2005 April 14 Thursday
Will Declining Costs Of Child Care Offset Rising Costs Of Elder Care?

Tyler Cowen of Marginal Revolution points to a story in the NY Times about how the growing burden of paying for the old is being partially offset by the declining burden of paying for children.

The overall burden on the employed will grow, but not to unprecedented levels. The ratio of people of working age to those either under 20 or over 65 will decrease to 1.2 in 2050 from about 1.5 today. But this is still an easier load than in 1965, when the country was awash with children, and the ratio of the working-age population to each dependent was only 1.1.

True, the young are cheaper to maintain than the old. In 1990, economists at Harvard and M.I.T., including David M. Cutler and Lawrence H. Summers of Harvard, estimated that people over 64 consume 76 percent more than children.

Still, Mr. Burtless estimated that in 2050 a worker will have to sacrifice 49.6 percent of his or her wages - through taxes or other means - to maintain society's dependents. That is nearly 6 percentage points more than in 2000, but it is merely 0.8 percentage points more than 1965. And the percentage could well be smaller if people work later in life to pay for more of their keep.

My guess is that the cost of paying for each child is growing for a few reasons. First off, the tax burden for each child has risen in part due to the futile pursuit of improvements in educational outcomes by throwing more money at children who are simply not bright enough to meet expectations. Also, the rise in illegitimacy (see the first graph here) means fewer men are paying for their children and hence more funding for child raising (especially medical costs through Medicaid) is coming via the tax man.

The rising tax burden for child care will have the same effect as the rising tax burden for elder care: People will work less at paying jobs in order to spend more time doing work for themselves. High marginal tax rates to pay for old folks means the harder you work the less you get out of each additional dollar earned. How depressing. I see this as having an opposite effect on motivation than having a newly born baby. In the case of the costs of the new born baby suddenly Dad (at least in intact families) feels the urge to work harder. Got to keep that job. Got to get that raise. The costs for the pediatrician and dentist stretch into the future and more money is needed.

Mom and Dad working for the baby have an incentive to work much harder because with enough hard work so those baby costs can be paid for. The more successful workers can earn enough income that after paying the fixed costs there can still be money left over to pay for enjoyable things. The fact that child costs are more typically fixed costs and not a percentage of income motivates parents to earn more than the fixed costs of child care. This is an incentive for greater economic activity, not less.

Another important difference between paying for child care and for elder care is that a much larger fraction of child-rearing costs are borne by those who have the children. People are more willing to spend on that which is in some sense theirs than on that which is for strangers. Granted, a lot of people are not thrilled to spend time with their kids. But most of those same people are motivated to go to work to earn money for their children. Whereas taxes exacted on them to pay for old folks are not earmarked specificially for their parents. So the incentive to work harder to pay for the elderly is just not there the way it is to pay for one's own children. For someone whose parents have already died no taxes they pay will go to their parents. Similarly, if one's parents are still working one knows that one's taxes for old folks are going to pay for other people, few if any of whom are closely related to you.

Rising illegitimacy, rising uninsurance of children, and the rising number of children of poor illegal immigrants who pay little in taxes are all increasing the fraction of child care that is paid for via taxes. Therefore on average children are not as much a motivation to work as was previously the case pre-welfare state. This partially offsets the declining costs of smaller families and makes the financial outlook for the future bleaker still.

Thanks to Dan Vanzile for pointing me to Tyler's post.

Share |      By Randall Parker at 2005 April 14 12:22 PM  Economics Demographic


Comments
crush41 said at April 14, 2005 3:42 PM:

The birth rate to death rate ratio in the EU is lower than in the US. Any idea about the degree of causality from higher tax rates and a growing welfare state? Even though this will decrease the amount of dependents for a few decades, that seems a precarious road to travel. If higher costs for the elderly are leading to lower birth rates, the situation is going to perpetuate itself, and the population will continue to age while slowing in growth or even shrinking (as some of the EU already is in the process of), putting an ever-greater burden on the producers.

As for the elderly working more and helping offset the dependency--what's to stop the AARP, et al from voting for increased old-age entitlements? As this aging occurs, the voting power is going to continue to shift towards older Americans (accentuated by a shrinking birth rate) who have a vested interest in the very same policies. Will they work when the option of turning up the retirement benefits exists?

I concur with the bleak assessment.

PacRim Jim said at April 14, 2005 3:49 PM:

We humans will have to care for our elderly? I thought robots were going to do it, like in Japan.

Randall Parker said at April 14, 2005 6:34 PM:

PacRim Jim,

Just because I urge a particular course of action is unfortunately no guarantee that the nation will heed my advice. We ought to be trying harder to automate elderly care.

I expect some entrepreneurs will develop better ways to care for the elderly. But we really need a much bigger push. Ditto for the development of treatments that will delay frailty.

crush41,

I certainly agree that higher taxes are a disincentive for reproduction.

Jim said at April 15, 2005 2:13 PM:

sure seems like investing in improving healthcare productivity and supply (i.e. train more doctors/nurses) would be a good move for the country right now.


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