BUFFALO, N.Y. -- Policymakers and citizens pondering the merits
of Social Security reform should consider new evidence showing that
"social security" adversely affects decisions to marry and have
A new University at Buffalo study, examining the experience of
57 countries over a 32-year period, concludes that in the U.S. and
other countries where social security is instituted as a
defined-benefits, pay-as-you-go system, marriage and fertility
rates fell sharply over time -- partly as a result of social
Those declines were not found in countries utilizing
government-managed personal savings accounts or privatized pension
funds as a basis of their social security system.
The study, led by renowned economist Isaac Ehrlich, chair of the
UB Department of Economics, also supports previous research showing
that pay-as-you-go social security has contributed to a slowdown in
the rates of savings and economic growth.
"Current Social Security systems in the U.S. and elsewhere have
some unintended consequences, which include disincentives to form
families and have children," explains Ehrlich, who also is Melvin
H. Baker Professor of American Enterprise in UB School of
"I'm not ascribing the reduction in family formation entirely to
social security -- there are many other contributing factors, such
as greater opportunities for women in the workforce – but, on
the margin, social security has had an adverse effect on the
choices we make regarding family: whether to marry, to have
children or even whether to save for our children's future."
This trend, Ehrlich says, has contributed to the projected
growing imbalance between the number of U.S. retirees who will
collect Social Security benefits and numbers of workers who pay
into Social Security.
Ehrlich's study, with co-researcher Jinyoung Kim, UB assistant
professor of economics, is posted on the Web site of the National
Bureau of Economic Research (NBER): at http://www.nber.org/papers/w11121.
The study found that among the 54 countries studied with
pay-as-you-go social security programs, the average annual marriage
rate (net-of-divorce) fell from 9.72 per 1,000 people in 1960 to
6.40 in 1990, and the average total fertility rate (the average
number of children born to an average woman during her reproductive
years) fell from 3.82 in 1965 to 2.07 in 1989. In the U.S., the
marriage rate fell from 9.17 in 1960 to 6.39 in 1990, and the
fertility rate fell from 2.9 in 1965 to 2.0 in 1989.
According to the study, declines in marriage and fertility rates
that are attributable to the specific impact of social security
were not observed on average among the subset of countries
(Singapore, Malaysia, and the Philippines) in the international
sample that utilize government-managed personal saving accounts or
privatized pension funds (Chile) as a basis of their social
security system, rather than our type of pay-as-you-go social
Ehrlich, who supports the principle of social security as a
means to secure old-age pension benefits, attributes declines in
U.S. marriage and fertility rates partly to a Social Security
system that does not strongly link the defined benefits with
contributions that are supposed to fund the system.
Prior to the establishment of current form of Social Security in
the U.S., the family was the main form of social security, Ehrlich
points out. "Working children took care of retired parents as they
aged, and so there was an incentive for parents to have large
families," he says.
A pay-as-you-go system is, in principle, financially sound if it
behaves like a large family where the entire generation of retirees
is supported by the succeeding generation of workers, Ehrlich says.
"In reality, however," he adds, "the pay-as-you-go system does not
provide strong incentives for the system to remain financially
"Today, your Social Security benefits are entirely independent
of what your children put into the system or whether you have any
children at all. And yet the entire concept of our current Social
Security system is based on the present generation of retirees
being financed by the next generation of workers, their
"There is an obvious disconnect between the financial needs of
the system and the needs of the family," he concludes. "The
structure of our Social Security system is sowing the seeds of its
own financial vulnerability, if not ultimate demise."
The solution, Ehrlich suggests, is to reform Social Security by
making it fully funded by individual contributions (thus, also
independent of inter-generational support) by allowing people to
manage some portion of their contribution through
government-regulated, properly balanced pension funds. Americans
also should be given the option of bequeathing these annuities to
their children, he says.
This, Ehrlich says, would provide people with more incentive to
adequately plan for retirement. Moreover, contributions to
privately managed pension funds, channeled to productive private
investments, also will promote higher economic growth, he says.
"If people want Social Security to provide a nest egg, they will
know they have the opportunity to manage their contributions and
see the payoff," he says. "And because generational contributions
would become less of an issue, the financial solvency of Social
Security would no longer be as vulnerable to the aging of the
Under our pay-as-you-go system, benefits are guaranteed by how
many workers contribute to the system relative to the number of
retirees. According to Ehrlich, the "support" ratio was 16 to 1
when the system started paying benefits in 1940. Right now, the
ratio is 3.3 to 1 and falling. The aging of the population -- more
people living longer and fewer babies being born -- "is threatening
the current level of benefits and lowering the return people should
receive on their contributions," he says.
"Under a fully funded social security system, in contrast,
people fund their own retirement by the amounts they actually
contribute to their personal accounts," Ehrlich says. "If mandated
savings are not excessive, this system does not distort the
incentive to retire early, to save or to form families."
According to Ehrlich, the Bush Social Security plan may
therefore be on the right path, but he would like it to provide
oversight for contributions managed by the private sector and
linked to the financial markets.
"The government should provide some guarantees for these
investments by insisting on a diversified portfolio of stocks,
bonds and government securities, monitoring closely the investment
returns and offering clearer assurances that Social Security would
continue to be a safety net for the needy," Ehrlich says.
"We should structure Social Security investment vehicles so
people get a choice, and the government has regulatory
responsibility," he adds. "There have to be safety valves to
protect the needy and to protect people from making overly risky
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