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Babies and Social Security



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An email from a smart friend who follows the Social Security debate:

“Don’t know if you saw the Phil Longman piece in today’s [Washington] Post, but it hits some of the same points as that Mueller article [which I discuss here--RP] and might be worth commenting on in the Corner. Longman’s got some points – part of Social Security’s shortfall is due to falling birth rates – but he exaggerates their role and his solution is a bit off. He says that ‘it’s the decline in the American birthrate since the postwar “baby boom” years that most threatens the benefits of future retirees.’ Partly, but the real killer is increased longevity (Mueller makes this mistake as well). Every worker eventually becomes a retiree, so there’s a bit of a wash there. But if life expectancy at 65 goes from 10 years to 20 years, that’s almost a pure loss to the system.

“The average birth rate since the baby boom has been about 2.1 children per woman, while from 1940-1964 it averaged 3.1. Even if we went from 2.1 to 3.1 kids/woman, you’d only erase 1.1 percentage points of the 1.9 percent 75-year deficit, which itself exaggerates the impact because it doesn’t count the extra people born before 2075 who need to be paid benefits afterwards. (This is one of many good reasons to use the perpetuity forecasts, since this truncation affects measures of a bunch of different factors).

“Longman’s policy idea ['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.'] has even more problems. Since the average person already has two kids, we’d be cutting payroll taxes by two-thirds on most of them. Even if it’s just til the kids turn 19, it would cut revenue by about one-third without any real payoff. You’d really have to rejigger things to get it right, plus you’d have lawsuits from infertile people protesting the tax increase.

“Personally, I wouldn’t have any beef if the spousal benefit were traded for a child’s benefit like a tax cut, since it’s a more effective way to raise fertility, but I wouldn’t look to this to rescue us.

“Longman’s also wrong that it was Social Security that caused the decline in fertility. Before stocks and mutual funds were widely available, there weren’t many ways for people to save for retirement. Having and investing in kids was a way to transfer assets over time. But once financial capital became readily available, people would invest in stocks or bonds rather than kids. Now, SS probably reduced the amount that people save (as Feldstein argues), but if there weren’t SS there would be more money in stocks/bonds, not necessarily more kids.

“Anyway, just a few thoughts.”



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