– April 15, 2019
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Some conservative social engineers — believing without warrant that paid family leave is undersupplied by the market — have concocted a plan for government to increase the availability of paid leave. The plan is this: allow workers to buy for themselves paid leave today by borrowing against their Social Security accounts

Reporting on legislation introduced in March by Senators Marco Rubio (R-FL) and Mitt Romney (R-UT) — and supported by a number of other Republicans and conservatives — The Hill writes:

Under the legislation, new parents would have the option to get early Social Security benefits for up to three months to finance paid parental leave….

In exchange for receiving the paid parental leave benefit, people would either have to increase their Social Security retirement age by several months or get a reduction in their monthly Social Security benefits for the first five years of their retirements.

As a means of increasing the amount of paid leave taken by workers, this conservative plan, on its face, is superior to a simple government mandate that employers offer more paid leave.

When government mandates paid leave, the value of workers’ take-home pay (or of other fringe benefits) falls in order to compensate employers for the expense of supplying more paid leave. One result is that workers who value paid leave less than they value higher take-home pay are nevertheless stuck with paid leave and lower take-home pay.

Not so with this conservative plan for increasing paid leave. Workers who value paid leave at less than its cost are not obliged to buy it.

Yet even beyond the fact that there is no reason to suppose that paid leave is currently undersupplied, serious problems lurk within this conservative plan to increase paid leave — problems that perhaps make this conservative plan at least as bad as any other government intervention aimed at increasing paid leave.

Social Security Accounts Are a Political Fiction

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.

Taxing 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.

To deny the realism of this prediction is to deny the logic of politics as explained by the late Nobel-laureate economist James Buchanan and other public-choice scholars.

In Tension With Social Security’s (Il)logic

Another, related problem with the conservative plan to fund paid leave is that it runs counter to the very premise of Social Security. This premise is that too many people today are too irresponsible to save enough for their own retirements. Government, therefore, must compel some minimum amount of saving.

Yet by allowing workers today to “borrow” against their (fictional) Social Security savings, the conservative plan treats workers as being sufficiently responsible to make sound choices about how to allocate their incomes across time.

While I fully agree that adults should be presumed to be responsible in this way, this presumption is irreconcilable with Social Security’s premise. And so when many retirees in the future are confronted with the need to accept reduced streams of benefits, Social Security’s premise will win the day politically, leading politicians to save these retirees from what will be seen as their earlier financial myopia by ensuring that their benefits are not reduced.

The bottom line is that it is not at all clear that the conservative plan to increase paid family leave is better than any plan pushed by progressives. All such plans should be shelved. Social engineering done by those on the political right is nearly always as destructive as is social engineering done by those on the political left.

 
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Donald J. Boudreaux

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Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University; a Mercatus Center Board Member; and a professor of economics and former economics-department chair at George Mason University. He is the author of the books The Essential Hayek, Globalization, Hypocrites and Half-Wits, and his articles appear in such publications as the Wall Street Journal, New York Times, US News & World Report as well as numerous scholarly journals. He writes a blog called Cafe Hayek and a regular column on economics for the Pittsburgh Tribune-Review. Boudreaux earned a PhD in economics from Auburn University and a law degree from the University of Virginia.
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