Connecticut Treasurer proposes baby bonds to address the wealth gap

Shawn Wooden, Connecticut State Treasurer, joins Yahoo Finance Live to discuss the introduction of Connecticut’s baby bonds program and how it combats the anti-poverty and aid in racial equity.

Video transcript

ALEXIS CHRISTOFOROUS: Those living in poverty don't usually grow up with the expectation of getting a higher education or starting a business. And that is something Connecticut's State Treasurer, Shawn Wooden, is trying to change with his baby bonds program. If approved by local lawmakers, it would invest $5,000 for each child born who was on Connecticut's insurance program for low-income families. And we're very pleased to have Shawn Wooden join us right now.

Treasurer, thanks for being with us. In terms of just pure numbers here, how much are you expecting, if it does pass-- how much are you expecting this baby bond program to cost, and where would the money come from to fund it?

ALEXIS CHRISTOFOROUS: Sure. So the cost would be approximately $75 million a year. The funding would come from a combination of-- we have a budget surplus this year in terms of seeding the program, and also long-term debt financing.

KRISTIN MYERS: So Shawn, what would the return on that investment be in terms of its impact to some of the residents of Connecticut that are the lowest income.

SHAWN WOODEN: Sure. And to take a step back, you know, the point of this is to be an anti-poverty bill, a racial equity bill, as well as an economic growth bill for our state all wrapped into one. The impact-- this would cover approximately 16,000 kids a year born into poverty in our state.

And over time-- you asked about the return. We're using-- the same thing. I invest $42 billion pension system, our assumed rate of return is 6.9%. Using that calculation, that would translate into between $16,000 and $17,000 at the age of 18, although the funds could be claimed from 18 to 30, depending on what they're being used for.

ALEXIS CHRISTOFOROUS: I know this is not certainly a new idea, and very recently, we had Senator Cory Booker talk about baby bonds. We've had Governor Phil Murphy in New Jersey talk about this idea as well. But you know, there are critics out there who say this really doesn't move the needle much in terms of closing the wealth gap. What would you say to those people? How can it start a long-term change in that area?

SHAWN WOODEN: Sure. I would say a few things. One, that it's just not correct. There's been a lot of analysis done around the concept of baby bonds. A 2019 Columbia University study analyzing the federal proposal saying that it's one of the biggest-- could be one of the biggest game changers for leveling the playing field with young adults. So that's not true in terms of what's been studied.

Beyond that, I would say it is directly tied to closing the wealth gap. I've spent a lot of time studying and thinking about this and working with others on wealth inequity. And when you look at education, when you look at homeownership, when you look at business ownership, and when you look at retirement savings or security, those are major drivers of the differential in the wealth gap.

And I would just close by saying, if someone says that this is not the total solution to addressing racial inequality in America or the wealth gap, I would wholeheartedly agree that this is one part of a broader set of policy initiatives that we need to dramatically change the trajectory. But this is a big idea, a bold idea, and something that will absolutely pay dividends in the long-term. And Connecticut, our bill has gotten further than any other bills. It has been voted out of the Appropriations Committee of our legislature, and we hope to be the first in the nation to actually enact a baby bonds proposal.

KRISTIN MYERS: Now, by its name, baby bonds, you think of children that are just born. What about young children under the age of 18 that are already inside of the state? Would they be able to get some of this money? Is anything retroactively applied? How are you helping those that are a little bit more older than infancy, I should say?

SHAWN WOODEN: Sure. So the answer is no, it's not a proposal to retroactively apply. If it were, then you'd be asking me a different question about how to pay for it. But so in terms of helping-- you know, we're trying to do, those of us that care about racial equity, trying to do as much as possible, whether it's through investments in school and early childhood education in our state and investing into school districts that have had less resources, whether it's in workforce development and pipeline development programs.

So there are other-- you know, going back to this proposal, just like any other legislative proposal, can't be the answer for all things and everyone. But it is a big gamechanger in terms of the potential of what it has. And it's different in the sense of its long-term nature.

And a lot of times people in government, you know, can't think beyond one legislative session. As a long-term institutional investor, I think in 20-year cycles, just in terms of beneficiaries and payouts and money. And if we are going to make structural change in our country that's deep, that's real, that's meaningful, we have to also think long-term. And this is a proposal that does exactly that.

And it would have an impact even earlier. There was a "New York Times" article last week or the week before about a program in the South showing the benefit of change behavior for kids and families in connection with having an educational account at birth and how it actually changed behavior. And it would be the expectation that this would do the same. And in order to claim those funds after reaching the age of 18 and still being a Connecticut resident, you would have to-- we would have financial literacy requirements as well. So it's not just the money, but it's the money plus education in finance, and targeted at areas that address wealth disparities.

ALEXIS CHRISTOFOROUS: Yeah, I like that. I like that there's an education component as well. But tell us how this money can be used, because I know that it can't be used for just anything, right? You can't go out and buy a car when you turn 18 with the money that was in your baby bond.

SHAWN WOODEN: Right. You have to explicitly exclude that, because that would be the first thing every 18-year-old would do. Only kidding. But for educational purposes-- so that's one. Two, investing in a home. So a down payment on a home to increase homeownership in Connecticut. Three, investing in a business or an entrepreneurial pursuit in Connecticut. And the fourth component would be a retirement security savings account of some sort. Again, all correlated to drivers of the wealth inequality in our country.

ALEXIS CHRISTOFOROUS: And real quick, I understand there's a surplus this year. But in the year where there is no surplus, would you see raising taxes as a way to fund a program like this?

SHAWN WOODEN: No, I don't think we need to raise taxes to fund this program. I know that we can, within our limits and our spending priorities-- through bonding and borrowing at historically low interest rates right now-- we will generate more in terms of the return on that borrowing and that investment. But we do not need to raise taxes in order to fund this initiative. We need to prioritize the existing resources in the borrowing that we do as a state in order to fund these key priorities to close racial wealth gaps.

ALEXIS CHRISTOFOROUS: All right. Connecticut State Treasurer Shawn Wooden, thanks so much for joining us today.