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Saturday, February 10, 2018

Paid Leave Will Speed Up Social Security Crash

Thanks to the paid-leave idea developed by the Independent Women's Forum (IWF), the debate over this new entitlement is heating up. So far, though, it has not been placed in the fiscal context where it belongs. That fiscal context, of course, is the federal budget in general and, specifically, the finances of the Social Security system, to which the IWF program would be added.

Courtesy of the tax cuts passed in December, which were thin on growth incentives and thick on reinforced economic redistribution, the federal budget is now on track back to $1 trillion deficits. This week's budget deal between Democrats and Republicans pour more salt in the deficit. Thomas Binion, Opinion Contributor with The Hill, explains:
The Bipartisan Budget Act is 652 pages long. The bill increases spending by $386 billion over two years and nearly $1.5 trillion over 10 years. It also suspends the debt ceiling until after the next election. This is a massive and sweeping increase in federal spending. The increase in domestic spending is three times larger than even the increase requested by President Obama in his last budget. It was first proposed in the form of actual legislative text after 10 o’clock on Wednesday night. It was done and dusted, signed into law by 9 o’clock Friday morning. It took only 35 hours for both chambers of Congress to read, process, debate, and pass the 652-page bill. The House committee and floor process took only two hours and 23 minutes. Total. To make matters worse, nearly all of the action on this bill was in the dead of night with a government shutdown looming. The level of irresponsibility and absence of principle and decency over those 35 hours is unfathomable.

As I reported last week on this blog, and on Friday in my weekly article for the American Institute for Economic Research (AIER), the IWF's paid family leave, picked up by Senator Rubio (R-Fla.), is a big budget boondoggle. To even propose this new entitlement when the budget deficit is sharply no the rise, is - frankly - fiscally very irresponsible.

Unfortunately, this insight is about as hard to find among conservatives as fiscal conservatism is on Capitol Hill. 

The IWF suggests that their program would only cost $7bn per year in entitlements and that it would be budget neutral. Others have offered their support. For example, here is what Ramesh Ponnoru, senior editor for National Review and visiting fellow of the American Enterprise Institute, has to say:
If the government makes companies eat the cost, it might also make them less willing to promote or hire women of child-bearing age. If the government instead makes taxpayers as a whole pay for leave, then it penalizes families that have chosen to have one parent stay out of the paid labor force to take care of children. This seems especially unfair since those families have lower average incomes than two-earner families. A new proposal on paid leave, however, avoids these pitfalls. It would instead let new parents finance time off from their jobs by slightly delaying the time at which they would collect Social Security benefits. Kristin Shapiro, a lawyer in Washington, explained the idea in a recent paper for the Independent Women’s Forum. She estimates that new parents could finance 12 weeks of leave in return for a six-week delay in taking Social Security checks.

This, Ponnoru suggests,
wouldn’t add a new burden to the program or raise anyone’s taxes: It would just let parents move some federal spending from the future to the present. It wouldn’t make Social Security's overall finances any worse.
His description of the mechanics of the IWF-Rubio proposal is correct, but his conclusion regarding the Social Security system is woefully lacking in fiscal literacy. Bloomberg View columnist Michael Strain gets it right:
Since Social Security is underfunded, the concept of letting people borrow from future benefits is on shaky ground. Social Security will soon pay out more to retirees than it receives in tax revenue and interest income, and its “trust fund” reserve is projected to be exhausted in 2034. By the time today’s new parents reach retirement age, either benefits will have been reduced or taxes will have increased. If the former, it is imprudent to allow new parents to use promised money ahead of schedule, since the anticipated benefits won’t be there in full when they retire. If the latter, then the claims of advocates that their plan doesn’t require tax increases could be misguided.
It is even worse than Strain suggests. According to the 2017 report by the Board of Trustees of the Social Security system, the trust fund guarding the system will run dry in 2034 (p. 17), but the system's cash flow will go permanently negative no later than 2020 (p. 15). With this background, it seems almost unbelievable that someone - anyone - would contemplate draining the Social Security system for more money.

The fact of the matter is that the IWF-Rubio idea could easily run up such a tab that it would materially change the pace at which Social Security runs out of money. With a few entirely realistic assumptions, we can dramatically change the cost trajectory of their paid-leave program. Instead of assuming 12 weeks of leave for paid family leave, we assume 20 weeks in total, 12 for paid family leave and eight weeks of paid sick leave or leave to be home with a child who is too sick to go to school; both these benefits exist in other countries and have been suggested previously by liberals promoting paid leave legislation.

There are now 32 million children whose parents are eligible for either of the two benefit types. If we assume that 25 percent of all eligible parents would use it, and the income replacement rates are the same, the expanded pool of eligible parents and the extended benefits period increases the cost of the program dramatically. Under the assumptions in the IWF-Rubio model, the cumulative cost of the program from a hypothetical start in 2019 through 2034 - the depletion date for the Social Security trust fund - will be $103.4 billion. Under the modified assumptions, the cumulative cost would add up to almost $1.4 trillion. This would shorten the life of the Social Security trust fund by at least a year. 

The exact trust fund life is somewhat hypothetical, depending on a number of assumptions that economists could rightly debate for weeks. Therefore, the prediction of a one-year shortened life span for the fund is of less importance than its implication for fiscal policy over the next 15 years. It is completely unreasonable to expect that Congress would create a new entitlement program that would have statistically visible, negative effects on the short, remaining life of Social Security as a solvent program, without also proposing a tax increase to go with it. 

As I mentioned in my aforementioned AIER piece, there are already talks about tax increases to go with the IWF-Rubio program. On the one hand, such taxes would - in theory - extend the life of the trust fund for some time; on the other hand, those tax hikes would - in practice - erode the positive effects from the tax cuts that Congress passed in December. With the economy back on a lower growth trajectory under higher Social Security taxes, and with the extra drain from the program caused by the IWF-Rubio program, the net consequences for Social Security would be negative compared to today's outlook.

We have already indebted our nation for generations to come. We do not need to pile on to the burden that our children and grandchildren will have to shoulder. It is time for us to stop thinking like Eruopean egalitarians - and start thinking like American conservatives. 

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