In 2015, more than half of American households had negative or zero savings.
For households with incomes less than $40,000 per annum, 68 percent spent more than or the equivalent of their incomes. That proportion fell to 44 percent for households with incomes between $40,000 and $100,000, and dropped further, to 32 percent, for households with incomes greater than $100,000.
These figures from a Federal Reserve Board report show how both the share of savings and the amount of savings out of personal income rise as individuals’ income and wealth increase. It also helps illustrate why economic inequality in America is continuing to grow.
In our country, savings activity leads to an uneven spiral – where those who start with more wealth initially attain greater wealth over their lifetime. And their initial endowment of wealth is a consequence of transfers of resources across generations – from parent to child and from grandparent to grandchild.
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People who receive larger intergenerational transfers – via inheritances and gifts – are better able to accumulate assets that outstrip their debts. The decisive factor in their advantage in acquiring wealth is their favorable luck of the draw with respect to the family into which they were born.
The net effect has been a grossly unequal distribution of wealth. The top 1 percent of households own a staggering 40 percent of the nation’s wealth. The bottom 90 percent hold only 30 percent of the nation’s wealth and also 70 percent of the debt.
Wealth matters because it yields a much wider range of opportunities and options than income. Wealthier families can have a greater impact on the political process, purchase homes in higher-amenity neighborhoods, and provide their kids with higher-quality education. Wealthier families have assets they can draw on to handle emergencies like the loss of a job or a serious medical condition, emergencies that can devastate families with no assets. And, of course, wealthier families can leave bequests to the next generation, often in the form of a trust fund.
To confront the outrageous American distribution of wealth, we contend that every child should be given a trust fund, not just the children of the rich. Each newborn infant should receive a “baby bond,” financed by the federal government, giving them a foundation for asset-building and economic security during their adult years.
The program we envision will be universal, but not uniform. Children born into the nation’s richest families will receive a $50 trust fund, while children born into nation’s least wealth families will receive a trust fund ranging between $50,000 and $60,000. Guaranteeing the accounts a 1 percent rate of interest above inflation, young people can access the funds when they reach adulthood.
If there are about 4 million newborn infants in the United States each year and the average amount of the trust fund is $20,000 to $25,000, the annual expense of the program would range between $80 billion and $100 billion – a mere 2 percent of a total federal budget that is now about $4 trillion. Plus, the first payouts of baby bonds would not have to be made until at least 18 years from the birth of the first cohort, providing ample time to build a reserve to support the program. Therefore, the program could be funded out of general revenues without jeopardizing other budgetary commitments.
This means, in turn, we could have baby bonds without engaging in any confiscation (i.e. news taxes) of anyone else’s wealth. And even if the decision were made to tax the very rich to finance baby bonds, it hardly would entail a burden for them – less than 0.5 percent of the top 1 percent’s total wealth.
To close the ever-growing wealth gap in our country, we must engage in a redistributive effort. By giving every child a trust fund they can activate when they reach adulthood, we vastly widen choice and opportunity, empower our young people and greatly weaken the link between a child’s family of origin and their destiny.
William Darity Jr is the Samuel DuBois Cook Professor of Public Policy at Duke University; Darrick Hamilton is an associate professor of Economics and Urban Policy at the New School.