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Paid Family Leave And Personal Accounts

(Larryhw/Dreamstime)

Ramesh is telling skeptical conservatives and libertarians to relax about the prospect of hijacking the already massively insolvent Social Security program to create a paid-family leave account. After all, he says, we supported Social Security personal retirement accounts and these paid family leave accounts have some conceptual similarities.

I won’t get into all the reasons why I am against the plan, as it would be too long. Also, I am finishing up a paper on the issue with my Mercatus colleagues who have much more expertise about Social Security than I  so you can check it out when it’s published.

But for now I will just note that whatever the design similarities are between Social Security personal accounts and Social Security paid-leave, they are more than offset by the main differences: personal accounts are meant to be fully-funded defined contribution plans meant to empower the individual and shift away from the broken and financial underfunded defined benefit portion of social security. The paid family leave idea moves in the opposite direction by adding further short-term financial stress on the system and expanding the government’s involvement into a new benefit.

Moreover, moving to personal accounts was meant to address the solvency issues of social security by reducing government involvement [sadly they were still mandatory] in addition to providing better financial returns and property rights over the money invested. While there was a transition cost, as traditional unfunded accounts were phased down, the net benefit was positive from day one because of the huge reduction in long-run unfunded liabilities. If we had ever managed to move to personal accounts, the best thing that could have happened is a smaller government involvement compared to the status quo, a significant increase in retirement security and saving levels, as well as less long-run fiscal pressure (see, for instance, Australia and Chile). The worst thing that could have happened in the longer run is that we would return to the current system where the government is involved in retirement security (either by guaranteeing the private accounts or by dragging us back to something akin the current system). In other words, a win or a draw.

By contrast, moving to paid family leave implies adding to Social Security solvency problems in the short to medium run (i.e the system is only potentially budget neutral in the work lifespan of the SS beneficiary). That means that on day one, the new scheme instantly increases government involvement in paid family leave compared to the status quo by the simple fact of using the SS system. It also immediately requires more borrowing (to pay for all SS benefits plus whatever paid leave benefits are needed) and speeds up the insolvency of the program (which will probably be addressed with higher taxes or further benefit cuts). Also, once in place, the best thing that can happen is that the system stays in its original form and “merely” redistributes tax dollars to parents in the short run until it is reformed when the Social Security Trust Fund dries out (talk of moving to private accounts from there seems as unlikely as without the paid leave account). In the worst case scenario, however, you have an increase in eligibility and benefit–including the demand that everyone retires at the same age regardless of the leaves parents took earlier in their lives. That requires a government takeover and a further increase in unfunded social security obligations that could bankrupt the country. In other words, a minor defeat or a major defeat.

If you think this is unlikely, read John Cogan’s  new book, The High Costs of Good Intentions, to see how programs that start small always devolve and end up much bigger. (videos here and here).

Now, if your priority is to get more benefits for families and you don’t care as much about moving toward more government involvement, then you will assess this differently than I. But for now the few similarities in design do nothing to reduce this libertarian’s skepticism of the proposal.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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