by Thomas A. Firey
…if universal family leave is important enough to require government intervention, this idea is as close to a good-but-cheap lunch as policymakers can hope to find.
Earlier this year, Kristin Shapiro and Andrew Biggs described in a Wall Street Journal op-ed how the United States could finance a universal paid leave benefit for new parents without any tax increase or employer mandate. (Disclosure: Shapiro is a personal friend and Biggs a longtime professional acquaintance of mine; I think highly of both.) Following an idea Shapiro developed for the Independent Women’s Forum, their op-ed explains how Social Security could offer the benefit through its current financing if the people who take parental leave would accept a delay in their future retirement benefit. For example, a 12-week parental leave benefit at roughly half of current earnings could be offered in exchange for a similar-length delay in retirement benefits.
Opinion polls indicate that a majority of Americans support a government mandate for family leave, but the question is how to cover the cost. American employers already shoulder a considerable tax and government mandate burden that weakens the demand for labor (resulting in less employment and lower wages), and few people are willing to pay more in taxes to subsidize family leave. Putting aside my libertarian priors and concerns about unintended consequences, I think the Social Security idea is a clever compromise that would provide the leave that progressives want without the burdens that budget hawks and many conservatives oppose. Unsurprisingly, some pragmatic lawmakers have expressed interest in the idea.
What is surprising, though, is the sharp opposition to the idea from some progressives. A few weeks after the Shapiro-Biggs op-ed, New York Times writers Tara Siegel Bernard and Claire Cain Miller posted a column outlining three concerns over “a Republican plan for paid leave”:
• Social Security already faces shaky finances.
• The delay in retirement benefits would mean an overall reduction in people’s–predominantly women’s–retirement benefits.
• The parental leave benefit would treat Social Security “as an individual account rather than a social insurance program.” As Kathleen Romig of the Center on Budget and Policy Priorities says in the article, “This is a significant philosophy shift that doesn’t look at [Social Security] like an insurance program where we are all in it together, but an individual asset you can tap to pay for your individual needs.”
But with the exception of part of Romig’s comment (I’ll explain that in a moment), none of those concerns seem too worrisome.
The short delay in retirement benefits means the parental leave benefit would have no long-run effect on Social Security’s finances (assuming future policymakers won’t prove time-inconsistent and “forgive” the offset). There would be a short-run cost between people’s taking advantage of parental leave and their later delayed retirement, but as Shapiro explains in her paper, that cost is tiny relative to Social Security’s overall finances. I’d add that the short-run cost could be covered easily with government bonds, which sell at very low real rates.
It is true that the delay in retirement benefits is equivalent to a benefit cut. There is no free lunch, as Milton Friedman said of government benefits. But if universal family leave is important enough to require government intervention, this idea is as close to a good-but-cheap lunch as policymakers can hope to find. Besides, given Americans’ increased life expectancy (especially women’s), three months’ delayed retirement in a worker’s 60s seems modest trade-off for paid leave as a new parent–especially when the individual gets to choose whether to make that trade-off.
What about the “philosophy shift” in Social Security that a parental leave program would represent? If that means a move away from “social insurance” that “we are all in … together,” then it’s unclear why the proposed parental leave benefit wouldn’t be part of that social insurance that we’re all in together.
However, I think there is something to Romig’s concern that if this idea is enacted, it could lead people to consider Social Security “an individual asset you can tap to pay for your individual needs.”
If we accept the notion that Social Security’s retirement benefit is “insurance,” then it’s pretty crummy insurance for a number of reasons:
- It’s high-cost: formally a 6.2 percent income tax on workers plus a 6.2 percent tax on employer payrolls, along with the deadweight losses from the taxes’ negative incentives on labor and employment.
- It provides lousy benefits, as underscored by benefit calculators and recipients’ complaints about the size of their checks.
- It’s terribly inflexible, offering minimal options for qualifying ages or benefit levels, let alone other opportunities to use those funds when they are needed.
- It’s compulsory; people and their employers must pay into Social Security regardless of how well it suits their needs or whether they have more-valued uses for their money.
- Finally, it’s incredibly risky in at least three different ways:
- Workers only receive the retirement benefit if they reach the qualifying age, and those payments continue only as long as recipients or their spouses live.
- It’s dependent on U.S. demographic and wage trends–and right now those trends and current law dictate the program will have to cut its benefits by roughly 25 percent in about 15 years.
- It’s overseen by politicians, who show little consensus on how to manage the program responsibly.
Given those reasons, I’m constantly surprised by Americans’ strong support for Social Security in public opinion polls, even as they express skepticism on how much they can count on it for their own retirements. That support discourages policymakers from reforming Social Security to address its problems and make it more beneficial to Americans.
However, public support may change following the benefit cuts 15 years from now. At that time, Medicare and Medicaid will be consuming ever-larger shares of federal and state budgets, as will debt service on the federal level and retired public employee costs on the state and local level. I believe that public support for Social Security will fall once workers see so much of their tax money going to items other than public benefits they enjoy. As its support falls, the likelihood of meaningful, positive policy change to Social Security will increase.
But if the parental leave idea is adopted, workers will become eligible for an immediate benefit from Social Security, and that may buttress its public support. If Romig’s concern comes to pass and Social Security evolves more broadly into “an individual asset you can tap to pay for your individual needs,” that would provide many more immediate benefits to workers, resulting in even stronger public appreciation and support for the program.
The question is, would that be a good thing? Resuming my libertarian priors, I agree with my Cato colleagues Vanessa Brown Calder and Chris Edwards that people would be better off if, instead of paying taxes to provide themselves private goods like parental leave or retirement income, they could keep their money and buy the goods themselves or voluntarily band together to buy the goods (though I should note that, apart from savings, no such private “family leave” good is currently available that I’m aware). Unfortunately, I don’t see that policy change happening anytime soon.
That leaves this libertarian with a second-best dilemma: should I embrace the parental leave idea and other proposals to make Social Security more of an individual asset (perhaps even evolving into the Universal Savings Accounts that Edwards and another of my Cato colleagues, Ryan Bourne, discuss)–which would make the program more beneficial to people and less crummy? Or should I oppose such changes and hope that, when Social Security’s retirement benefit shrinks in 15 years, public pressure will force policymakers to radically reform the program into something more beneficial to people?
I don’t have an answer to that question (though it’s hard for me not to root for Shapiro and Biggs). I would be interested in reading your answers and thoughts in the comments below.
Thomas A. Firey is a Cato Institute senior fellow and managing editor of Cato’s journal Regulation.
READER COMMENTS
robc
Mar 26 2018 at 2:25pm
If I understand the final question, it is one I struggle with too.
As I understand it, the question is:
Should we turn SS into something like a mandatory 401K/IRA program with possible other flexible uses for the money other than retirement vs hoping the system can be eliminated directly?
I think a similar question is school vouchers vs separation of school and state?
In both case, I would prefer the latter, but maybe the former is good enough.
I think a 3rd similar example is some sort of replacement for Obamacare vs going for flat our repeal.
I think the devil is in the details. It depends on how free-market the semi-privatization model is. I think I favor the former in 1 and 2 and repeal in 3 (although the pre-ACA system isnt what I would want either).
Hazel Meade
Mar 26 2018 at 3:08pm
Here’s another angle: increase the retirement age for everyone to finance the universal maternity leave policy. Eventually, if we do this for many similar issues (i.e. temporary sick leave, short term disability), we might transform the program from being primarily a retirement program to being more of a disability program – old age being just one more form of disability. And the retirement age would creep up into a region where most people don’t live long enough to draw it as a pension.
Mark Z
Mar 26 2018 at 4:47pm
Hazel,
I expect raising the retirement age into the 80s would be more politically unacceptable than making employed parents pay for their own leave out of their social security benefits. It would also likely lead workers to take more sick leave and disability leave during their prime years, when they’re more productive than when they’re 80, which would of course negatively affect general productivity.
It’s pretty clear that progressive advocates for universal parental leave are intent on socializing the costs of having kids rather than letting the costs fall on those who choose to have children. This seems to be rooted in several dubious assumptions:
1) that the benefits of having children are mostly socialized (parents already recoup some of their losses through their kids taking care of them, and most of the ‘non-monetary’ benefits of kids are not spread to society at large).
2) that the costs of having children are not in large part already socialized (parents don’t have to for pay their kids’ welfare, medicaid, or incarceration if they turn out to be not so productive; taxpayers do)
3) Most ironically (given progressive feminists support for these types of measures): they automatically assume that women generally (mostly women use this benefit) are more productive as child-bearers and rearers than as employees, and that the net social benefit of a woman having and rearing a child exceeds the opportunity cost of her instead choosing to keep working, which we forget has its own social benefit from her contribution not in taxes, but to consumer surplus from her labor. This assumption that every woman is automatically more socially productive as a mother than as a worker doesn’t seem a priori particularly feminist.
In any case, if we are going to mandate that employers provide a benefit utilized overwhelming by women, maybe we should allow employers to pay women less to compensate for their reduced expected productivity? I’m being half-facetious; I’d much prefer workers be allowed to opt out of these kinds of benefits and get higher salaries instead, but if people insist on prohibiting that, they don’t really have much of a right to complain about a class of workers being paid less – when they support legislation that automatically reduces that class of workers expected productivity.
Mark Z
Mar 26 2018 at 4:51pm
Oh, and also, on the question of whether libertarians should support efforts to make bad ideas less bad or just oppose them and try to reform them when they fall apart, I don’t see why they (or we) can’t do both. This is already what most do with monetary policy: people like George Selgin who favor free banking nonetheless write a great deal on how the Fed should conduct monetary policy inasmuch as its existence and current structure are taken for granted. I think we can simultaneously vociferously oppose mandatory family leave while at the same time arguing that, if we’re going to have mandatory family leave, we should adopt the Shapiro-Biggs approach.
Hazel Meade
Mar 26 2018 at 5:49pm
It would also likely lead workers to take more sick leave and disability leave during their prime years, when they’re more productive than when they’re 80, which would of course negatively affect general productivity.
Being facetious, it might lead to more European amounts of vacation time.
But seriously, if we’re talking about giving people more time off to recover from illnesses (which would likely even out the sex ratio as to who this benefits most), I’m not sure it would affect productivity that much.
The truth is that many large employers actually already do have short-term disability policies, so this isn’t even necessarily going against what the market already provides. Most women take up to 3 months of short term disability when they have a child. The market more or less already *has* maternity leave – it just isn’t 100% universal.
But as long as we’re throwing around ideas for rolling it into social security we might as well consider generalizing it from just maternity leave to short-term disability, which seems to be an areas where SS needs reform anyway.
Mark Z
Mar 27 2018 at 1:41am
Even if workers’ transferring some of their retirement time to their younger working years doesn’t reduce productivity per se (which I guess I could see, since if one’s productivity does decline as one ages, one’s SS-taxable wages would probably decline as well), it’d make it much easier to collect some of your benefits before dying (many people who die before getting to retire and collect much SS will instead collect it while they are still alive). I have no idea though how much additional cost this would put on the system.
Regarding markets already having maternity leave: I’m curious to know if there is any regulatory or tax advantage to providing this benefit instead of wages, like with employer provided healthcare? Given that it is (I believe) illegal for employers to have ‘no-pregnancy’ clauses in their contracts with employees, I would think there’d be a solid market out there for jobs that *don’t* come with parental leave benefits. After all, even much of the female work force is post-menopausal and therefore have no need for such a benefit. Unless companies have figured out a secret way to pay-discriminate in favor of post-menopausal women who won’t use this benefit, I’d expect a lot of such women to preferentially seek higher paying jobs with fewer maternity leave benefits.
dcpi
Mar 27 2018 at 11:04am
What about adding parental leave as a allowed non-penalized premature distribution to qualified plan accounts and IRAs?
Thaomas
Mar 27 2018 at 3:48pm
“American employers already shoulder a considerable tax.”
The author clearly flunked Econ 101. SS taxes are a tax on wages.
We should finance SS/Medicare/and any new family eave benefit from a consumption tax.
Hazel Meade
Mar 27 2018 at 5:55pm
@Mark, the private short-term disability is generally insured privately so it doesn’t impact company finances that much. I think they provide it to women for the same reasons they would give it to any employee – it’s cheaper to pay for a temporary absence and get the employee back than it is to hire and train someone else. The impact on women’s wages probably would be more related to the effect of their absence on the company than it is to the cost of the temporary leave. You can’t have someone in a position of serious responsibility disappear for 3 month periods – its too disruptive to operations. So women of childbearing age tend not to get placed in positions of serious responsibility, because the risk that they will have a pregnancy and that will interrupt an important project is too high.
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