– April 23, 2019
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In the debate over creating a new federal paid-leave program, conservatives think they have found the ultimate free lunch. Here is Representative Ann Wagner (R-MO) explaining how it works on NPR:

We have a plan here that would allow young moms and dads to take kind of an advance on their Social Security benefits to help them during this difficult transition. At their retirement — again, it’s totally voluntary if you want to do it this way — the worker who chose to take this option for a paid family leave will repay any parental benefits received through either, one, a temporary benefit reduction upon retirement, or a delay in their retirement to offset the costs.

Because what’s so important … is that we do not affect the future solvency of the Social Security trust fund. And we’re making sure that we do not affect any senior who’s currently benefiting … from Social Security.

So basically the idea — which I have written about in these pages before — is that women can get paid leave without growing the size of government because what they will receive in paid-leave benefits from Social Security after the birth of a child, they’ll supposedly pay back at the end of their career by working a few weeks longer. The government isn’t really involved like it would be if the benefits were paid from general revenue, and even better, that money will be returned (we promise) a few decades down the road. Just like that, you’ve got yourself a free lunch.

And now the Social Security Administration has actually come out with a score of the Wagner plan, which she introduced a few weeks ago with Senator Marco Rubio (R-FL), called the New Parents Act. According to the plan’s advocates, all you really need to know is that the report concludes it “would have a negligible effect on the long-range OASDI [Old-Age, Survivors and Disability Insurance Program] actuarial balance.”

Before I get into why one should take this interpretation with a grain of salt, I’d like to remind people why we shouldn’t want the federal government to be involved in paid-leave policy in the first place, no matter what form it takes.

These may all be correct arguments as far as they go, but they aren’t enough to justify further government action to encourage more paid leave. First, it’s difficult to argue that there’s a market failure in supplying paid leave when over 65 percent of women already report getting paid leave. The market-failure argument, which rests on an assertion of adverse selection, has been thoroughly debunked by Don Boudreaux. Second, there’s a large body of literature on the negative impact of government paid-leave policies on women’s wages, prospects for advancement, and overall employment. You can’t wish these facts away. A poll by Emily Ekins at the Cato Institute shows that when women learn of the trade-offs inherent in any federal paid-leave policy (that is, lower pay, fewer promotions, and higher unemployment), women’s support for such a program collapses.

Interestingly, conservatives generally understand the negative impact of government mandates and federal spending. This long-standing attitude is why they have put their support behind the idea of using Social Security benefits to finance family leave. But this is still a bad idea.

Social Security obviously has a lot of problems. Yet it also has one quality that fiscally responsible people should care about. Although in practice, it’s an income-transfer program, each individual still has to earn benefit entitlements; each worker pays payroll taxes over his or her career. The payment of these taxes makes a person eligible for benefits in retirement. Contributions first, benefits later.

Using Social Security to pay for paid leave would turn the contribution-then-benefits pattern on its head. Benefits happen first in this case, then contributions (supposedly) come later.

That’s problematic in many ways. The most obvious one is that there is no actual money sitting around waiting to pay benefits; there’s only a promise to repay benefits decades after workers receive them. In addition, we have tons of evidence that the “dessert now, spinach later” approach to policy is never actually carried out in full. What you end up with is dessert now, with the spinach being eaten later by (often other) taxpayers.

There are a few reasons for this. First, you can’t tie the hands of future Congresses. Today’s politicians are weak, and so will be future politicians. Last, but not least, Social Security faces massive deficits and the prospect of a 22 percent cut in 2034.

While on paper, the program looks as if it doesn’t grow the government’s size, it does — even on its face — grow government’s scope. This is an area where the government wasn’t previously involved and now it is.

Even in the short term, this plan grows government’s size. That’s because extra benefits need to be paid upfront — either by depleting the trust funds faster or using funds from the general revenue today. And it will take decades for the first beneficiaries to (supposedly) start paying the program back.

That brings us back to the recent score of the Rubio-Wagner plan put out by the actuaries from the Social Security Administration. The thing that the plan’s advocates don’t advertise when they tell you about the negligible effect it would have on the Social Security Trust Funds is that the score assumes that the benefits cease in 2032. It means that within the 75-year window that the report looks at, all beneficiaries would have paid back the money they took out, which wouldn’t be the case if the score had assumed the benefit is continued.

Part of me understands why the score was done this way – to get around the fundamental problem one has in making a score over look budget neutral over a 75 year widow when the benefits are paid first and are supposed to be repaid decades down the road. That said, it does seem misleading to imply that this score is more than a measure of the impact of, and only of, 10 years of benefits over that 75 year widow.

Obviously, the actuaries also assume that members of Congress and special interest groups don’t interfere with the requirement that paid-leave beneficiaries actually have to retire later.

Raise your hand if you actually believe paid-leave benefits will stop in 2032 and that beneficiaries will actually have to retire later, decades down the road. If you do, I have a bridge to sell you.

The truth is that in the real world, we should expect this plan to grow both the scope and size of government, because there’s no way future Congresses will enforce what is required to make the effect of the policy “negligible.” Yet, if they don’t the program’s impact on the trust funds will be significant.

Beyond the real financial cost of this design, there is a consequence that is rarely mentioned but should concern us. Having a federal policy on paid leave will shrink the size of civil society. As I mentioned before, a majority of women report already receiving paid leave in various ways. Yet, in states where they have government paid-leave policy, employers ask employees to first use the state benefits and then they will fill the gap with private benefits. That effectively substitutes state intervention for private sector intervention.

Doug Bandow had a good explanation of why it matters:

Here government is threatening civil society institutions, ranging from charitable to business, which are aiding the poor, disadvantaged, and uninsured! True, the aid process is disorganized, decentralized, uncertain, and uneven. But that is society. Individuals, families, institutions, and organizations respond differently, yet their complex interplay is what makes community. Discerning and addressing needs, organizing diverse approaches, and responding to the people in front of you is what genuine compassion, which once meant “suffering with,” is all about.

David Beito has detailed the role of mutual aid societies, which played an important role a century ago. One of their benefits was ensuring access to health care for working people, including minorities. But for various reasons, which Beito explores, they were replaced by “impersonal bureaucracies controlled by outsiders.”

Conservatives clamoring for federal intervention in paid leave should give some thought to this issue.

In conclusion, the plan can be summed up this way: incentives matter, trade-offs exist, and there is no free lunch.

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Veronique de Rugy

listpg_veroniqueDeRugy AIER Senior Fellow Veronique de Rugy is also a Senior Research Fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist. Her primary research interests include the US economy, the federal budget, homeland security, taxation, tax competition, and financial privacy.
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