Social security: hinders growth of families

Policymakers and citizens pondering the merits of Social Security reform should consider new evidence showing that it adversely affects decisions to marry and have children. A University at Buffalo (N.Y.) study, examining the experience of 57 countries over a 32-year period, concludes that, in the U.S. and other nations where Social Security is instituted as a defined-benefits, pay-as-you-go system, marriage and fertility rates fell sharply over time.

Those declines were not found in countries utilizing government-managed personal savings accounts or privatized pension funds as a basis of their Social Security system. The extensive study, led by Isaac Ehrlich, chair of the Department of Economics, also supports previous research showing that pay-as-you-go Social Security has contributed to a slowdown in the rates of savings and economic growth.

"I'm not ascribing the reduction in family formation entirely to Social Security," he says. "There are many other contributing factors, such as greater opportunities for women in the workforce, but, on the margin, Social Security has had an adverse effect on the choices we make regarding family: whether to marry, to have children, or even whether to save for our children's future."

Ehrlich, who supports the principle of Social Security as a means to secure old-age pension benefits, attributes declines in marriage and fertility rates partly to a system that does not strongly link the defined benefits with contributions that are supposed to fund the system.

Prior to the official establishment of government-run entitlements, the family was the main form of "social security," Ehrlich points out. "Working children took care of retired parents as they aged, and so there was an incentive for parents to have large families. Today, your Social Security benefits are entirely independent of what your children put into the system or whether you have any children at all. And yet, the entire concept of our current Social Security system is based on the present generation of retirees being financed by the next generation of workers--their children.

"There is an obvious disconnect between the financial needs of the system and the needs of the family. The structure of our Social Security system is sowing the seeds of its own financial vulnerability, if not ultimate demise."

The solution, Ehrlich suggests, is to reform Social Security by making it fully funded by individual contributions (thus, also independent of intergenerational support) by allowing people to manage some portion of their contribution through government-regulated, properly balanced pension funds. People also should be given the option of bequeathing these annuities to their children.

"Under a fully funded Social Security system, people fund their own retirement by the amounts they actually contribute to their personal accounts," Ehrlich explains. "If mandated savings are not excessive, this system does not distort the incentive to retire early, to save, or to form families"

The Bush Administration Social Security plan therefore may be on the right path, but should have oversight of contributions managed by the private sector and linked to the financial markets. "The government should provide some guarantees for these investments by insisting on a diversified portfolio of stocks, bonds, and government securities, monitoring closely the investment returns and offering clearer assurances that Social Security would continue to be a safety net for the needy.

"We should structure Social Security investment vehicles so people get a choice, and the government has regulatory responsibility" he concludes. "There have to be safety valves to protect the needy and to protect people from making overly risky choicest."

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