financial markets, and the later it is claimed, the more it is likely to yield. The money can be used for higher education, job training, an in-state home purchase, an in-state business or retirement, so long as recipients complete a state-approved financial literacy course. 

While there are always concerns about individuals who may try to circumvent rules in the future, Connecticut’s Treasurer Erick Russell told one of us last fall that most “people want to change their circumstances” and so are likely to use their endowments as originally intended. Still, he acknowledged, “There is no perfect way to do this.” Russell also noted a benefit of such a program is that children born in poverty may reinvest their future funds back into their own, often impoverished, communities — giving a broader boost to a community in need.

On the opposite side of the country, in California, legislators approved the creation of a $100-million (plus an expected $15 million in ongoing annual appropriations) Hope, Opportunity, Perseverance, and Empowerment (HOPE) for Children Trust Account Program in 2022, after 32,500 youths lost a parent amid the Covid pandemic. As a matter of fact, according to a report published this year by the Office of the California State Treasurer, during the COVID-19 pandemic, child poverty more than doubled from 5.2% to 12.4% from 2021-2022, the largest one-year increase ever. Meanwhile, the report notes, Covid-19 has disproportionately impacted Latino/Hispanic and African Americans ages 18 to 34, as well as women and immigrants in low-wage jobs. 

The HOPE program is designed for minors in the foster care system, who tend to be predominantly Black & brown and children in low-income households that lost a parent due to Covid-19. Beginning as early as July 2025, when these youths turn 18, they will receive an expected $4,500 endowment, making this program the first of its kind to disburse funds to recipients in the U.S. Outreach to identify eligible individuals has already started, so that the estimated 58,000 youths who may qualify actually activate their accounts.

The funding won’t come with requirements for how it must be used, but beneficiaries “are not going to waste money,” said Kasey O’Connor, HOPE’s executive director. O’Connor noted that members of a youth panel advising on the policy implementation anticipate that funding will be used for basic necessities. While California’s approach differs from that of Connecticut, both Russell and O’Connor believe that young people can reasonably be trusted to put their startup capital to good use.

Earlier this year, Harlem Children’s Zone, an antipoverty nonprofit based in New York City, decided to experiment with a similar approach, giving thousands of local students $10,000 to invest. This innovation also recognizes that a good education can do only so much; significant capital is required to kickstart adult life on solid ground. A 2023 review of U.S. baby bond simulation exercises conducted by the Urban Institute found that they can meaningfully reduce racial wealth disparities.

France Experiments With Startup Capital

A similar initiative in France’s western Loire-Atlantique Department, a local government area, provides young people ages 18 to 25 lacking financial resources and parental support with a 500 euro (or $525) monthly subsidy to help them with things like housing, employment, job training or obtaining a driver’s license. For instance, to obtain a full driver’s license in France, you can pay more than 1,000 euros ($1,050) in many cases. Because especially disadvantaged youths lack such funds, they can subsequently face serious challenges in gaining employment and job opportunities.

“I would like to work, for example, in perfumery, in shops or [as a] hairdresser. But I need a driver’s license; I might get it now,” Stacy, a beneficiary, told the Department of Loire-Atlantique. She noted that since receiving her “youth income” each month upon becoming eligible, she has been able to save money and is now studying for her learner’s permit.

As early as 2021, the Metropolis of Lyon voted to pass a resolution that established a monthly payment of up to 420 euros ($444) to youths 18 to 24 years old, with little or no income and who don’t qualify for other financial aid, for a maximum duration of 24 months.

This fall, the Department of Meurthe-et-Moselle joined Loire-Atlantique and announced that it would be conducting a three-year trial of a similar policy: “revenu d’émancipation jeunes” or youth emancipation income. In the Meurthe-et-Moselle, more than a quarter of people under 30 years old live below the poverty line — making less than 1,216 euros ($1,277) monthly, according to 2022 data — and 14% of the Department’s youths are considered “not in employment, education or in training,” (or NEETs). 

The monthly 500 euro ($525) allowance is provided over six months and can only be renewed once. The payment comes with mentorship and is geared toward completing a project or toward resolving temporary difficulties such as lack of access to housing, to encourage young people to lift themselves out of poverty.

Meurthe-et-Moselle’s program is budgeted at 1 million euros ($1.1 million) and relies on very simple criteria: The beneficiary must be 16 to 24 years old; a French national or a foreigner with legal status; reside in Meurthe-et-Moselle; and have little (up to 400 euros monthly, or $423) or no financial resources.

“The idea is to support young people and to shake the state,” Lionel Adam, department councilor of Meurthe-et-Moselle, told us. Adam, who is in charge of the project, recalled that several equivalent local jurisdictions proposed providing a basic income for French youth in 2018, but the idea was rejected by the French government. Still, some communities, such as Lyon or Loire-Atlantique, have managed to implement such an idea specifically for disadvantaged young people. Adam said that he hopes the Meurthe-et-Moselle program’s financial windfall helps “remove some obstacles” youths face.

The UK Experience

Whether such schemes will achieve their goals, is an open question. But there are some lessons to be found in the United Kingdom’s baby bond program, known as the Child Trust Fund, which ran from 2005 to 2010. 

Research into UK individuals’ behavior over their lifetime found that having a small amount of capital — typically $1,000 or less — at a relatively young age gave a major boost to young people’s life plans. Those who owned a few assets by age 23 generally had better health, employment and earnings records a decade and two decades later. Those with assets in their 20s experienced less depression than their asset-less peers a decade later and also displayed a stronger work ethic and greater interest in politics. Even marital stability was affected, as they had lower divorce rates. And these links remained even when other factors like education and income levels were taken into account. 

Such favorable outcomes seemed to support the idea that even small amounts of wealth could act as a springboard for young people, enabling them to make the most of their adult lives. This is why UK policy analysts, including one of us, have advocated in research papers for the introduction of a baby bond scheme. Julian Le Grand, along with economist David Nissan, suggested giving 10,000 pounds ($12,622) to every 18-year-old, while policy researchers Gavin Kelly and Rachel Lissauer suggested giving smaller amounts, like 500 pounds ($630) to every newborn baby in the United Kingdom with the condition that it cannot be accessed until the child turns 18.

An obvious potential criticism of these ideas was that 18-year-olds were too young to be entrusted with a large capital sum — that the money would be wasted on entertainment, expensive holidays, drugs etc. However, what we might call the Doolittle creed came into play. Named after the dustman Alfred Doolittle in Bernard Shaw’s play “Pygmalion” (1912) who turns down a gift of 10 pounds for half the amount, because the larger sum would make him “prudent-like” and reluctant to spend it on “a good spree,” this was the phenomenon that people often tend to spend small windfalls on treats for the immediate present but defer spending potentially life-changing sums until appropriate investment opportunities arise.

In 2003, Tony Blair’s Labor government announced a universal baby bond program known as the “Child Trust Fund.” Starting in 2005, the government opened an investment account with at least 250 pounds ($316) for every baby born beginning back in September 2002 until the program ended in 2011. Low-income families and families with a child with a disability received 500 pounds per newborn.

Today, parents, other relatives, family friends, local authorities, charities or other donors can still deposit a total of up to 9,000 pounds ($11,360) annually into these accounts, and any interest or capital gains are exempt from taxes. Investments can be in the form of shares, some securities or cash-savings accounts. The money could only be accessed by youths at the age of 18, and — following the Doolittle creed — there were no restrictions on what they could spend it on.

Blair and then-Chancellor of the Exchequer Gordon Brown launched the program with great fanfare, and despite some grumbling from the extreme right about yet another welfare handout, it enjoyed widespread support from much of the political spectrum.

In many ways, the Child Trust Fund was a success story, especially in encouraging savings. During its lifetime, 6.3 million new savings accounts were opened. As of April 2023, the total market value of the accounts was 9 billion pounds ($11.4 billion), of which the government contributed only 2 billion pounds ($2.5 billion). The fund was popular with parents, especially poorer families, most of whom welcomed the fact that it was locked away until the child reached 18.

But after the 2008 financial crisis and Labor’s replacement by a coalition government led by Conservative Prime Minister David Cameron in 2010, the program was abolished — and with little protest, despite its relative success and popularity. Such apathy might have been partly due to the relatively limited size of the individual amounts in play. The initial endowment of at least 250 pounds ($316) at birth invested in a savings account was relatively small and likely would not result in a very large sum at 18, even with additional savings by family and others. As of September 2024, some 670,000 18- to 22-year-olds had yet to claim an average of 2,212 pounds ($2,792) in savings. Only a small portion of the accounts had investments totaling more than 3,000 pounds ($3,787).

These amounts are not trivial, and, as we noted earlier, even small amounts can make a significant difference in people’s adult lives. So the size of the sums involved are unlikely to fully explain the relatively few protests that accompanied the program’s removal. A more likely explanation for the lack of protest was that few people felt an immediate loss from the policy’s removal. Even the oldest recipients at the time, those born in 2002, were too young to protest, and the financial losses to parents were indirect. Anyone born after 2011 would have nothing to miss. And so, when the government was looking for expenditure cuts that would incur the least political damage, there went the Child Trust Fund. 

Since then, many of the practical problems with the scheme have come to light. For example, the government set up many accounts on behalf of children without directly informing family members, who then remained ignorant about the existence of the funds — and the additional tax-free savings they could accrue — during the lifetime of the scheme. Additionally, many of the banks also failed to communicate with families, sometimes because these accounts were sold to other banks, so many families were unaware of whom to contact. The scheme was also criticized for its failure to meet other important policy objectives like increasing financial literacy among youths.

The lessons of the UK experience make it clear that the banks and other financial institutions maintaining baby bond accounts that involve grants at birth must keep in close touch with the families of the beneficiaries, so as to make sure that they pay proper attention to the accounts, know what’s happening to them and learn to handle them wisely. 

Also, both for grants given at birth and for grants given at 18 or later, the banks should help with young people’s financial education. As Thornton Wilder noted, “Money is like manure; it’s not worth a thing unless it’s spread around encouraging young things to grow.” But spreading it around is not enough: knowing how and where to use it is key.

Perhaps most significantly, to resist political and economic challenges, these policies must ensure that people have skin in the game — that should there be efforts to abolish them, people will feel compelled to speak up. Generally, one way to do this is by ensuring the financial grant is sizeable, even if there are worries that it may be misspent. 

The earliest UK Child Trust Funds are only just maturing, so it is difficult to say whether this is a real problem. But early anecdotal evidence seems to suggest that poor families are spending the money on college fees or setting it aside for use in the future: the Doolittle creed at work.