Social Security System Weakens American Family, Slows Economic Growth

BUFFALO, N.Y. -- Commercialism, Hollywood movies, working parents, a decline in church-going -- just some of the usual suspects blamed for the breakdown of the American family.

"Yes," according to a new study on some neglected economic and social effects of our current Social Security system, to be published in the May issue of American Economic Review.

Isaac Ehrlich, Melvin H. Baker Professor of American Enterprise in the University at Buffalo School of Management and chair of the UB Department of Economics, says that this country's Social Security system is partly to blame for a breakdown in the social and economic structure of the family, which, in turn, has adversely affected the family's impact on economic growth.

Ehrlich and study co-author Jian-Gou Zhong, a senior analyst at PNC National Bank, have analyzed the economic effects of Social Security in the United States and 48 other countries since 1960. They found that, depending on a country's wealth, Social Security had negatively impacted at least one of three choices involving the family: fertility, investment in children or savings.

In the United States, as in most other countries, according to the study, the current "pay-as-you-go" system of Social Security has negatively impacted the decision to marry or form families. Moreover, it has created a disincentive for parents to invest time and effort in their children.

"The family is a unique enterprise because it provides a bond between overlapping generations," Ehrlich says. "Traditionally, it has served as a form of old-age insurance, where parents bear, take care of and invest in children because they have an emotional and financial stake in their success. Successful children are better able to take care of parents in old age.

"Social Security has replaced that bond with a competing system that says to parents, 'It's the government, not your children, that is going to take care of you in old age.' That message has reduced America's incentive to form families or invest in children's futures."

As evidence of this reluctance to form and nurture families, Ehrlich and Zhong point to a decline in U.S. marriage rates and an increase in divorce rates in the four decades since 1960, when Social Security taxes and benefits were raised significantly. They also show that in developed countries, such as the U.S., there has been a decrease in savings since 1960, which the researchers link to a reluctance to save for old age, influenced by the promise of a Social Security pension.

Ehrlich further speculates that in addition to weakening the emotional and economic bonds of the family, the Social Security system has contributed to other sociological phenomena in the U.S., including the creation of a less-motivated workforce and a cultural devaluing of education.

"Some of the problems of our educational system, such as the low test scores of students, can, to some extent, be linked to the effects of our Social Security system," says Ehrlich. "Our current system creates a disincentive for parents to be involved in the education of their children, because the old-age benefits received by parents are independent of the achievements of their children."

Consequently, Ehrlich says, American children, and children of other developed countries, are inadequately prepared for success in the marketplace. This has contributed to a slowdown in productivity growth in the U.S. and other developed countries since 1960 -- a trend that increases the likelihood of bankruptcy for the U.S. Social Security system because lower productivity means less input into the Social Security fund.

According to Ehrlich, Clinton Administration proposals to use budget surpluses to strengthen the Social Security system provide only a temporary, Band-Aid solution. He contends that the U.S. must move to a government-supervised, privatized system, in which workers contribute to an individual pension account. Chile, Singapore, Great Britain and Eastern Europe already have begun this transition, he says.

"The only way to solve the problem is to replace our current system with a system in which benefits received are a direct result of what is contributed,” says Ehrlich. “This would increase the incentive to work and invest in knowledge across all generations, which would increase productivity growth."