We Should Have a Mega-Baby-Bonus

Happy Birthday, America.

At the Institute for Family Studies I and my intrepid associate at IFS Peter Foreshaw Brookes have just released a new article, the major annual report for the Pronatalism Initiative, foreshadowing some key themes we will be working on this year:

It contains multitudes. Exciting new historical fertility data! An interaction visualization tool for fertility rates by U.S. state! Survey results on how your friends might be reshaping your family desires!

But for this post I want to ask a simple question:

Would you have another baby for $75,000?

For many people the answer is no. But for some, it may be yes; and those saying yes are probably far more numerous than the share saying yes to the same question if the number were $500. Bigger cash benefits are more likely to actually change fertility behavior.

But big benefits have big problems. They might distort behavior in concerning ways. You can easily imagine such benefits causing an explosion in single parenthood, or disproportionately encouraging fertility by people facing imminent bankruptcy. Big benefits can also be fiscally ruinous. Paying a $75,000 baby bonus to every baby born in America would cost $250-$300 billion/yr, a pretty huge financial commitment.

Can we create big bonuses without these problems?

The answer is yes. At the Institute for Family Studies, we have spent the last year and more quietly working with partners in Finland to develop a bleeding-edge baby bonus proposal. The Finnish version is called Vauvosampo, which, translated poetically rather than literally, means something like “Magical baby-making device of myth and legend.” You can read about the proposal in great detail here.

The basic idea is simple: instead of paying a baby bonus for current kids from current tax revenues, on a constant tax-and-transfer treadmill, instead, we can use current tax revenues to make productive investments to pay for a much more lucrative future baby bonus. Instead of fighting against market forces driving low fertility, we propose embracing the market and creating an actuarially-sound, zero-unfunded obligation, long-run-zero-cost investment program. Too good to be true? Let’s work through it.

Up front investment: $17,000

Why $17,000? Well, that’s actually cheaper than paying for 1 year of public school for an average American child. If we spend 12 years investing in a kid’s future career, we think it’s reasonable to spend the equivalent of one year investment in their future family. Fair’s fair— invest in careers and make a modest family investment costing 1/2th as much; surely that isn’t too much to ask?

At that price, depending on birth effects, the program will cost about $40-$85 billion/year. That’s less than 1% of Federal tax revenues. We are not talking about a massive program here.

Long run cost: $0

And in the long run there’s no cost at all!

To understand why, we need to understand the actual program design a bit. If you know anything about Social Security, you know current retirees are paid for, not by savings or investments, but current workers. This creates “unfunded obligations”: cases where the government has made promises but without any dedicated funding.

American Birthday Accounts don’t work that way. The initial investment goes into a fund in a newborn baby’s name. Eventually, they claim the fund when they have babies.

But not everybody has babies (and certainly not everyone has the 3 babies you’d have to have to claim the full benefit value). In our vision, once people turn 50, any fund value not yet claimed due to not having had kids (or early mortality) would be yielded back into a fund, which would be continually reinvested and used to pay for the next generation of seed funding for American Birthday Accounts. By our math, it is extremely unlikely that the American Birthday Accounts raise fertility enough to make unclaimed funds too small to pay for the next round of baby bonuses, because unclaimed funds have had fifty years to accrue value.

Assuming funds are invested in some kind of broad equities index, and assuming the effects on births are not 2 or 3 times what we expect, then this program becomes fully self financing by year 50. In fact, it may even turn a profit, allowing the American Birthday Account to make small surplus contributions to Social Security in some years.

How it works: Benefits for parents and kids

Classic baby bonuses are benefits for the kids. The American Birthday Account (ABA) is ultimately a benefit for the parent. When a kid with an ABA grows up, they get to claim ownership of a benefit when they become a parent.

So here’s how it works. The money is invested when a child is born in America, for every child born in America. It grows in an equities fund until the individual has a 1st birth. At a 1st birth, or perhaps at the 1st birthday of their 1st child to ensure ongoing custody, they become direct trustees of a personal account equal to 50% of their ABAs. They can choose to sell it, keep it, sell pieces of it for ongoing money, whatever they want to do. Anything they sell is treated, for tax and welfare purposes, like ordinary income.

The other 50% keeps growing. At a 2nd birth, they get to claim 75% of the value of their account at that time, i.e. the 50% left over after the 1st birth plus any growth on it since. At the 3rd birth, they clear out everything that remains in the account.

It’s very plausible that a typical family choosing to have 3 children could receive over $100,000 in inflation-adjusted after-tax benefits, with about half of that received at the 1st birth. Exact amounts would vary based on a family’s income and taxes, age at births, number of children, etc. Here’s one example of what it might look like for a married couple:

What about marriage? It’s a huge, and fair, marriage benefit.

Is it possible this program might subsidize single parenthood? That’s nobody’s goal, but could it be an adverse outcome?

Obviously, any financial transfer will nudge some single parenthoods towards having a child instead of aborting it (or contracepting). But will the effect be disproportionate?

We think not. See, to claim the ABA value, a parent would have to be a coresident, full-custody parent at the child’s first birthday, and be listed on the birth certificate. A small number of unmarried couples would have two qualifying parents, but in the vast majority of cases, parents would face a simple choice: stay single and get just one parent’s bonus, or get married, move in, share custody, and get both parents’ bonuses.

This isn’t an unfair subsidy for married people at the expense of singles. Every individual is eligible for the same benefit. But a given birth might be linked to either one or two parents; and if two, then both claim it. Assuming parents have any shared budget at all, that creates a huge incentive for marriage. And since singles have narrower tax bracket widths and thus more punishing tax losses if they sell the whole benefit, the benefit would genuinely tend to be more generous for married couples.

Here’s the same family I showed above, in full detail:

And here they are, if it was just a single parent:

You can see the births to the single parent are literally half as generous per birth.

Won’t this subsidize fertility for the desperate and the poor? No, it’s mostly a middle-class subsidy.

The same logic applies to the question of subsidy by income class.

Yes it’s true, low-income beneficiaries would get some benefit. But the largest benefits go to middle-income families.

Think about what happens if a low-income family with $10,000 in income claims a $40,000 windfall in income. I’ll tell you what happens: they’re booted off a bunch of welfare programs. Depending on exactly what state they live in, marital status, other income type and sources, and many other factors, they might end up losing benefits worth anywhere from $4,000 (an effective 10% tax rate) to up to $35,000 (an 87.5% tax rate). In the most typical case, their effective tax rate on the income would end up being about 40-50%. Low-income parents are also less likely to be married which, as we noted above, there is a large marriage bonus.

At the opposite extreme, very rich families would also be less subsidized. Whereas middle-income families may pay a combined tax rate of 25-35% on their marginal income, high-earners in many states face nearly 50% effective marginal tax rates.

In other words, the real benefit value tends to be highest for middle-income families. So while, yes, some money will go to low-income families, disproportionately, American Birthday Accounts are middle-class benefits.

Won’t there be lots of fraud? No— this would actually be a relatively hard-to-defraud program.

No government program has a zero fraud rate, and American Birthday Accounts would be no exception. But on the whole, it would be an easy program to administer and to discourage fraud.

First of all, birth certificates are already used as proof of identity for U.S. passports. Issuing the account paired to Social Security Numbers is entirely reasonable, limiting account-seeding to individuals who receive SSNs. Of course, while rates of Social Security fraud are low compared to e.g. misclaimed EITC benefits, they’re not zero: but ABAs would, functionally, be double-verified. Verified first at account seeding, and verified again at account claiming, when the newborn child’s SSN is issued, allowing Social Security to verify that a new child was born. Fraudsters would have to falsify two SSNs, not one, and come up with a plausible linkage between them backed up by birth records.

The major source of possible fraud would be claimancy of accounts of individuals who died young. Their Social Security Numbers might be illegally obtained by individuals who try to use them when having their own babies. But again, they would have to not only claim the SSN, but the parental name, date of birth, and other information on the newborn’s birth records would also have to match that SSN. Social Security has full Death Index access, so could easily set up flags on the system for such cases.

Teens are impulsive— won’t this create a problem where teens have babies for the money? No, we can set age limits.

We propose that 1st births before age 21 should not allow the parents to claim their ABA until they reach age 21; nor 2nd births until 23, and 3rd births until 25. Youthful parenthood is a great thing— but offering 16-year-olds big cash accounts to get pregnant seems like a bad idea, especially since they would be foregoing the future financial returns from ongoing investment growth. Consistent with our idea of setting the investment amount based on public education spending comparisons, we don’t want our program to be discouraging school completion or employment. As such, we think it’s reasonable to allow teen parents to claim the benefit but only when they have reached appropriate minimum ages.

Be real: Will this really boost fertility? Yes.

Exact effects will vary, but our Finnish partners used the best available evidence and a very sophisticated modeling approach, and found that a benefit rather like the one we propose would boost Finnish fertility practically all the way to replacement rate (their proposal also has a temporary bridge-bonus program):

Using a much simpler and less aggressive modeling approach, we estimate that this program will boost fertility by 8 to 25%. That’s not accounting for any dynamic effects on age at first birth, nor accumulating parity effects. It’s just accounting for the very simple aggregate effects we pick up in classic quasi-experimental economic studies.

Would that alone put us to replacement rate? Maybe, maybe not. But paying the equivalent of 1 year of public school for 50 years to get 300,000 to 900,000 extra babies every year for the next 250 years seems like a decent deal to us.

Want to test out your own American Birthday Account scenarios?