Fiscal Implications of Social Security-financed Parental Leave

In this article, we discuss the fiscal implications of a recent proposal to give workers an option to receive a parental leave benefit funded by the Social Security system if they accept an offsetting retirement benefit reduction with the same present discounted value. In principle, the proposal could avoid the harmful fiscal consequences that would arise from other parental leave proposals. If the proposal were implemented in its intended form, it would not require tax increases and it would not shift burdens to future generations. Under the further assumption that workers smooth their consumer spending over their lifetimes, there would be no reduction in national saving because the increase in the budget deficit would be offset by a rise in private saving.

We are skeptical, however, that things will work out quite that well. If workers do not perfectly smooth their consumer spending over their lifetimes, the proposal would reduce national saving even if it were implemented as intended. Indeed, the proposal’s supporters’ stated goal is that beneficiaries increase their consumer spending and reduce their labor earnings after welcoming a new child, implicitly assuming that workers do not perfectly smooth their consumer spending.

It is also likely that benefits for retirees would not be reduced to the full extent necessary to offset the costs of parental leave. In that case, the parental leave benefits claimed by each generation would result in tax increases for the next generation of workers. A future Congress might not actually enforce the requirement that workers who used parental leave receive lower retirement benefits than otherwise similar workers, especially if the Social Security system were restructured before the affected workers retired. More broadly, because the proposal would lower the average level of retirement benefits, Congress might choose more tax increases and fewer benefit cuts when addressing the program’s fiscal imbalance. Indeed, the costs of each generation’s parental leave benefits might be spread over many future generations if Congress allowed Social Security to keep the general revenue transfer that the proposal calls on the program to repay. The proposal is therefore likely to shift fiscal burdens to future generations and reduce national saving.

The parental leave proposal might also spur other proposals allowing workers to borrow against their Social Security retirement benefits. If such provisions became more widespread, harmful effects would be more likely to occur.

In summary, we are concerned that the proposal may shift fiscal burdens to future generations, reduce national saving, and undermine the retirement income function and the earmarked financing of the Social Security program.

Read the full article.