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Monday, August 6, 2018

Rubio's Paid Leave: A Highway to Fiscal Hell


Never bark at the Big Dog. The Big Dog is always right. 

Ever since early 2017 I have predicted that the conservative movement to create a paid family leave program will open the entitlement flood gates for a massive, new entitlement program costing taxpayers hundreds of billions of dollars per year.

Now that Senator Marco Rubio (RINO-FL) has presented his paid-leave legislation, everything I have said about this disaster in the making, turns out to be true. 

Sen. Marco Rubio unveiled legislation Thursday to provide paid leave to new parents by drawing from their future Social Security payments. The senator and 2016 GOP presidential candidate from Florida touted the plan as a novel approach to an issue on which Congress has not taken significant action, despite high-profile involvement by Ivanka Trump. “This is important legislation. It is also unique,” Rubio said at a news conference at the Capitol. “This is a dramatic readjustment of the way we deal with economic insecurity in the modern era.”
Indeed it is. This program will do to Social Security what a second iceberg would have done to the Titanic. The Washington Post again:
Rubio’s bill would allow parents of newborns to receive a Social Security benefit paying a portion of their wages for at least two months. Later in life, they would delay the date at which they begin receiving Social Security retirement benefits to make up for the amount withdrawn during their leave.
This idea originates with conservative Independent Women's Forum, IWF, which has sold it as "budget neutral". It is budget neutral in the same way as a kid is budget neutral if he spends his retirement savings on a Ferrari on his 18th birthday. He has not saved up the money, because he has not yet worked a lifetime to pay for his own retirement, so he obviously has to spend someone else's money.

From a fiscal viewpoint, Rubio's and the IWF's paid-leave idea is equally reckless. Social Security is built to finance the pension checks it sends out with cash that people in the workforce pay in through their Social Security taxes. The Social Security Trust Fund exists only to balance out cash-flow swings due to fluctuations in the business cycle; that Congress has used it for other purposes is a different, though not irrelevant matter.

The blunt meaning of this is that there will be more money going out of the Social Security system, but no more money going in. The idea, again, is that the paid-leave benefits that people take out of the system now will pay for themselves by the same people forfeiting an equal amount of retirement benefits - when they retire. 

Let us be clear about this: there would be no more tax revenue going into the system. Therefore, as soon as this paid-leave program went into effect, it would immediately increase the cash-flow drain on Social Security. This program is already on a path to bankruptcy, with no more than 16 years to live.

In fact, as I explained back in February, the cash flow in Social Security is going to go negative already in 2020. If Congress were to create this program next year, the cash-flow deficit will immediately grow bigger. 

That is not a forecast - it is an arithmetic truth: if you take more money out of Social Security in 2020 and take less out in 2050, there is still going to be a bigger cash flow deficit in 2020. Forfeiture of tomorrow's retirement payments do not help cash flow today. In other words, if Senator Rubio and the IWF get what they want, they will speed up the collapse of Social Security, and they will do it by probably as much as three years

Instead of going bankrupt in 2034, Social Security would spend its last dollar in 2031.

Not everyone exhibits the same fiscal illiteracy as the good senator from Florida and his pals at IWF. The problem is that those who do understand the arithmetic are not exactly on the fiscally conservative side of the aisle. The Washington Post again:
Rubio’s proposal was immediately criticized by Democrats and some family-leave advocacy groups. Critics said the benefit was skimpy and condemned the idea of limiting beneficiaries’ future retirement payments. 
A Democrat version of this program would add a big, new paid-leave tax on top of the existing Social Security tax. How big would it be? Well, let us get back to the Washington Post story and find out:
They also noted that a majority of people who utilize the federal Family and Medical Leave Act (FMLA) do so to care for sick family members or when they themselves are seriously ill — not because of childbirth or adoption, which are the conditions covered by Rubio’s bill.“This proposal forces workers into an impossible position: If they need to cover a medical emergency today, then their Social Security benefits get cut when it’s time to retire,” Sen. Kirsten Gillibrand (D-N.Y.) said in a statement about Rubio’s bill. “If they need to take care of a sick or dying parent, as three out of four people who need paid leave would use it, they get nothing.”
And there you have it. Conservative organizations like the IWF, but also the American Enterprise Institute and the American Action Forum, who support this idea, have now rolled out the red carpet for a budget bomb that will bring about enormous tax increases in the near future. 

I predicted all this in my paper from last year, where I also explained that once this program is up and running, with all the amendments and tax hikes that the Democrats will add on, it will run an annual tab so big only Social Security will cost more: 


In this paper I also explain how these programs work in other countries - countries whose economies are stumbling and stalling under taxes much higher than ours.

By opening the door for this Gargantuan entitlement program, Senator Rubio is putting the United States on a fast track to either of two, equally undesirable futures: 

1. A Greek-style fiscal disaster as paid leave fast-tracks Social Security for bankruptcy, and Congress borrows even more money to backfill the program with cash; or 
2. Tax increases in the vicinity of $500-$700 billion per year, likely in the form of drastically higher Social Security taxes.

I have outlined the case for a Greek-style crisis in a recent paper for Center for Freedom and Prosperity (a second part is due out very soon). The effects of drastic tax hikes are no more appetizing: they would hurl us right back into the years of economic stagnation under Obama. Once there, our budget deficit would again explode, as tax revenue falls drastically short of current and newly added spending (including paid leave). That, in turn, would cause a Greek-style crisis. 

The only difference between the two scenarios is that in the latter, we would pass through the gates of Fiscal Hell with destructively higher taxes than under the first scenario.

A paid-leave program of any kind, Rubio's or any other, brings America one step closer to becoming a full-fledged European welfare state. Once it is in place, only paid family leave and universal, government-run child care are left on the list. If conservative senators and think tanks can bring about paid leave, who is to say they won't also add the remaining pieces and complete the egalitarian dreamland?

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