Your Pension Depends on Kids You Did Not Have — Julien Reszka

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Pay-as-you-go pensions need a growing base of future workers to fund a shrinking one of retirees. Not having kids is free, and someone else pays twice.

23% Cut to US Social Security benefits scheduled to take effect in 2033, when the retirement trust fund is projected to run out under current law Social Security Administration, 2025 OASDI Trustees Report

A pay-as-you-go pension is a claim on other people's children. It only works if enough of them exist, and it pays out the same whether you helped make them or not.

Start with the arithmetic, because it is not a matter of opinion. The ratio of retirees to workers has been climbing for decades and keeps climbing.

The OECD's old-age dependency ratio, people 65 and over per 100 people aged 20 to 64, has more than doubled since 1960 and is still rising

The share of the OECD population aged 65 and over went from 18 percent in 2022 to a projected 30 percent by 2060

The US Social Security retirement trust fund is projected to run dry in 2033, after which incoming payroll taxes cover only 77 percent of scheduled benefits

A pay-as-you-go system does not hold your money in an account with your name on it. It pays retirees out of the wages of whoever happens to be working the year they retire. Children are the actual capital stock of the system, not the contributions on a payslip. That makes the decision to have them, or not, an economic decision with consequences for people other than the parents.

Alessandro Cigno and Martin Werding worked out the mechanics of this in their book on children and pensions, and the case comes down to two plain facts about anyone who opts out of raising children.

They spend less over their own lifetime, since raising a child to adulthood costs a working income's worth of money and years

They still collect a full pension, funded by the payroll taxes of other people's children once those children are working adults

That is a free ride, not a private choice with no side effects. It is also not a hypothetical someone dreamed up for a paper. Germany's constitutional court ruled in 2001 that charging parents and childless contributors the identical rate for long-term care insurance was unconstitutional, since parents already bear the economic cost of raising the next generation of contributors. The legislature responded with a surcharge on childless contributors, 0.25 percentage points of gross income from 2005, raised to 0.35 points in 2022. In April 2022 the court went further still and ruled that even a flat surcharge was not enough, because the cost of raising three children is not the cost of raising one. The same court accepted that ordinary pension insurance already compensates parents adequately, through credited child-rearing years built into the benefit formula. Germany's own pension system, in other words, already runs a small transfer from the childless to parents, because the courts made it.

Pensions Buy Fewer Babies. Cutting Them Costs Votes. made the fertility case for reforming these systems. The demographic and fairness case stands on its own and does not depend on anyone changing their family plans in response. The dependency ratio keeps rising regardless of what any single household decides, and the free ride does not correct itself. Someone has to be the last generation asked to fund a promise made when the ratio still worked.

Myth: Choosing not to have children is a private decision with no effect on anyone else's finances.Cigno, A. & Werding, M., 'Children and Pensions', MIT Press, 2007

Before you treat a pension check as money you paid in and are owed back, check who actually funds it. A pay-as-you-go system pays out of current workers' wages. If you did not help produce any of those workers, someone else's children just did.

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Discussion

If your pension is funded entirely by other people's children, do childless retirees owe anything back, or is that arrangement fair as it stands?

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See also

The Upcoming War in Eastern Europe

War in Libya. What's in It for Us?

Ruling Is a Skill. Voting for It Is a Joke.

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