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.

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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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