Undervaluing Parents

by Robert Stein

Andrew Biggs finds that subsidizing parents can help close the long term fiscal imbalance in Social Security.  His finding, however, hinges on the fact that today’s kids and future kids must contribute more than they get back out to make the program sustainable over the long run. As a result, he grossly underestimates the positive impact of higher fertility.

Biggs’s calculations take the difference between what each child will contribute and then later take out (both discounted to present value).  That’s where he gets $22,000.  In effect, Biggs assumes that additional child dies without children. 

If that child, in turn, has kids himself, however, it is THOSE kids that will finance the retirement benefits of today’s additional children. In other words, the value of today’s marginal child to Social Security is not his future taxes minus his future benefits.  It’s his future taxes…period. 

Here’s a simple example.  My wife and I support my parents.  Let’s say we have two kids and they will support us when we retire.  If we instead go for three kids, our retirement improves by ALL the additional retirement “taxes” paid by that third child.  In turn, if our three kids themselves have one kid each, that will finance their retirements.   

This point was explained in a 1997 working paper published by NBER.

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