On July 11 the Social Security Subcommittee of the Senate Finance Committee will hold a hearing on the importance of paid family leave for working American families. The Social Security Subcommittee will likely examine recent proposals to use the Social Security system to finance a paid parental leave benefit. I recently joined my Mercatus Center colleagues Veronique de Rugy and Jason Fichtner in co-authoring a policy brief outlining concerns about this concept and will elaborate upon those concerns here as a reference for the hearing.
The basic idea underlying the proposal is that working parents could claim parental-leave benefits, paid from the Social Security trust funds, in exchange for accepting an increase in their eventual age of full Social Security retirement benefit eligibility. The exchange would be designed to be financially neutral, so that the value of the retirement benefits sacrificed would equal the size of the parental leave benefit paid up front.
In an example provided by proposal co-author Andrew Biggs, “in return for twelve weeks of paid-leave benefits, beneficiaries’ ‘Normal Retirement Age’ would increase by about 25 weeks.” The idea has already been the subject of an interesting debate, with Emily Top of E21, Michael Strain and Alan Viard expressing opposition, Melissa Favreault and Richard Johnson concluding that the proposal is unlikely to be successfully self-financing, and Ramesh Ponnuru, Aparna Mathur and Abby McCloskey expressing support.
There are multiple reasons why using Social Security to finance paid parental leave is a fatally problematic idea.
Before explaining, let us stipulate that paid parental leave is a good thing. It has obvious benefits for working parents and their families, and has been identified in bipartisan analysis as a policy that can go a long way towards reducing existing gender-based gaps in earnings and labor force participation. Opposition to this particular proposal should not be misinterpreted as opposition to paid parental leave.
Another important question is whether there is a diagnosed market failure interfering with the demand for parental leave benefits being met, requiring the federal government to step in either to mandate or to directly provide the benefit. Although this is also an important issue, I will sidestep it here. The purpose of this piece is to explain that even if one strongly believes that the federal government should directly pay parental leave benefits, the Social Security system is ill-equipped for that purpose.
A little background on Social Security might be useful in understanding some of the problems with this idea. Social Security is a benefit program of very specific design. It is not a government program like many others in which benefits are paid solely, or even primarily, on the basis of need or demand. It is -- and this is the first important point -- a contributory insurance program, into which workers pay payroll taxes for several years to earn an entitlement to benefits later.
Social Security’s requirement for retirement benefit eligibility is that workers must have contributed payroll taxes for forty quarters (the equivalent of ten years) and have also reached eligibility age (soon to be 67 for full benefits under current law, though reduced benefits can be claimed as early as 62). Social Security also provides disability benefits accessible at younger ages. The details of disability eligibility are more complex, but the principle is similar: one earns benefits via one’s payroll tax contributions, and one must have contributed for a minimum number of years to become benefit-eligible.
A second key feature is that Social Security benefits are financed through separate trust funds, one for retirement (and survivor) benefits and one for disability benefits. Disability benefits can only be paid from the Disability Insurance trust fund, and retirement benefits only from the Old-Age and Survivors Insurance trust fund. Social Security does not have authority to spend money beyond the resources of these trust funds, which means that any gaps between its revenues and its benefit obligations are required to be closed.
This system is not perfect, but it has important advantages for beneficiaries and taxpayers alike. For taxpayers, there is the assurance that spending will be limited to the amounts deposited in the trust funds. For beneficiaries, there is the important political protection that comes from the widespread perception that they have paid, at least in the aggregate, for their benefits.
A third important point is that Social Security is effectively operating on a pay-as-you-go basis. Workers’ tax contributions aren’t saved in individual accounts with their names on them. Instead that money goes immediately out the door to pay today’s beneficiaries. What the taxpaying worker accrues is not retirement savings in a funded account, but rather a government promise that at some future date the next generation of workers will be taxed sufficiently to finance the benefits that worker is earning today.
The fourth and final salient point is that Social Security faces a massive structural financing shortfall. The latest trustees’ report estimates the shortfall at $13.2 trillion dollars in present value, or roughly 2.8 percent of all taxable wages American workers are projected to earn, over the next 75 years. Elected officials have so far failed to enact measures to close this shortfall, despite the documented and increasingly urgent need to do so. In short, 17 percent of Social Security’s currently scheduled benefits already lack financing, even before considering the creation of new ones.
The essence of the proposal is that, instead of receiving all of their Social Security benefits only decades in the future, parents will be able to receive a portion of them today as parental leave benefits. They’ll receive immediate income now, in exchange for receiving less retirement income decades from now by delaying their retirement age.
There are a number of flaws in this conception. First, it is based on a mischaracterization of Social Security benefits themselves. Workers in Social Security do not own a pot of money that they can draw from, they are only promised that in the distant future, their retirement or disability benefits will be paid by taxing other workers sufficiently to do so. Basically, this proposal would seek to pay benefits without a financing source that even yet exists.
Second, once the principle is established that young parents should be able to spend future Social Security benefits now, there is no logical reason to limit the access to parental leave benefits. There are millions of young adults today with pressing income needs. If their eventual Social Security benefits are truly already theirs to access now, why shouldn’t everyone who needs that money today be able to receive it? There is no reason, which means the door would have been opened to paying all sorts of benefits under the guise of advance payments on future Social Security. Given that these future Social Security obligations extend into the tens of trillions of dollars, granting permission to spend that money today would be a fiscally ruinous principle.
Third, there is little reason to believe the cost of today’s parental leave benefits would ever be fully financed by withholding Social Security retirement benefits decades from now. The federal government has a long-established tradition of spending money up front and reneging on the budgetary offsets later. It is simply unrealistic to assume it would follow through this time with spending offsets to be enforced only decades in the future, especially in an area as politically sensitive as Americans’ Social Security benefits.
Fourth, paid parental leave does not fit within Social Security’s design. Social Security is designed to pay benefits after one’s working career has ended – either because of retirement in old age, or an ongoing disability. It is designed entirely around that principle, requiring that workers pay taxes for several years to earn their entitlement to benefits, to distinguish it from welfare. But bearing children is something that more often happens toward the beginning of one’s working career, not at the end. Paid parental leave cannot itself be adequately funded using Social Security’s financing framework (which is why this proposal must rely on siphoning funds from future retirement benefits).
Fifth, because Social Security is so severely out of financial balance, the information does not exist that would enable young parents to even weigh the trade-off to make the decision. At some point elected officials will need to decide how to close Social Security’s financial imbalance. It is quite likely, for example, that benefit eligibility ages will need to be raised as part of that solution. Would someone who is willing to delay retirement from 67, to 67 and a half, to receive paid parental leave, also have been willing to delay retirement from 69 to 69 and a half, if 69 eventually becomes Social Security’s full retirement age? Not necessarily -- and thus workers opting for parental leave when the full retirement age (FRA) is 67 cannot reasonably be bound to that decision if the FRA changes later to 69.
We already know that due to Social Security’s imbalance, elected officials will have to change the rules of the game at some point. Until then, it is not even possible for young workers and the federal government to make an enduring, enforceable deal as to when workers electing for parental leave will be able to claim retirement benefits.
Sixth and finally, the proposal would create a new type of Social Security benefit. Elected officials have not yet figured out how to finance Social Security’s current retirement, survivor and disability benefit obligations. It is imprudent, to put it mildly, to obligate Social Security to finance a whole new category of benefits before a solution has been implemented to this increasingly urgent problem. Let elected officials determine how they will finance Social Security’s current benefit obligations before they start promising whole new categories of benefits.
The idea of tapping future Social Security benefits to pay for today’s parental leave benefits is so inherently problematic that it has already been subject to harsh criticism from both right and left. Sometimes an idea is attacked by both sides because it represents a bipartisan compromise; but sometimes, as in this case, it is just because it’s a really bad idea.
Charles Blahous is the J. Fish and Lillian F. Smith Chair and Senior Research Strategist at the Mercatus Center, a visiting fellow with the Hoover Institution, and a contributor to E21. He recently served as a public trustee for Social Security and Medicare.
Editor’s Note: This piece was originally published by Economics21 at the Manhattan Institute.