November 7, 2024
By Peter Jacobsen
This summer, Maurie Backman of The Motley Fool wrote an article raising the alarm over our nation’s looming Social Security crisis. Backman noted that we’re nearing the point where Social Security payments will exceed payroll tax receipts. At this point, the Social Security system will begin to lose money.
This isn’t necessarily the end of the system. Backman continues by highlighting that it “has trust funds it can tap to bridge that gap for a period of time. But that period is dwindling down.”
According to Social Security's latest Trustee Report, its combined trust funds may be depleted as early as 2035. From there, Social Security may need to slash benefits by 17% if lawmakers don't find other ways to pump more money into the program.”
It’s likely that as this benefits cliff approaches, lawmakers will push for increased funding of the program ultimately borne by the taxpayers. Special interest groups like the AARP and the voters they represent will be unkind to any politician willing to acknowledge the unsustainable reality of the current Social Security system.
This issue is only exacerbated by the fact that the United States’s demographic pyramid is turning upside down. As the country’s fertility rate falls, the responsibility to care for the elderly will be foisted on smaller and smaller groups of young people. And while fertility decline may be slowing, there’s no clear bottom yet.
Proposed political solutions to the population implosion have been weak. Former President Trump recently unveiled a proposal to get “more babies” by forcing insurance companies to cover the costs of IVF. However, this proposal is likely to lead to higher premiums which could dampen fertility.
Kamala Harris fares no better on the issue. Her party is mostly silent on our demographic cliff, and the most she has proposed is a one-time tax credit increase for infants.
Rather than ratcheting up taxation to throw money into the pit that is the current Social Security system, it’s time to consider true out-of-the-box alternatives to face our demographic challenges and the Social Security crisis. To go forward, we have to go back to see what elderly care looked like before our bureaucratic labyrinth was erected.
The Family Contra the State
The Social Security system was not a novel invention of the state. Like many welfare systems, Social Security crowded out an already-existing retirement system held together by a network of informal institutions. At the middle of this network, one type of institution reigned supreme—the family.
For most of human history, the family was the core of care elder care. In 1974, sociologist Mahmood Mamdani reminded scholars of this fact. In his book The Myth of Population Control, Mamdani explains how Western attempts to lower fertility in India were wrong-headed and doomed to fail.
These attempts were guided by ideas thinkers like Paul Ehrlich, who wrote the famous book The Population Bomb in 1968. The book influenced many development experts to pursue population control in developing countries as a means of spurring economic development.
These experts believed that by offering “education” and contraceptives, they could free Indians from the chains of “overpopulation.” Mamdani examines several cases which refute Ehrlich’s story. Villagers often politely claimed they were happy to receive the contraceptives, but they never used them. Why? Let’s look at what Mamdani says.
To talk, as Ehrlich does, of ‘overpopulation’ is to say to people: you are poor because you are too many … [but] people are not poor because they have large families. Quite the contrary: they have large families because they are poor.
Why would they choose to have large families if they are poor? Mamdani gives several reasons, but one in particular stands out: elderly care. In the words of one interviewee, “If I didn’t have sons… God knows what would happen to me and their mother when we are too old to work and earn.”Mamdani reports similarly, “When a couple grows too old to work, their only shelter is among their children, and parents have a socially approved claim on the resources of their children.” In other words, one of the incentives for individuals in developing countries to have children is that children are their social security.
Notice how our Social Security system, and those around the developed world, turn this logic on its head. The costs of having children remain privatized, but the benefits are socialized. When you have a large family and your children go on to work, they end up using their resources to pay for the retirement of those who had few or no children.
Relinking Retirement and Reproduction
This insight isn’t new among economists and demographers. It’s long been recognized that one of the primary functions of children historically has been their ability to care for parents in old age. Many countries even codify this fact in law. However, it’s somewhat rarer to find a scholar who notes that nationalized bureaucratic retirement systems have an unintended secondary effect of severing the link between the fuel of retirement (population growth) and the beneficiaries of retirement.
Although the population collapse seems to be a modern issue, demographers like Paul Demeny noticed it coming long ago. In 1987, Demeny published a note titled Re-Linking Fertility Behavior and Economic Security in Old Age: A Pronatalist Reform in the journal Population and Development Review. Speaking of Western Europe he said:
In a number of countries aggregate fertility is below replacement level by a sufficient margin to imply a rapid future decline of population size. Other countries may face such a situation in the coming years.
Somewhat presciently, he predicts that pronatal policies will tend to be extremely blunt cash-transfer style policies which will be ineffective due to the tendency of these policies to ignore relevant cultural and political context. Instead, Demeny says we should, “[Reflect] on the economic props that historically supported high fertility.”
Stated simply, what sort of past conditions were compatible with high fertility? He notes two. First, children were once an essential ingredient to family life because of the labor they provided. Modern economic development has rendered this point moot. Second, he highlights how children were essential for old-age care. This function has not been diminished by economic progress. Rather, our political institutions have overturned this historical regularity with the modern Social Security system.
Demeny notices this unlinking between children and retirement and offers a simple proposal:
The proposed institutional reform would seek to correct this flaw in the incentive structure affecting fertility behavior by allocating a specified fraction of social security contributions made by individual labor force participants directly to their parents, during parents' lifetimes.
The proposal is straightforward. As you work, part of your contribution to Social Security goes into the pot for everyone, but a different part goes directly to your parents. In theory, the amount you contribute could remain the same in this system. The only difference is some of your money benefits your parents rather than all of it going to people who didn’t spend time or money raising you.
A Potential Win-win
Because this system re-links a person’s decision to have children with his or her security in old age, we should expect that the system will lead to there being more children. In simple terms, if having more children means you’ll be wealthier in old age, many people will choose to have more children.
One objection to this system is that it would leave the elderly without children destitute, but this is not necessarily the case. If this system encourages people to have more children, the bottom of the population pyramid will grow. The population growth this creates will lead to increased money not just for the parents, but for society as a whole. A larger number of workers could offset the lower share received by those who don’t have children.
For example, let's say a family has one child. That child grows up and let’s imagine he pays $1,000 into social security over a given period. Imagine, for the sake of ease, this $1,000 is split evenly between his parents and eight strangers he does not know. In this world, each person gets $100.
Now let’s change our example by implementing Demeny’s policy and give the parents 50% of all contributions. The parents recognize that under this new system, they have more old-age security if they have more children. They decide to have two children instead of one. Both children now pay $1,000 into the system.
Under the new rule, each child gives 50% ($500) to their parents. The parents get a total of $1,000. What about the remaining eight? Each child contributes the other half of the money ($500 each) to the other eight retirees. That’s $1000 divided by the eight or $125 per person.
We can compare the two systems. In the first example, which mirrors our current system, each person gets $100. In the Demeny system, the parents get $500 or $250 apiece. The non-parents receive $125 each. In the Demeny system, everyone is better off. It’s a win-win.
How is this possible? By re-linking fertility decisions and old-age security, the Demeny system incentivizes parents to have more children who in turn increase the base of people paying into the system.
There’s no guarantee before the fact that the increased number of children will be large enough to make up for the percent loss by those without children. However, the system has one clear advantage over all the other pronatal schemes proposed by politicians. Rather than engineering a new kind of intervention, this one has the distinct advantage of being time-tested.
A second objection might be that people in bad or alienated relationships with parents may not want to be payees through this system. If this were a serious concern to voters, the option of allowing for an opt out could be a possibility. In that case the parent would receive the normal Social Security benefits.
Alternatively some objective criteria (like whether the parent was the primary caregiver for the whole childhood) could be used if the opt-out system led to too many issues. Whichever route is used to solve this issue would be preferable to having no option for people to support their parents.
To this point, our politicians have proposed no serious solutions to our Social Security system or our demographic crisis. To solve these problems, we need politicians to be willing to make serious reforms. Leveraging Demeny’s proposal to reverse the socialization of the benefits of children is exactly the sort of thing needed to tackle our demographic difficulties.
Peter Jacobsen is a professor of economics at the Gwartney Institute at Ottawa University in Kansas, and a writing fellow for FEE.