Economy & Business

Parental Leave through Social Security: A Response to Critics

(Pixabay)
The proposal holds up well to various attacks from left and right.

The United States is one of very few countries that fail to provide paid leave for new parents. Surveys indicate that Americans want paid leave. A proposal to allow new parents to claim a temporary Social Security benefit — in return for lower retirement benefits in the future — has generated interest in policy circles but also stirred up opposition.

Research indicates that Americans may be right to favor paid parental leave. Evidence suggests that when parents are offered paid leave, their children’s health and upbringing benefit and mothers return to work with higher earnings. Likewise, by keeping new mothers connected with their previous jobs, by which they retain seniority and job-specific skills, California’s paid-leave program appears to have increased these women’s work hours by 10 to 17 percent in the three years following childbirth. By itself, that would close much of the so-called gender pay gap. Likewise, when Norway expanded its paid-leave program in 1977, high-school graduation rates increased by 2 percent and children’s earnings at age 30 rose by 5 percent. For children of less-educated mothers, those gains were nearly doubled. A bipartisan coalition of analysts gathered by the American Enterprise Institute and the Brookings Institution called paid parental leave “an issue whose time has come.” (AEI is my employer, but I was not part of the working group.)

But when Kristin Shapiro and I wrote on paid leave in the Wall Street Journal in January, the main question we considered was how to pay for it. Americans are reluctant to fund paid leave with a new payroll tax of 0.4 percent of their wages, as proposed in the FAMILY Act, a bill supported by many Democrats. Likewise, evidence indicates that if employers are mandated to provide paid leave, they will offset the costs by reducing wages for women of child-bearing age. Finally, it is difficult for young workers to save to provide leave for themselves, given their low earners and the often-short time between entering the work force and having children.

We argued for a different approach in the Journal op-ed, while Kristin provided greater detail in a policy study published by the Independent Women’s Forum. The concept is straightforward: New parents could claim Social Security benefit, but in return would have to accept a slightly higher retirement age. According to a simulation by the Urban Institute, the leave benefit would replace about 59 percent of prior earnings for the median new mother claiming benefits, while a lower-income woman could expect a replacement rate of about 69 percent.

In return for twelve weeks of paid-leave benefits, beneficiaries’ “Normal Retirement Age” would increase by about 25 weeks. They could then choose between working an extra 25 weeks before retiring, or retiring below the Normal Retirement Age and accepting a cut in benefits. Essentially, the change implies a lower benefit, of about 3.2 percent, at whatever age the individual retires.

The estimated cost of the plan in 2019 is $5 billion, equal to about 0.5 percent of Social Security outlays. The plan will cost money in the early years because the retirement delays won’t occur until today’s new parents grow old.

When you’re in the middle of the road, you get hit by traffic coming from both directions.

While details must still be hammered out, the concept has generated significant interest. It avoids shouldering taxpayers or employers with the cost of paid leave, while allowing new parents to shift a small portion of their Social Security retirement benefits from a time in life when their earnings and savings are high to one in which both are low.

Along with significant interest, however, the proposal has also generated a number of objections from both the left and the right. Many are entirely reasonable; we are the first to admit that no proposal is immune from criticism. However, I think our proposal holds up fairly well against many of the arguments pitted against it.

Interestingly, our parental leave plan has at times been criticized from the right and the left with precisely opposite arguments. The editors of the Wall Street Journal, for instance, argue that we are creating “a new GOP entitlement.” By contrast, liberals such as Nancy Altman and Linda Benesch call the proposal “the latest devious Republican attack on Social Security.” As the saying goes: When you’re in the middle of the road, you get hit by traffic coming from both directions.

The reality is neither. The proposal would result in a roughly 0.7 percent near-term increase in annual Social Security costs, which would be offset by reductions in future retirement benefits. So it’s slightly higher costs today, slightly lower costs in the future. For either claim to resonate it must rely on a slippery-slope argument that what we’ve proposed will morph into something very different. But because individuals would effectively pay for their paid leave themselves rather than having it provided “free” by taxpayers or employers, there is an inherent brake on irresponsible expansion. That incentive would be absent in proposals such as the FAMILY Act, where paid leave is financed via a payroll tax levied on all employees.

The critique from Veronique de Rugy of the Mercatus Center falls short in a similar way. Ordinarily, a conservative or libertarian might criticize a proposal such as ours for increasing the “size and scope” of the federal government. But as de Rugy realizes, it is only the scope of federal policies that would expand; by design, the size of the federal budget would not. While I understand the “not an inch more” attitude toward federal programs, in the context of all the other things Republicans have been willing to expend federal dollars on — from shrimp treadmills to cowboy poetry — a self-funding parental-leave benefit doesn’t seem beyond the pale.

One seemingly dead-on objection, emphasized in a New York Times article on the proposal, is that any reduction to Social Security retirement benefits is too much for women, who already have lower retirement incomes than men. While not unreasonable, this objection fails for two reasons. First, retirement incomes for women are rising, and rapidly. A 2016 study by two Census Bureau economists, Adam Bee and Josh Mitchell, found that the percentage of women receiving private retirement-plan benefits doubled from 1984 to 2007. The median household income for women aged 65 to 69 rose by 58 percent above inflation from 1989 through 2007. That’s a far greater increase than for working-age individuals of either gender.

Moreover, research suggests that paid parental leave leads to higher earnings later in life. Without paid leave, many women end up leaving their jobs and later re-enter the workforce at lower pay. Paid parental leave appears to help mothers remain connected with their jobs, retaining seniority and the skill sets that leads to higher salaries. A joint American Enterprise Institute–Brookings Institution study cited evidence that work hours for mothers who had paid leave were 10 to 17 percent higher than before paid leave was instituted. Assuming that mothers could earn higher hourly wages in their prior jobs than in newfound positions, due to the retention of seniority and job-specific skills, it is likely that wages increased by at least that amount. For low-income women, these higher earnings would lead to 5 to 9 percent higher Social Security retirement benefits, even after the retirement-age increase used to fund the parental leave benefit.

Others argue that paid parental leave will hurt women’s careers, despite evidence to the contrary. The Reason Foundation’s Shikha Dalmia holds nothing back, arguing that even a paid-leave plan without direct employer costs

will be especially disruptive for small businesses and start-ups that operate on a shoestring budget and can’t spread the responsibilities of the absent workers across a large workforce. They will inevitably shy away from hiring young women of childbearing age.

Dalmia concludes that lawmakers “should strangle their ill-advised plan in the crib.” Thanks for the visual, Shikha.

Most criticisms appear to have been leveled at a visceral level, with the Right concerned about the creation of a new benefit and the Left fearing how it might affect Social Security.

My first reaction is, “Boo hoo for business.” Because Dalmia here isn’t arguing against our proposal or any other proposal for paid leave, but against the idea of women taking time off work after a child is born. Regardless of how leave is financed, the costs to businesses described by Dalmia are the same.

But I think she’s got the substantive picture wrong. Paid parental leave appears to increase job retention among working women who have kids, which in turn boosts future earnings. If paid leave had the costs Dalmia describes, I expect we’d see different outcomes. Moreover, a small business or startup might like to offer parental leave to increase employee retention, but might not be able to do so because it must “operate on a shoestring.” The Social Security–based plan for paid leave would provide small businesses with the employee-retention benefits that larger businesses already enjoy.

As I said earlier, no policy proposal is perfect. Honest analysts on the left and right can reasonably object to the plan. But so far, most criticisms appear to have been leveled at a visceral level, with the Right concerned about the creation of a new benefit and the Left fearing how it might affect Social Security. Against those objections, the proposals holds up very well.

Andrew G. Biggs — Andrew G. Biggs is a resident scholar at the American Enterprise Institute and a former principal deputy commissioner at the Social Security Administration.

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