I. Social Security programs:

The following social security programs have supporting trust funds to provide the mandated payments: Old-Age and Survivors, and Disability Insurance (OASDI).  The other programs are considered Pay as you go as are many European retirement  programs.  For this reason and also the extensive range of recipient coverage, the issue of solvency for the trust funds is often debated.

 

II. Origin of Old Age and Survivors Insurance

During the depression, the savings of many elderly were lost as banks closed.  Two movements were sparked by their impoverishment, the Robert Townsend and Huey Long’s “Chicken in every pot!”  In response, the Roosevelt administration worked on a support program that was intended to pass a Conservative Congress and Supreme Court while also heading off the demands of Long and Townsend.  A major goal was the removal of older workers from the labor force so that younger workers could find work.  The Administration  packaged old age pensions with unemployment compensation to establish self-financed (Trust Fund) programs for obvious financial needs and it was passed in August,1935. [Paul Kennedy, Freedom from Fear, p. ]

III. The Current Actuarial Situation of the OASI Trust Fund

Once all earners were paying taxes to the Trust Fund, its funding was secure with a large number of tax payers relative to elderly recipients.  According to the chief actuary of the Social Security Administration:

“ Currently, fund assets are exhausted without reform, benefits will necessarily be lowered with no effect. The Social Security Board of Trustees projects program cost to rise by 2035 so that taxes will be enough to pay for only 75 percent of scheduled benefits. This increase in cost results from population aging, not because we are living longer, but because birth rates dropped from three to two children  per woman. Importantly, this shortfall is basically stable after 2035; adjustments to taxes or benefits that offset the effects of the lower birth rate may restore solvency for the Social Security program on a sustainable basis for the foreseeable future.”[Stephen C. Goss, Social Security Bulletin, Vol. 70 # 3, 2010]

The chart first makes a distinction that includes infant mortality, a statistic that was reduced in later years.  Therefore the fertility trends from 1935 on are the significant indicators of parental willingness to bear children.  The fertility rate for the fifties and sixties were more than sufficient to provide new workers that could support the previous generation.  Subsequently, there was a sharp decline which is the basis for the actuarial conclusion that tax revenues would be insufficient to support the claimants for benefits by the year 2037. The following graph summarizes these data: Period    Average TFR      Adjusted TFR 

1875–1925 3.67 2.85 

1926–1965 2.84 2.69 

1966–1990 1.99 1.95 

1991–2003 2.01 1.99

SOURCE: Social Security Administration, Office of the Chief Actuary.

NOTE: TFR = total fertility rate.

Table 1.Annual average total U.S. fertility rates with and without adjustment for survival to age 10, various periods, 1875–2003 7.There do not appear to be individual studies to confirm that such programs influence the birth decision.Some observers have suggested that the degree to which public programs provide day care, family leave, etc. assist and assure would be parents that they will be able to adequately raise and take care of children while others question whether such program influence birth decision.  In France, nearly all children ages 3 to 5 attend free pre-primary school. Free after-school care is also widely available. Children under 3 can be placed in nurseries or in the homes of licensed baby sitters. Teams of doctors and nurses visit regularly to inspect centers and check on the health of the children, and parents pay according to income. There are also subsidized day-care centers.  Certainly the programs of other low fertility countries are likely to be adequate.  Either way one could argue that the importance of the next generation for sustaining a SS/retirement system outweighs the employment or other taxes that currently fund the benefits.

There have been other proposals to improve the distribution of benefits: 1. capping benefits for high earners; 2. Counting other source of income; 3. Increase “homemaker” credits for parents who interrupt careers to care for their children; 4. Included more earnings years in benefit calculations; 5. Adjust COLA lower; 6. Tax 401k/health insurance benefits; and  7. Adjust eligibility ages.  Given the importance of  fertility and the child-rearing efforts that go with it, I chose to focus on that issue and the feasibility of providing social security credits for stay-at-home parenting and other such activities that conflict with work and cause one to lose income.  While the association has not been proven statistically, 

There was one interesting effort to evaluate the effects of tax rate increases in PAYG systems.  It found that it depresses fertility levels by reducing decisions to marry[Ehrlich & Kim].   Any attempt to meet fund shortfalls by taxing the earners has this negative effect in trust fund systems as well for the obvious reason that it reduces family resources often at the time when the decision to marry and/or have children so that result would be predictable.  I found no research that assessed the effects of enhanced payments at retirement.  Moreover, I am unfamiliar with any policy change that does this.

Explanation of the CIA world fertility table

The most obvious pattern in these country-by-country data is the high fertility rate of underdeveloped countries in both Africa and elsewhere.  Therefore, I am focusing on more developed countries in Europe.  There we find some variance in fertility from France, the US,  Iceland, ranging from just above 2.08 and two per woman down to Belgium, Russia, Germany, Italy, etc. at 1.42 per woman.  These differences cannot be related easily to development level although an influx from high fertility societies could skew the numbers.  However, I will now try to relate such differences to culture and government policy as a possible means to bolster social security and other forms of retirement payments.  Much of the attention on fertility in Europe has centered on France as one of the highest rates of a developed country.  .  

In Boldrin and Jones’ framework parents procreate because the children will care about their parents’utility, and thus provide their parents with financial support .  In the Barro and Becker model  parents have children because they perceive their children’s lives as a continuation of their own. This value is not influenced by future financial benefits.  In the Boldrin and Jones’ framework parents procreate because the children care about their old parents’ utility, and thus provide them with support.   They also note the contributions of the older generation in raising children and help out when able.  They concluded that  a social security system financed with a tax on labor income may lead to an increase in fertility when the cost of raising children consists mostly of time. This does not address time that does not allow for work or career. 

Generally, however, large scale national level studies of relationships find little or even a negative relationship to pension sizes.  

However when we can examine the financial circumstances of today’s millennials we can find specific financial issues that delay marriage and family; viz. student loan  debt.  A recent ASA sponsored survey released a report of findings as follows: 

• 29% indicated that they have put off marriage as a result of their student loans;

• 43% said that student debt has delayed their decision to start a family. [ ASA American Student Assistance]

While this study was not a “true sample” when it is combined with what is known about the strains of repaying student loan debt.  It should be considered likely to impact fertility in subsequent generations–especially when we add in proprietary schools.  Any decline in fertility will create financial issues involving the OAS trust fund by shortening the solvency period below 2037 AD.

The future needs to be compared to present day issues in which those-male or female- who become primary care-givers and reduce hours, move to less demanding employment or drop out of the labor force will be obliged by their lower earnings to accept survivor’s benefits at half the amount of the full time worker you are linked to.  If they are single mothers and/or ineligible for spousal or survivor benefits they are likely to have nothing.  Their part-time work is also unlikely to offer health care or pensions.

Proposed reforms to properly credit those who lose income and social security due to child rearing responsibilities. This is a subjective evaluation that the SSA is not designed to do.  Birth dates and age are objective and do not have to be evaluated.  Wage tax receipts have been received.  Then benefits are awarded.   Moreover how do we consider the contributions of next generation dependent s who were raised during this period.  However, even with no change in benefits, we should appreciate the importance of child rearing for the future of the SS trust fund on the part of the next generation of workers.

Gender inequity is very evident in one’s social security entitlement.  Having been able to work for their entire career, men receive much higher payments.  Women who have had to take care of aging relatives or children either have significant time out of the workforce or restricted to low paying part-time employment.  The average female retiree on Social Security gets a monthly benefit $300 smaller than the average male retiree. Because retirement benefits are tied to average lifetime earnings, and women have tended to earn less than men, the average monthly Social Security retirement benefit is $1,023 for women, $1,323 for men. The difference -- $300 - is about what the average American household spends on groceries per month.  Women accounted for 56 percent of Social Security beneficiaries in 2010.