A Radical Solution for the Social Security Crisis: Have More Babies!

A Radical Solution for the Social Security Crisis: Have More Babies!
A Radical Solution for the Social Security Crisis: Have More Babies!

The long-term Social Security crisis may be taking a backseat to more immediate concerns like jobs, the economy and health care reform in the buildup to the 2012 presidential election. But it's still a pressing problem the occupant of the White House in 2013 should really begin to deal with.

As it stands, the debate surrounding how to keep Social Security afloat takes two sides: On one side you have those who want to raise taxes, and on the other you have those who want to cut benefits (either by reducing individuals' payouts or by postponing the retirement age).

Neither is an attractive option.

But there is one little-mentioned solution that could fix Social Security without ruffling anyone's feathers. And it's one the next president should seriously consider.

Make more little taxpayers.

Fostering the Taxpayers of Tomorrow

Economist Bryan Caplan expounds on this idea in his book Selfish Reasons to Have More Kids. "Big families have subsidized retirement since the dawn of government retirement programs," he notes.

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The problem today that is even as we're living longer, creating an ever growing pool of retirees, large families are dwindling. In 1940, 42 workers' payroll taxes supported each retiree. Today, it's only 3.3. By 2050, the ratio will be just 2 workers to 1 retiree.

This number will likely continue to get even smaller. After all, the average number of children per family in America (among families with children) is 1.86.

But if we can change this trend with a higher birth rate, Social Security can be fixed with minimal adjustments to tax rates and benefits.

Making a Tough Sell More Palatable

Obviously, the most difficult part of this equation is convincing Americans as a group to have more babies. With the economy still recovering, unemployment numbers still high, and the likeliness of the inflation rate rising in the coming years, it's a valid concern. Kids cost a bundle, and people may have fewer if they fear being able to support them.

But Caplan explained to me that couples would be influenced (especially today) with a one-time tax credit for each child they give birth to. He tossed out the figure of $30,000 per child as an amount that could make couples seriously reconsider becoming parents or having additional children.

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The Math Behind Bringing Up Baby

And as outlandishly high as that number seems, it actually makes sense for the government to take the short-term hit in tax revenue for the long-term benefit to the economy.

That's because of what's called the "fiscal externality" of each new U.S. citizen.

This represents "the present discounted value of the marginal cost of all the government services the baby will ever consume, minus the present discounted value of all the taxes a baby will ever pay," according to a 2011 essay Caplan wrote for The Cato Institute.

In simpler terms, the fiscal externality is the value of the money the government will collect from a citizen over his lifetime, minus the amount the government will spend on that citizen.

In 2009, economists calculated that the fiscal externality of a new baby was $83,000 -- clearly showing that, even with a tax credit of $30,000 per child, using tax breaks to encourage people to have more kids is an economically responsible tactic.

Similar incentives have worked in other countries that have tried to boost their fertility rate. So it's safe to assume it would work in America as well.

And, perhaps most important, it's a bipartisan solution, both lowering taxes and strengthening the government's fiscal health, according to Caplan -- meaning that having more babies may represent the easiest solution to prevent Social Security's impending demise.

This article was written by Motley Fool analyst Adam J. Wiederman. Click here to read Adam's report detailing one tactic to boost your Social Security payment by as much as 76%.

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