From personal experience:
Yes, they do need passports. Age is not an issue; the officials need to know where a person is from, and birth certificates, even official ones, don't meet the proper identification requirements anymore. I think they changed the law in 2007, because our 2006 cruise accepted birth certificates.
We live in California. Our 2009 cruise left from Los Angeles and went to Oregon and Canada, and everyone in our group with 16 people, including the 1-year-old, 5-year-old, etc., had a passport of some kind (book or card). In fact, the cruise line, Carnival, warned us several times about the new law that requires passports for cruises (and how important it is to order them several weeks ahead of time) so that everyone had a passport before the cruise sailed.
You need a card if you are traveling by boat to Canada, Mexico, or the Caribbean. And a book if you are traveling either by plane or to a not-listed country. Cards are a bit cheaper than the books, so if money is an issue and a card is accepted where you're going, I would go with the card.
From the
DCL site:
http://disneycruise.disney.go.com/planning-center/planning-library/passport-information/
Guests are responsible for obtaining proper documentation to board the ship. U.S. Government passport requirements continue to change; therefore, we strongly encourage Guests of all ages to have a valid U.S. passport for all cruises. Having a passport allows you to always be prepared to travel wherever you wish, and offers an added measure of security when you're traveling.
For air travel, however, the deadline was January 23, 2007. This means that all travelers, including U.S. Citizens and all foreign nationals, traveling to the United States by air, such as Guests flying to Orlando, Florida from Canada, are required to carry a valid passport after the effective date.
U.S. Department of State
Travel.State.Gov
Passport Fees are:
Adult (16+) Passport Book: $110+$25
Adult (16+) Passport Card: $30+$25
Minor (15 & under) Passport Book: $80+$25
Minor (15 & under) Passport Card: $15+$25
The U.S. Passport Card can be used to enter the United States from Canada, Mexico, the Caribbean, and Bermuda at land border crossings or sea ports-of-entry and is more convenient and less expensive than a passport book. The passport card cannot be used for international travel by air.
My advice: order passports for everyone in your group, and do it at least three months before the cruise sails to ensure they arrive in the mail in time for the cruise.