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Give More Credit to Prolific Parents

By Phillip Longman
Sunday, January 9, 2005; Page B07

Ever wonder why Social Security didn't crash and burn years ago? After all, for nearly all of the program's history, each generation of retirees has taken far more money out of the system than it contributed in taxes.

The answer is simple, though largely ignored in the current debate over Social Security reform. Today's retirees may not have paid anywhere near as much in taxes as today's workers do. But most contributed something far more valuable to the system: They created, raised and educated the baby boomers.

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As my mother used to say, "You try doing that." Children ultimately finance Social Security and other programs for the elderly, and it's the decline in the American birthrate since the postwar "baby boom" years that most threatens the benefits of future retirees. Unfortunately, the Bush administration's plans for Social Security don't remedy that core problem. The only true solution is to ease the burdens on today's parents that are driving down birthrates, including the substantial disincentives to parenthood that Social Security itself helps to create.

Social Security as we know it depends on a growing supply of youth. Under current law, benefits go up automatically with wages, so economic growth does little or nothing to improve its long-term solvency. Linking future benefits to inflation rather than wages, as the administration is considering, makes it theoretically possible for economic growth to ease Social Security's long-term deficits -- provided that aging baby boomers don't later organize and force Congress to raise benefits back up.

But as long as birthrates remain below the levels necessary to prevent rapid population aging, that still leaves fewer workers available to support each Social Security beneficiary, as well as every other cost of government, including Medicare and the mounting national debt. A relative decline in the size of the working-age population will also make it more difficult to finance the enormous levels of additional borrowing that would be needed to implement the administration's call for private retirement accounts.

The core problem remains one of human capital: As a nation, we are not producing enough children to provide us with the support we will need, and expect, in old age. Today, 18 percent of women ages 40 to 44 are childless. That's up from 10 percent in 1976.

Meanwhile, large families are disappearing. In 1976, almost 60 percent of women ages 40 to 44 had three or more children. Today, that percentage has dropped in half, to 29 percent. All told, Americans no longer have enough children to reproduce themselves, let alone finance the Social Security system.

There are many reasons birthrates are falling, but Social Security itself is likely a major cause because of the raw deal it creates for parents and the enormous subsidies it provides to non-parents. By raising and educating their children, parents provide the system with essential human capital. The cost of this contribution, in both direct expenses and forgone wages, is often measured in the millions.

Yet parents get no compensation from Social Security, nor from the wider economy, for the investments they make in their children. Instead, Social Security pays the same benefits, and often more, to people who avoid the burdens of parenthood. So long as Social Security effectively penalizes people for having the very children the system requires, it contributes to a downward spiral of falling birthrates leading to higher and higher tax rates.

Here's a possible solution. Instead of slashing benefits across the board and borrowing trillions to create a risky system of personal accounts, use the same money to offer substantial tax relief, and extra benefits, to married parents who successfully raise their children. For example, 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.

When it came time to retire, your Social Security benefit (and your spouse's) would be calculated just as if you had both been contributing the maximum Social Security tax during the period in which you were raising children, provided that all your children graduate from high school.

To pay for it all, benefits to non-parents would have to be reduced, at least until birthrates rose sufficiently to increase the system's tax base and avoid rapid population aging. But to keep that in perspective, remember that today's workers are promised substantially higher benefits than today's retirees, even though they have substantially fewer kids. The only alternative way to finance these benefits is to raise taxes still more on our few children or load them up with more debt.

To those who find the world already too crowded or parents already too honored in our society, any solution that encourages a higher birthrate may seem appalling. But if you want those golden years, one way or another you're going to wind up depending on other people's children.

The writer is a senior fellow at the New America Foundation and author of "The Empty Cradle: How Falling Birthrates Threaten World Prosperity."

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