Kids as Capital

When we grow old, we do not depend directly on our own children. Instead, we depend on other people's children.

Americans like to think of their children as a source of pleasure rather than profit. Recently, when I asked people I know why they had had children, they talked about family values, about the kind of people they want to be, about the kind of world they want to leave behind. The one reason for having children that never came up was economic need.

This is a curious thing, when you stop to think about it. Not so many generations ago people had children because they needed them. In those simpler, more agrarian days, a child was an extra set of hands to help support the family. And a child was insurance against being left unsupported and indigent in one's dotage. Earlier cultures didn't have the luxury of thinking of children as strictly a nonprofit venture. And the truth is, we don't either. Socializing many of the costs of old age let us think for a while that we had transcended the ancient economics of family. Now it seems that we were kidding ourselves.

Children are very expensive--in terms of time, career, opportunities forgone, and cash. Thomas J. Espenshade, of Princeton University, has calculated that a middle-class family with two children is likely to spend about $100,000 to rear each child to age eighteen. And because people today are less likely to have children and the ones who do have children are having fewer of them, the American fertility rate is barely half what it was thirty years ago, when the Baby Boom was at its peak. Of the children that we do have, a higher proportion have been impoverished in this decade than at any other time since 1965: as of 1987 one in five American children lived in a poor family--this when the economy was strong. Forty-six percent of all black children lived in poverty in 1987; so did 40 percent of all Hispanic children. In New York City 38 percent of the children are poor. Why all this matters to the middle class may not be immediately obvious--which is just the problem. If boys and girls grew up to become industrial machinery instead of men and women, it would be easy to see that everybody had a stake in other peoples children.

"Kids are a form of capital," David P. Hale. the chief economist of Kemper Financial Services, in Chicago, told me recently, when I asked him what was behind all the talk about "investing" in children "There was always an intellectual camp running around saying these things. But suddenly the intellectual camp has a following, out of need." As the sparse generation of the Baby Bust enters the work force, business is discovering that the supply of qualified young workers is tightening.

This same sparse generation will have to undertake the potentially staggering burden, starting early in the next century, of paying the public costs of their parents' dependency. Inexorably, the intergenerational circle closes. Here is a question that every working-age American might do well to ask himself; If we have fewer kids, and if more of the ones we do have are slouching toward adulthood from poverty then how generously am I going to be supported in my old age?

The past half century has established as a basic principle of American life that we will pay for other people's retirements. Today, as we face the need to nurture our work force and safeguard our retirements, the question forcing its way onto the agenda is how much more we will pay for other people's children. More out of necessity than out of choice, a new redistributional politics is emerging--a politics of redistribution from the childless to the child-rearing.

It is no accident that George Bush, a pro-business, more or less conservative Republican, has proposed a European-style children's allowance. The proposal, a per-child federal subsidy for parents, would help only the poorest and is modest in scale--so modest that many liberals sneer at it, perhaps unwisely. A lot of the critics miss the point. Conceptually speaking, the Bush children's tax credit is a political preview of the next few decades.


The national "family," having had fewer children, is going to find early in the next century that its labor force has stopped growing. New entrants into the work force are already becoming a scarce commodity, at least relative to what the country has been accustomed to. Projections are showing that in the 1990s the U.S. labor force will grow more slowly than it has at any time since the 1930s. Fully a third of the new entrants into the work force between now and the turn of the century will be members of minority groups. Those future minority workers are today's minority children--among whom the rates of poverty and illiteracy are highest. On average, poor children grow up to make poor workers. Poor workers generate lower standards of living for society--and for their old parents. The primordial interdependence of generations ultimately makes itself felt, albeit at the level of the national unit rather than the family unit.

"The two ways that a society provides for its future," Frank Levy, an economist at the University of Maryland, told me, "are its level of physical capital accumulation"--that is, the number and quality of its machines, factories, roads, and so on--"and the number and the quality of its kids. In both cases, you can cheat on the accumulation and, by doing that, raise your current consumption. But eventually it comes back to haunt you."

Right now about one in eight Americans is sixty-five or older. That will start changing fast, as the Baby Boom generation marches in unprecedented numbers across the line between work and retirement. According to projections by the Census Bureau, by late in the 2020s one in five Americans will be sixty-five or older. As the proportion of dependent elderly people in the adult population rises, the number of workers supporting each of them must fall. And that is exactly what is going to happen. The number of working-age people on hand to support each elderly person will drop by almost half, from almost five in 1990 to about two and a half by 2030 or so.

This is a retirement burden whose like no generation of American workers has yet borne. John L. Palmer, of Syracuse University, has figured that the federal tax take will have to rise by an amount equivalent to at least five percent of the gross national product, and quite possibly a good bit more, to cover the health and pension costs of the Baby Roomers' retirement. Today the government takes in about 19 percent of the GNP in taxes. So we are talking about at least a 25 percent federal tax increase.

Economically the burden is probably manageable. The important question is whether it is politically manageable. The country is already moving to raise the retirement age (thus increasing the worker-to-retiree ratio), and it's likely to have to reduce benefits to the elderly somewhat. But cutting benefits is politically inflammatory and, for those affected, personally wrenching. We can ease the need to take either step by making the workers we have more productive, getting more workers, or some combination of the two. For instance, we could save and invest more. That should boost the future productivity of the economy, making the retirement bill more affordable. Or we could import workers. Immigration, which brings new talent and muscle and youth to an aging population. is one of our richest resources--potentially a major advantage over Japan and the many European countries, like West Germany and France, that are aging even more rapidly than we are and that lack our immigrant tradition.

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Jonathan Rauch is a contributing editor of The Atlantic and National Journal and a senior fellow at the Brookings Institution.

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