Monday, March 18, 2013

Froma Harrop on incentives

Froma Harrop, a columnist who often writes about economics, opines:
"The most insidious effect of the Social Security and Medicare regimes is that they actually shift economic incentives away from having children," Jonathan V. Last, a writer for the conservative Weekly Standard, says in his book, "What to Expect When No One's Expecting: America's Coming Demographic Disaster ."
Here's a counter-argument: These programs reassure parents bearing the considerable expense of raising children that they won't be destitute if they can't save enough for their old age.
Ms Harrop has a strange notion of how incentives work: If you have children, you get state-funded retirement payments. If you do not have children, you get state-funded retirement payments. Therefore state-funded retirement payments encourage you to have children.

Economists have studied savings and fertility for many years and, as far as I know, none have seriously proposed what Harrop is suggesting. On the contrary, they expect social security programs to reduce the incentive to have children because they are alternative ways of providing income when people get old and are no longer productive.

There are three ways to prepare for old age. The only one available in primitive societies is to have children who will support you when you get old. In these societies being childless is a curse. In some of them, only male children support their parents, and in these societies there is a strong preference for male offspring.

When societies get financial markets and the rule of law, a new way, savings, becomes important. However, many people have self control problems when it comes to budgeting, so various sorts of pension funds, which force patience, develop. When this alternative way to prepare for old age becomes an option, having children becomes less important and we can expect fertility rates to fall.

A final way to provide for the old is for the government to tax the young and give the money to the old. This is what social security programs of welfare states do, though they may disguise what is going on by pretending it is a retirement plan similar to those offered outside of government. Because social security programs offer a third way to provide for old age, we can expect their existence will cause people to rely less on the other two ways, having children and private savings.

All three ways transfer income from the young to the old. With children the transfer is within the family. With private saving it is a voluntary exchange; assets that the old acquire are sold to the young. With government tax and transfer, it is a coerced transaction.

The emergence of articles like this from Harrop may indicate that the decline of fertility is finally attracting notice beyond a narrow slice of academic specialists. Demography is destiny, but math is hard.

See also Jonathan Last's reaction.

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