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.

Samuelson on Social Security

 From Jonathan Last:

The first person I’ve found drawing the parallel is economist Paul A. Samuelson. In the November 13, 1967 Newsweek Samuelson defended Social Security by pointing out that it was linked to population growth and that “A growing nation is the greatest Ponzi scheme ever devised. And that is a fact, not a paradox.” (I found this quote in Phillip Longman’s excellent essay “Missing Children,” in the latest issue of the journal The Family in America. I can’t find the original Newsweek cite to provide full context, but Longman says that Samuelson was defending Social Security and I’m happy to trust him because Phillip Longman is stone-cold awesome.)

This view is really not that surprising. Laurence Kotlikoff writes in Jimmy Stewart Is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking:

For its part, economics places no moral stigma on the words: "Ponzi scheme." Indeed, there is a significant economics literature concerned with the question of whether Ponzi schemes--chain letters--are preferred investments for everyone. (p. 61)

Kotlikoff goes on to say that if population or productivity is growing faster than the rate of interest, social Ponzi schemes work well. However, when population growth and productivity slow or come to halt, the programs will run into trouble.

(Kotlifkoff's proposal for reforming the financial sector is to abolish limited liability for any financial institution that uses leverage.)

update: A fuller version of the Samuelson quote is here.

Update 2: More on people recognizing that Social Security is structured in the same way a Ponzi scheme is.

Where to cut?

Michael Gerson on the continuing struggle with state and federal finances:

The cost of maintaining government structures is making it impossible to maintain government functions. To fund commitments made to the providers of services, services must be cut. So piles of money go to government pensions and benefits instead of roads, education or mental health services. This is one of the primary reasons the public resists tax increases. A tax increase used to provide an actual public service might have a shot at support. But a tax increase to prop up a system that consumes endless resources while cutting services is a harder sell.
 ....
But events in Madison are also a preview of the federal debt debate. On the continuum of pain, Obama has targeted home heating oil subsidies for the poor and Teach for America. House Republicans' reductions have been broader but included foreign aid and low-income housing. Few protesters have emerged to scream and chant. But these cuts are distractions from the problem of unsustainable entitlement obligations to the middle class and the wealthy, which threaten to eventually consume the other functions of the federal government. Structural change is required - reforming benefits to reduce costs while focusing benefits on those in the greatest need. 

What are they doing in Illinois? Cutting state funding to drug and alcohol abuse programs. Druggies do not demonstrate, state union workers do.

Even the New York Times recognizes that the welfare state is unsustainable

Europe is beginning to realize that it has built a Ponzi scheme, and the New York Times, of all places, is reporting it.

The reaction so far to government efforts to cut spending has been pessimism and anger, with an understanding that the current system is unsustainable.
....
Changes have now become urgent. Europe’s population is aging quickly as birthrates decline. Unemployment has risen as traditional industries have shifted to Asia. And the region lacks competitiveness in world markets.
According to the European Commission, by 2050 the percentage of Europeans older than 65 will nearly double. In the 1950s there were seven workers for every retiree in advanced economies. By 2050, the ratio in the European Union will drop to 1.3 to 1.

“The easy days are over for countries like Greece, Portugal and Spain, but for us, too,” said Laurent Cohen-Tanugi, a French lawyer who did a study of Europe in the global economy for the French government. “A lot of Europeans would not like the issue cast in these terms, but that is the storm we’re facing. We can no longer afford the old social model, and there is a real need for structural reform.”
....
Jean-Claude Meunier is 68, a retired French Navy official and headhunter, who plays bridge to “train my memory and avoid Alzheimer’s.” His main worry is pension. “For years, our political leaders acted with very little courage,” he said. “Pensions represent the failure of the leaders and the failure of the system.”
In Athens, Mr. Iordanidis, the graduate who makes 800 euros a month in a bookstore, said he saw one possible upside. “It could be a chance to overhaul the whole rancid system,” he said, “and create a state that actually works.”