Barring a political earthquake, President Bush will leave office without achieving his goal of transforming Social Security. That's too bad. A successful Social Security effort would be a significant down payment on much needed entitlement reform. But sooner or later, Social Security will find its way back onto the public agenda. The program's financial problems are simply too big to set aside indefinitely.
In a nutshell, Social Security's long-term prospects are bleak because of rapid and unprecedented population aging. Part of the demographic story is, of course, good news about longer lives. When Social Security started, the average man could expect to live about 12 years after reaching retirement at age 65. Today, he can expect to live 16 years.
But by far the most important factor in aging over the long run is falling fertility. Societies that do not produce children will, quite naturally, grow older. And there is simply no bigger problem than a low birth rate for a conventional "pay-as-you-go" pension system like Social Security. Without a steady stream of "payers," the system cannot "go."
What is not widely understood--despite the work of analysts like Allan Carlson, Phillip Longman, and John Mueller, among others--is that Social Security itself contributes significantly to the problem of low fertility. Odd as it may sound to the modern ear, a primary motivation for having children in earlier times was economic security in old age. As parents became frail and less productive, it was expected that one or more of their adult children would
take care of them, oftentimes by bringing them into their homes. Married couples thus "invested" in numerous children, in part, to ensure there would be family members to care for them in their twilight years. With state-run Social Security, the government has largely assumed this family responsibility. Married couples have a greatly diminished economic incentive to have children, because now they are counting on--and paying for--government-based old age support.
This insight is neither new nor conceived of by conservative opponents of the welfare state. As noted frequently by Carlson, Gunnar Myrdal, the eminent Swedish socialist economist, observed in the 1940s that state-run, pay-as-you-go pension systems are built on a fundamental "contradiction": They reduce the economic incentive within a family to have children, even as they remain ever dependent on a new generation of productive workers.
The evidence for Social Security's role in fertility decline is compelling and has been confirmed by numerous researchers. A 2005 study by economists Michele Boldrin, Mariacristina De Nardi, and Larry Jones found that a government-run pension system equal to 10 percent of a country's economy correlates with a reduction in the Total Fertility Rate (TFR)--which measures the average number of births per woman during her lifetime--of between 0.7 and 1.6 children, after controlling for other variables (no one suggests government pensions are the only reason fertility has dropped).This is extraordinary given that most industrialized countries now have TFRs well below 2.0. Importantly, this research indicates that program size matters. The bigger the Social Security scheme, the steeper the fertility decline.
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