Planning on retiring? Thank a parent

Sorry, /r/childfree. Other people's kids pay for you.

Image by serrano1004 from Pixabay

Across the political spectrum, you can find people who believe children are an economic burden that parents foist on the rest of society.

“I’ve never really felt it was society’s responsibility to take care of other people’s children,” Sen. Ron Johnson (R-WI) told the press in La Crosse earlier this year. He warned that federal subsidies for childcare would increase the national debt and “mortgage our children’s future.”

A recent piece in The Atlantic describes the anguish some liberals feel as they consider whether to have children in an age of climate change. And then there’s the Childfree community on Reddit, where there’s a constant drumbeat of bitterness about how childfree people are forced to pay for other people’s kids.

Such arguments miss something important: each of us will be too old to work some day. Senator Johnson is 66 years old. In a decade or two, his cohort will reach the stage in life where other people’s children take care of them. Most of the childfree redditors are younger, but ultimately they’ll end up in the same situation.

If we fail to raise enough children to provide a substantial workforce in our retirement years, our living standards will inevitably fall. This goes far beyond literal caretaker tasks, like working in nursing homes. In our golden years, we’re all going to rely on others to serve us in restaurants, fix our plumbing, and deliver our mail.

Even the climate worriers at the Atlantic don’t have it right; while more people might produce more emissions, a society with a poor ratio of workers to retirees is going to have limited free resources to solve other problems besides caring for the nonworking population.

Some of us may be able to accumulate enough savings, individually, to enjoy a high standard of living in retirement. But these savings only matter to the extent that young workers are ready and willing to take your money. Neither private saving nor government pension schemes work unless there are enough workers to meet the needs of older Americans. No amount of financial wizardry will conjure them into existence.

Understanding this basic mathematical reality helps us think clearly about intergenerational equity. It provides an affirmative case for population growth. And it shows that parents are doing much more for nonparents, economically, than many people appreciate.

In the end we “pay for” stuff with productive capacity

The goal of retirement planning is self-sufficiency without labor income. You put away money into your 401(k) during your working years, and then use the earnings during your retirement years to pay for goods and services. But the self-sufficiency provided by retirement savings is a bit of an illusion. In the absence of prime-age workers to produce those goods and services, the money alone does you little good.

The past year has been a great reminder of this principle. A series of fiscal packages signed by Donald Trump and Joe Biden between March 2020 and March 2021 provided individuals, businesses, and state governments with large amounts of financial aid to get through the COVID-19 pandemic. They pumped so much cash into the economy that firms have struggled to fill orders or hire workers. Prices have risen and many wants have gone unfulfilled despite a surplus of cash.

For society as a whole, it is the productive capacity of the physical economy, not the cash balances in our bank accounts, that determines our standard of living. Most of that productive capacity comes from human beings doing work. And this will likely be about as true when we retire as it is today.

If robots were sufficiently good caregivers, we might be able to “self-fund” our retirements by constructing fully automated systems that would take care of us for years to come, like the spaceship Axiom in Pixar’s film WALL-E. Or if we were sufficiently vigorous in old age, we could simply work and support ourselves for our whole lives. Then the distinction between old and young would become irrelevant, and we would not really care how our population pyramid looked.

But neither of these is likely in our own time. In our own world, society as a whole covers its retirement obligations by having children and raising them to be working adults.

The soft ponzi scheme that is our society

Social Security is often called a Ponzi scheme, by everyone from Boston University economist Laurence Kotlikoff to the Adam Smith Institute’s Tim Worstall. This claim usually prompts angry rebuttals from liberal supporters of these programs. But I think it’s more useful to look at things the other way around: our entire society is a little bit like a Ponzi scheme—and that’s not necessarily a bad thing.

“Ponzi scheme” is a pejorative, and like many pejoratives, we use it in a pretty binary fashion. Either something is a Ponzi scheme run by crooks, in which case, it is destined to blow up in everyone’s face, or it’s a legitimate institution run by decent people and it doesn’t have to worry about Ponzi problems.

I would relax that binary a little bit. Because some of the same principles that apply to ponzi schemes also apply to more legitimate institutions.

Consider the Securities and Exchange Commission’s description of ponzi schemes:

A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves.

With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.

This description hints at a provocative truth. A Ponzi scheme that promises unrealistic returns is bound to run out of dollars at some point. But what if you make more modest promises, keep your books transparent, and find a way to consistently recruit new people?

Well, then you might look a little bit more like Social Security, or a state-level pension fund. Pension funds are supposed to accumulate assets to pay for future benefits. But in 2019, no state had sufficient assets to fully cover the already-promised benefits (South Dakota came close.) New Jersey had assets worth only 36% of what they’ve promised to retirees. And you could even say that Social Security and Medicare aren’t really funded with assets at all. (To the extent that they have Treasury bonds, that simply moves the obligation to a different part of the government’s balance sheet; it doesn’t improve the government’s net financing.)

How will these investment schemes survive? State pension funds can recruit new investors, because the new investments are part of an employment contract. And pension beneficiaries are usually locked into the program: if there's an option to "cash out," it typically requires taking a substantial haircut. Social Security is even better at recruiting new investors, since it’s tied to almost every job in the country.

As long as these schemes keep more money coming in from new recruits than going out, they won’t collapse.

In other words, they survive in part by paying existing investors with funds collected from new investors, just as the SEC describes Ponzi schemes doing. But they are also premised on more reasonable rates of return and offer a valuable enough proposition that people are willing to participate. Some might be underfunded for years, or decades, but that doesn’t impede their operations.

Could a state’s pension system accumulate so many liabilities that people flee the state to avoid having to pay the bill? Sure. If a scheme relies too much on Ponzi-like principles, it could collapse just as the SEC says. But you can lean on them a surprising amount; the continued existence of New Jersey’s public sector is a testament to that.

Unfunded obligations are everywhere

People lose sleep over the national debt (or even more so, unfunded Social Security and Medicare obligations) or become convinced that these are irresponsible, and we have to deal with them. Sometimes they become further convinced that hyperinflation is just around the corner, and sometimes turn to alternatives like bitcoin.

In the end, none of the tricks you can think of to get rid of unfunded obligations actually get the job done. Can you eliminate mandatory promises to future retirees, and instead consider them “unofficial” somehow? Sure, but this doesn’t remove the obligation, it just changes how you account for it.

Could you have the government accumulate more assets—enough to cover all the liabilities? Sure, but it’s a bit of an illusion; it still comes on the backs of future generations. For example, the government could own a bunch of land and charge future generations rent in order to pay Social Security benefits. But ultimately, this isn’t obviously better than just paying taxes to finance Social Security.

Can you privatize retirement funding? Sure, and we do some of this, but it is not necessarily better from the future generations’ perspective. They end up with a low share of private wealth when they’re young, and therefore, a low share of capital income.

In the end, retirement programs work by letting seniors accumulate some sort of generational wealth⁠—in either private accounts or a government program⁠—that they can spend down. It’s fair to argue about the size (I’d prefer less generous retirement programs). And it’s fair to make sure our society doesn’t promise too much and act too Ponzi-like, for fear of painful cuts later. But the more young people you have, the easier this calculus becomes. The fewer, the tougher.

Might new children just “put us further in the hole” by adding to these unfunded obligations? Not really. What we tend to care about is not the total quantity of obligations, but the obligations relative to the overall productive capacity. (For example, something like debt-to-GDP ratio.) Children will eventually add to GDP, and maybe have children of their own, and improve the ratio of workers to non-workers.

Our dependence on future generations is an ineradicable facet of the physical world, not the financial system. You’re mortal, you have needs, and eventually you won’t be able to physically take care of yourself without help. Hundreds of millions of your countrymen, and billions of your fellow human beings, are in the same boat. Any economic system that could exist in the real world is going to reflect that. The fact that our financial system and our government tend to quantify our promises to the elderly is simply a mark of transparency.