The Folly of Dismissing the Effects of Entitlements on Fertility

Steve Entin recently wrote in the Wall Street Journal (“The Folly of ‘Family Friendly’ Tax Policy,” April 9, 2008; Page A15): “…proponents of greater family tax credits also claim that society owes families a big child credit because the children will face huge payroll taxes to support childless retirees who never paid to rear the next generation. Another claim is that payroll taxes make it hard for families to afford children, and we need families to have more children to pay for Social Security and Medicare. These arguments don’t wash. Most people have children because they want them, not because the state needs future taxpayers to fund social programs.”

On the 1st claim of the child tax credit proponents: Higher child tax credits today would strengthen the defense against cuts in future benefits by everyone, and especially by childless retirees.  But that goes in the wrong direction relative to what’s required–cutting future benefits because they’re not payable, even under today’s high payroll taxes.

On their 2nd claim: If payroll taxes are a hurdle to procreation by young adults, the correct remedy should be to lower them rather than introduce yet another entitlement for young adults in their children’s names – which they would use to extract resources from those children in the future by way of retirement benefits. But today’s high payroll taxes on parents are not for saving and investing for their own future retirements.  Those taxes are for paying benefits to today’s retirees under our pay-as-you-go Social Security system.  Cutting payroll taxes, therefore, would require today’s retirees, in turn, to accept smaller benefits—which is, of course, a big no-no for proponents of child-tax credits.

According to Mr. Entin, however, both of these claims don’t wash because of the rather tepid idea that people have kids because they want them, not because they (or the state) wants more future taxpayers.

However, according to studies on the potential links between fertility and entitlement spending, (for example, Michele Boldrin’s) it appears that fertility rates correlate negatively with generous government entitlement expenditures across countries.  They also correlate negatively with better access to financial markets which enables people to securely transfer purchasing power to old age. So positive fertility seems to reflect, however indirectly, a desire to “save/invest” for the future in the absence of other public and private vehicles of achieving economic security during old age.

The bottom line: Along with its well-established negative impacts on saving/investing and labor supply, unfunded entitlement promises potentially erode yet another pro-growth factor–fertility.  An estimate of net benefit promises to current adults under current entitlement policies – compiled from various tables of the latest Social Security and Medicare Trustees’ reports – shows that such underfunding amounts to $44 trillion in present discounted value!  That’s a promise of almost $200,000 in today’s dollars of future Social Security and Medicare benefits for each person aged 15 and older today.  Why would you, then, work, save, and have children to safeguard your future?