When I first thought of my idea for letting new parents collect a few months of Social Security benefits after the arrival of a child in return for deferring their retirement age a commensurate number of months to offset the cost — Social Security Earned Leave, or #SSEL for the Twitterverse — I thought it was a reasonable compromise on the issue of parental leave. Democrats would get legislation that provides new parents important benefits, and Republicans get a pro-family policy that doesn't increase taxes or government spending.
Silly me. While the proposal gained substantial Republican support, it was nearly universally panned by Democrats. The liberal criticism rested in large part on the idea that the proposal would present parents with a "false choice" between parental leave and retirement, as if allowing parents to agree to a retirement age of 67.5 instead of 67 would be so disastrous that we shouldn't even give them this option.
But there are good reasons to relax Social Security's one-size-fits-all approach to retirement planning and add some flexibility to the program so that it better accommodates the needs of individual families. Indeed, Social Security already permits individuals to retire early (starting at age 62) or late (up to age 70) and have their monthly benefits adjusted downwards or upwards accordingly.
New research further highlights the importance of adding flexibility to Social Security, particularly with respect to parents. Andrew Biggs, a Resident Scholar at the American Enterprise Institute — and my co-author on a Wall Street Journal OpEd introducing Social Security Earned Leave — just released a white paper answering the question, "How Do Children Affect the Need to Save for Retirement?" He concludes that "household spending in retirement is substantially higher relative to peak-career earnings for nonparents than for parents."
Why is this so? He explains:
Various data sources show that parents expend considerable resources supporting their children. The analysis using PSID data to form age-expenditure patterns indicate that, as households traverse the age range in which children typically become financially independent, parental expenditures decline. This decline occurs both in total and on purchases that might be involved with supporting children, including food, housing, education and childcare. No similar decline is seen for childless households. Rather, expenditures by non-parents follow a slow and steady increase from about age 30 through retirement age.
And more specifically:
In sum, the disaggregated spending data . . . lends support to the inference . . . that the decline in household expenditures among parental households beginning in the parents’ 50s is attributable to the household’s children becoming economically independent, even if it is difficult to identify the precise date upon which economic independence is attained. In total, annual household expenditures declined by $1,542 (3.5 percent) for parental households between ages 45-49 and ages 65-69 while rising by $12,032 (33.2 percent) for non-parental households.This means that, relative to their household income, parents generally need less income in retirement than non-parents to maintain their standard of living.
This makes complete sense. As a mom of two, I know first-hand that kids are expensive, and my husband and I have adjusted our standard of living in light of those costs! When we reach retirement age, we likely won't need as much income to maintain our standard of living as a couple who has no kids but earns the same amount as we do, as our standard of living is lower because we're spending so much money on our kids.
Biggs's fascinating research highlights how a variety of factors can affect an individual's financial needs in retirement, underscoring the importance of transitioning away from a one-size-fits-all government program for retirement. Social Security Earned Leave can be the first step towards modernizing Social Security. Because parents need less income in retirement than non-parents do, it makes sense for the government to give parents the option of collecting slightly less benefits in retirement and instead access those benefits when they need them the most — right after the arrival of an adorable, but costly, new child.