We can fix falling fertility with one program — and it costs hardly anything.
We can fix falling fertility with one program — and it costs hardly anything.
A merica is running out of Americans. Our birth rate has fallen below 1.6 children per woman, well under the 2.1 needed just to keep the population from shrinking, and far below the 2.4 children that Americans themselves say they actually want. While forecasters at the Social Security Trustees and the Census Bureau paint a rosy picture of the future, the reality is stark: The only way that U.S. population growth will continue beyond the next 35 years is if record-high migration rates continue and the country experiences a major increase in fertility. Neither seems likely.
America’s population peak may arrive as soon as 2054. It’s not coming so soon because Americans don’t want children. Rather, the combination of long years of schooling, delayed career progress, expensive housing, and a broken dating market have conspired to push family formation ever later in life.
When faced with a problem, Washington’s instinct is simple: spend. And spend it has. The Child Tax Credit costs more than $120 billion a year. Build Back Better proposed another $60 billion for pre-K and over $100 billion for childcare in total. The FAMILY Act’s leave program would have cost $50 billion had it passed in 2020.
The Child Tax Credit is a good program, but research from the Institute for Family Studies (IFS), where I work, suggests that a mere $2,200 per child per year cannot possibly be propping the U.S. fertility rate up by more than a few percent above where it would be otherwise. That’s a lot of money for not that many babies. The math of family formation in America is punishing, and you cannot fix it with pocket change.
If you want to offer people cash to change their behavior, it must be the kind of money that pays for a down payment, not a stroller. Unfortunately, direct expenditure of that level would bankrupt the country. Paying a $100,000 baby bonus to every American parent could possibly boost the fertility rate back to two children per woman, but it would cost nearly $500 billion per year in the process. That’s less than we currently spend on Social Security and Medicare, but given current deficits, adding a third mega-entitlement seems like a bridge too far. The only way to hand young families baby-making money without bankrupting the Treasury or strangling employers in new mandates is to stop thinking like a welfare state and start thinking like an investor.
One way to do that is through the creation of American Birthday Accounts. This idea, borrowed and improved from a Finnish proposal that IFS helped develop (and fitted to our nation’s 250th birthday), is simple. When a baby is born a U.S. citizen and receives their Social Security Number, the government invests $17,000 in a market index fund in that child’s name. Then, nobody touches it. The money compounds, untouched, for two decades or more, until that baby grows up and has their own baby.
For American children with a Birthday Account, at their first child’s birth, they can draw down 50 percent of the fund. At their second, they can withdraw 75 percent of what’s left. At the third, they can touch anything that remains. What this means in real-dollar terms is significant: Wait 20-plus years for a market fund to grow, and a single $17,000 seed could mature into baby bonuses worth $50,000 or more for a married couple.
There is no bigger pro-marriage subsidy in American life than that, and it doesn’t require a single sermon from a career politician about settling down. Based on how other financial programs have influenced fertility, this one program could boost birth rates by at least 10 percent, and perhaps up to 40 percent, for cohorts benefiting from it.
American Birthday Accounts have other nice features, too. The hefty bonus counts as income, so a low-income parent who claims it would pushed right up and over many of the various welfare cliffs and phaseout ranges that normally punish them for working. Many low-income families would find themselves suddenly facing much higher marginal returns to work, right when they also have an extra mouth to feed. For once, a government check would have a shot at nudging families off the rolls rather than onto them.
Plus, by nudging families off welfare, much of the program’s cost among low-income families would be recouped in reduced welfare spending. At the other end, high earners would see an appreciable share of the benefit recaptured by high marginal tax rates on ordinary income such as American Birthday Account payments. Middle-income families that face long work hours but don’t benefit from welfare programs would see the biggest payouts of all.
Moreover, in the long run, the American Birthday Accounts pay for themselves. Social Security and Medicare are pay-as-you-go promises — unfunded IOUs written against workers not yet born. The American Birthday Account is the opposite. It is actuarially sound, funded up front, and invested in real assets. We’ll never have to worry whether the American Birthday Fund is solvent, because, by its very design, it always will be.
Even with big benefits, plenty of Americans will have fewer than three children, and some will have none. Those unclaimed accounts continue gaining value. After age 50, when they can no longer be claimed, they roll back into the program to fund the next generation’s baby bonuses. In inflation-adjusted terms, assuming normal market returns, we expect that the average American will “yield back” over $22,000 in funds, against an outlay of just $17,000. As the first beneficiaries reach 50 with money still on the table, those untapped investments will become a steady revenue stream, making the program fully self-sustaining by year 60. Imagine if, when Social Security turned 60 in 1995, or Medicare turned 60 in 2025, those programs had suddenly become self-funding and were totally off-budget for the taxpayer. That’s how the American Birthday Accounts will actually work.
The sticker price along the way is modest by Washington standards: $45 to $80 billion a year, amounting to between 0.5 and 1 percent of federal spending. Put differently, it’s about the cost of one extra year of public school for every child born in America. We already spend roughly $19,000 a year educating each student. Investing a single year’s worth of that in a child’s future family is hardly radical. Furthermore, only U.S.-born children qualify for the program, making it a bet on more Americans having more American children, full stop: if you weren’t born in America, no subsidy is paid for your future childbearing.
We’ve tried bribing parents with taxpayer-funded cash transfers to keep pace with the rising cost of raising children, and we have lost that race every time. You cannot tax-and-transfer your way to a baby boom. But you can let the market do the heavy lifting to build something durable for the families who will inherit this country. For our 250th year, that would be a birthday present worth giving.