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Social Security and Lower Fertility Rates

Social Security is an entitlement program for retirees that works by transferring wealth from younger workers to senior citizens. Current workers are taxed a percentage of their income, and then that money is given to people who have retired. The program began taxing workers at 2 percent in 1937, but over the years the tax has increased, and it currently sits at 12.4 percent. In this way, rather than being a savings account – as it is often mistakenly referred to – Social Security is strictly pay as you go.

Social Security spending has become unsustainable due to the fact that the worker pool is shrinking. In 1955 there were eight workers for every retiree receiving Social Security benefits. In 2010 there were less than three. This shrinking worker pool stresses the program. In fact, starting in 2010 the Social Security program began to run deficits – bringing in less tax money than it paid out in retiree benefits. By 2033 the program will have used up its reserves and will be able to pay just 75 percent of its promised benefits.

Every year the Social Security trustees produce a report on the program’s fiscal health, and every year they plead with policymakers to fix its problems through tax increases, benefit cuts, or some combination of the two. But considering this is a program already paying out a negative return, those solutions have been less than palatable for politicians.

What Social Security really needs is more workers to tax. But what if Social Security’s very existence creates fewer workers?

In a little-known development, research shows that public pension programs like Social Security provide an incentive for people to have fewer children. For a program that requires more new workers to support its beneficiaries, this is a major problem.

In studying drastically falling fertility rates in Europe and the United States over the last century, researchers have found that government pension programs like Social Security account for much of the drop. When the benefits are greater, there’s a larger negative impact on fertility.

One could argue that even private wealth accumulation would have this same effect. But there’s a difference between having your own wealth and having a monthly government check. Many parents accumulate wealth so it can be passed on to their children. They’re building wealth not in spite of having children, but because they do have children.

The solution is to reform Social Security policies to encourage, rather than discourage, having children. For example, the child tax credit could be expanded and counted against taxes for Social Security. Additionally, benefits could be restructured to be based not only on income level and years worked, but on how many children you have that are employed.

As engaged citizenry and policymakers are compelled to tackle Social Security’s structural weaknesses, they would do well to recognize that while Social Security is predicated on having a base of people to tax, its very existence leads to fewer people in that base. This may be a self-inflicted wound.

Dig Deeper:

European Central Bank: Pensions and Fertility

National Bureau of Economic Research: Fertility and Social Security

Network for Studies on Pensions, Aging & Retirement: Social Welfare Policy as an Instrument for Fertility Regulation

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