Friday, January 14, 2005

Social Security and Children

Phillip Longman comes up with the most creative idea for Social Security reform I have read in a while in his Washington Post article, "Give More Credit to Prolific Parents." (Also available here.) Longman is a senior fellow at The New America Foundation, which is perhaps the most innovative think tank in Washington. His main thesis:

The core problem remains one of human capital: As a nation, we are not producing enough children to provide us with the support we will need, and expect, in old age. Today, 18 percent of women ages 40 to 44 are childless. That's up from 10 percent in 1976.


There are many reasons birthrates are falling, but Social Security itself is likely a major cause because of the raw deal it creates for parents and the enormous subsidies it provides to non-parents. By raising and educating their children, parents provide the system with essential human capital. The cost of this contribution, in both direct expenses and forgone wages, is often measured in the millions.

Yet parents get no compensation from Social Security, nor from the wider economy, for the investments they make in their children. Instead, Social Security pays the same benefits, and often more, to people who avoid the burdens of parenthood. So long as Social Security effectively penalizes people for having the very children the
system requires, it contributes to a downward spiral of falling birthrates leading to higher and higher tax rates.

The thrust of this seems right, if not every detail. Within the Social Security system, there is a dependent spouse benefit that very imperfectly subsidizes some parents to leave the workforce in part to rear children. I call this an "imperfect" subsidy because many second-earners with children still work, pay FICA taxes, and get essentially no incremental benefit for it. Social Security also provides some survivorship benefits to children.

In the economy more widely, people without children pay for public services devoted to children, mainly in the form of educational expenditures (public schools, state universities, and federal financial aid) and health care (Medicaid and related programs). There are also features of the tax code that are more generous to larger families--exemptions and deductions for mortgage interest (if larger families have larger houses), and exclusions of health insurance and dependent care expenses from taxable income. On the other side, seniors without children may be more likely to utilize Medicaid for long-term care expenses than are seniors who can move in with their adult children. It would be a very interesting empirical exercise to calculate the "fiscal externality" associated with adding a child to the population.*

Overall, I suspect that the conclusion is right--a typical middle class family with children pays money to raise them, and when these children grow up, they pay taxes that go to support all people in their parents' generation, regardless of how many children those seniors had. Longman goes on to propose a reform based on this idea:

Here's a possible solution. Instead of slashing benefits across the board and borrowing trillions to create a risky system of personal accounts, use the same money to offer substantial tax relief, and extra benefits, to married parents who successfully raise their children. For example, have one child, and the payroll tax you pay (and that your employer nominally pays) drops by one-third. A second child would be worth a two-thirds reduction in payroll taxes. Have three or more children and you wouldn't have any payroll taxes again until your youngest child turned 18.

When it came time to retire, your Social Security benefit (and your spouse's) would be calculated just as if you had both been contributing the maximum Social Security tax during the period in which you were raising children, provided that all your children graduate from high school.

To pay for it all, benefits to non-parents would have to be reduced, at least until birthrates rose sufficiently to increase the system's tax base and avoid rapid population aging. But to keep that in perspective, remember that today's workers are promised substantially higher benefits than today's retirees, even though they have substantially fewer kids. The only alternative way to finance these benefits is to raise taxes still more on our few children or load them up with more debt.

I'm not sure where Longman gets the particular parameters of this scheme, so it is better to just consider this idea as a proposed direction for reform. It is an interesting idea based on both equity and efficiency grounds. The equity part is to suggest that people who raise productive children should have some of the costs of doing so rebated to them, given what those children will contribute to society. The efficiency part is to suggest that by reducing the financial costs of having children, adults will consider having more of them, and thus old-age entitlement prorams that are run on a pay-as-you-go basis will be in better financial shape.

*This has been done for Germany in a paper from 1997 by Hans-Werner Sinn, "The Value of Children and Immigrants in a Pay-As-You-Go Pension System: A Proposal for a Partial Transition to a Funded System." He estimated this number to be DM 175,000 in 1997 [about $100,000 at prevailing exchange rates] and proposed a system with individual accounts and rebates proportional to each child raised.

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Porkopolis said...

Opponents of Social Security reform should address the following illogic implied by their opposition:

As Social Security is currently structured, individuals must first be employed. Secondly, employee contributions are matched by the employer. These two things are prerequisites for the continual funding of the program. If I were a proponent of Social Security in its current format, I would be a strong proponent of a vibrant and growing economy that allows for the perpetual contributions; from employees and employers.

You can’t have Social Security without economic growth. No employers, means no employees, means no contributions, means no Social Security funds over the long-term. The Government just can’t tax non-existent assets and profits to meet its obligations. Assets and profits are a prerequisite of Social Security. With me so far?

Now, here’s the kicker. If you assume that the current system requires a growing economy to sustain itself, why would you not translate that same assumption to the Personal Account structure of retirement funding?

Admittedly, there are no guarantees either way. That’s the very definition of a risk; no guarantees. Both structures involve risk. And BOTH sides of the issue (pro/con reform) assume a long term growing economy with occasional set backs.

I planted several Silver Maples in my backyard 15 years ago. The trees were barely 3 feet tall when I planted them. I did my research on what trees would do best considering soil and weather conditions. I almost went with Weeping Willows, but was advised against them. They grow very quickly, but according to the garden store owner, are ‘stringy’ and disease prone. My Maples have survived severe winters, summer droughts and insect infestation. But through it all, most of them have managed to survive; over the long term. They’re now about 40 feet tall. Long-term investing involves a similar patience and risk taking.

Anonymous said...

The aged adult (rich or poor) atop a large, healthy family will likely have much better support than the adult with no offspring. The old will move in with their kids. The kids will care for the old and the old will provide some care for the grandkids.

Anonymous said...

Where to begin?

This post and the comments above are just absurd.

People have fewer kids because it is really tough to maintain a reasonable standard of living with a large family, despite both parents working. And it takes two working parents to keep a family afloat these days. And since the Bush administration seems to be indifferent to jobs, I suspect we are living in the 'good old days' compared to the future.

In other words, a trivial subsidy to have more kids would mean jack to most families.

Now if the country is willing to get creative, e.g. take a huge bite out of inherited wealth in order to fund this effort, I am all in favor of this proposal. I would have loved for my wife to have her computer programmer salary subsidized while she stays home for 15 years or so raising the 3 kids. But that's not going to happen!

And how about the family health care angle? Fewer parents working and more kids means fewer opportunities for employer provided insurance (my family does not have that luxury) and higher costs. And the Bush administration seems to be hostile to employer provided insurance based on recent reports.

And the suggestion that elderly Mom and Dad could stay home with the kids and save Medicaid dollars just boggles. The kids are all working! If Mom and Dad are functioning well they are not in a nursing home. If they are declining and need care, there is no one home at the kid's place to provide that care.

A much more reasonable improvement to the system would be to include federal employees in the system. State employees all contribute to both Social Security and a state retirement system. Federal employees should as well.

And Professor Samwick: please take a cut at our national health care problem. I am very interested in what you have to say. As a 53 year old with an individual policy I am near the end of my life with health insurance. My business partner is already there. Despite the slagging in the press, I think Teddy Kennedy has the right idea: Medicare for everyone. I would gladly pay for the privilege instead of going without.

Anonymous said...

I think we've finally come up with a way to make young liberal people hate Social Security. Bravo!

Anonymous said...

Dare we ask whether the declining birth rates in Europe might be tied to a similar phenomenon? And has Longman attempted to argue such a connection?

Tom Maguire

Anonymous said...

]"A much more reasonable improvement to the system would be to include federal employees in the system. State employees all contribute to both Social Security and a state retirement system. Federal employees should as well".

New Federal employees hired since 1984 are covered under SS. This was changed 2 decades ago.

OHenry said...
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