THE CROWD-OUT EFFECT OF SOCIAL SECURITY
March 22, 2005
"Pay-as-you-go" social security systems not only have financing problems, but they also contribute to lower private savings, lower economic-growth, as well as lower rates of marriage and fertility, say economists Isaac Ehrlich and Jinyoung Kim of the National Bureau of Economic Research.
Ehrlich and Kim say that guaranteed retirement benefits, such as Social Security, crowd out private savings that would otherwise take place and reduces intergenerational transfers within families.
In addition, taxes to fund Social Security put a greater burden on families who raise and educate more children. As a result, Social Security contributes to the secular trend of fewer marriages, more divorces and fewer children.
Empirically, if the Social Security tax rate remained at its 1960 level (about 4.5 percent) instead of the average rate over the 1960 to 1992 period (about 6.7 percent), Ehrlich and Kim find that:
- Over this 33 year period, the net marriage rate would have increased by 12.7 percent and the total fertility rate would have increased by 6.5 percent, over and above what actually occurred.
- Similarly, the average savings rate would have risen by 2.1 percent.
- The average growth rate of per-capita gross domestic product (GDP) would have increased from 1.81 percent to 1.96 percent; for example, this means that per-capita GDP would have been 3.1 percent higher in 1991.
If instead the Social Security tax rate were reduced to zero over this period, the private U.S. savings level would have risen by 46 percent in 1991.
Ehrlich and Kim remark that single persons disproportionately benefit from the current system because they share in the larger Social Security pie produced by offspring of married couples but don't have to bear the substantial costs of their upbringing.
Source: Isaac Ehrlich and Jinyoung Kim, "Social Security, Demographic Trends, and Economic Growth: Theory and Evidence from the International Experience," National Bureau of Economic Research, February 2005.
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