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Leave the Market Be

My most recent column for AIER is the last in a series of three on paid family leave.

In the course of writing these three articles, my assessment changed of how a “conservative plan” (my term) to increase paid family leave (by allowing workers to purchase such leave by borrowing against their Social Security accounts) compares with a simple government mandate that employers supply more such leave. I began by believing that the conservative plan, while unnecessary and counterproductive, at least is not as bad as mandated paid leave. Now, however, I believe that the conservative plan is likely in practice to be just as counterproductive – just as destructive – as is mandated leave. (I thank my intrepid Mercatus Center colleague Veronique de Rugy for instructive conversations about this matter.)

Here’s a slice from my latest article:

Most obviously, no American has an actual Social Security account. Oh, the Social Security Administration does record the amount that is extracted, in the form of “contributions” to Social Security, from each American worker’s paycheck. But the government spends those dollars immediately. They are not invested in any account over which that worker has rights of ownership. Unlike a true pension account — say, one that a worker has with Fidelity — if that worker dies tomorrow, the value of what she contributed to the account does not become part of her estate.

What is called a worker’s “Social Security account” is nothing more than an unenforceable promise by politicians to pay to that worker, upon her retirement, a certain monthly amount until she dies. Congress can today, if it chooses, reduce or even completely wipe out the U.S. government’s Social Security “obligation.”

In short, Social Security is a pay-as-you-go income-transfer scheme masquerading as an investment fund. Therefore, no American has an actual Social Security account from which she can borrow. Any money taken today by a worker to pay for paid leave is money taken from taxpayers — specifically, from future taxpayers.

In practice, the conservative plan to increase paid leave will further deepen Uncle Sam’s indebtedness. The reason is that a key selling point of the conservative plan is no new taxes. Here’s Sen. Rubio: “Our proposal would enact paid family leave in America without increasing taxes.” And so each dollar taken by a worker today to pay for paid leave is a dollar that Uncle Sam will borrow. On the hook to repay this debt when it comes due are future taxpayers.

Advocates of the conservative plan will protest my conclusion. They’ll point out that, under the plan’s conditions, the worker herself effectively will repay the debt by taking fewer payments from Social Security in the future.

While possible — as in, “it violates no law of physics” — this outcome is very unlikely given Congress’s historical generosity to older voters (funded, of course, with other people’s money). Politicians in the future are sure to pander to retirees by promising to “protect” those who bought paid leave decades earlier from having to suffer reductions in their stream of benefits. This likelihood, in turn, will prompt workers today to discount the probability of actually having to repay any funds they borrow to buy paid leave. The result will be excessive borrowing to buy paid leave.

Note the vicious cycle. The more voters discount the probability of having actually to suffer reduced benefits tomorrow, the more will workers borrow today to buy paid leave, leading to an overly large scheduled reduction of these workers’ Social Security benefits tomorrow. Politicians tomorrow will thus have even sharper incentives to “protect” retirees from actually having their streams of benefits reduced. To pay these benefits, more taxes will be collected in the future.


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