Utilize the natural connection of parental leave and Social Security

Connecting parental leave to Social Security may at first glance seem a counterintuitive policy, but the two are in fact naturally linked. After all, becoming parents is how we fund Social Security.

Social Security is best understood not as a publicly managed savings account, but as an intergenerational payment transfer. Your payments pay for your parents’ retirement and your children’s payments pay for your retirement — if you have children.

{mosads}This is the big “if” that worries those who follow the finances of our safety net programs. These programs are predicated on continued growth in the size of future generations. To the extent we experience a slowing in population growth, we will always face the need to cut benefits, raise taxes or delay the age of retirement.

An obvious problem of the situation is that the main drivers we rely on to fund Social Security are not rewarded in how benefits in Social Security are calculated. In our benefits statements, we see a correlation between earnings and benefits. That is, if we make more money, pay more into Social Security and work longer, our benefits go up.

But our earnings aren’t actually funding our benefits. Earnings are not a real driver of the solvency and sustainability of the program. Children are what support this program, but the number of children you raise has no relation to what you get out of the program in terms of benefits.

This structure of funding makes it a perfectly reasonable approach to offer a paid family leave program funded through deferred retirement. This is the basic concept first proposed by Kristin Shapiro and Andrew Biggs and now being pursued by Sen. Marco Rubio (R-Fla.) and others. 

However the program is structured, the economics should be easy. If people were only motivated to have children based on economic calculations, such incentives would be very inexpensive to offer. The additional children paying into the system would help the finances of the program itself. 

Of course, people are not solely motivated by economics when they contemplate starting a family. There are million thoughts that go into that decision and a million more you wish you had thought of after the fact.

But, especially given the structure of our safety net, it is worth making the economics of that decision easier for families as a matter of public policy. 

This could include a family leave benefit paid for with a deferral of retirement later, but I would add another benefit. For third and subsequent children, we should allow people to recoup the deferral of their retirement date.

This would not only create a generous parental leave structure, but it would align incentives with how we actually fund Social Security. If you put in the work as a parent to raise children who are going to fund the system in the future, you should benefit from that when the future arrives for you.

None of this amounts to a complete solution for the funding pressures on our safety net programs. As baby boomers retire, as demographic shifts continue, we will continue to face challenges in the finances of these public programs. 

The only way these programs will ever be permanently sustainable is if the funding mechanism and the benefit calculation work together by rewarding the actions that fund it. That could come with more benefits for more children, or it could come with dedicated accounts funded through savings.

But when these incentives don’t align, we will forever be fixing a structural problem that has no solution.

Matt McDonald is a partner at Hamilton Place Strategies, a consulting firm. Previously, McDonald served under President George W. Bush as associate communications director with responsibility for economic issues. He also led research and messaging for Mitt Romney’s 2012 presidential campaign related to private equity issues.