Brookings: Topics - Intergenerational Equity

Spending on Children and the Elderly

Julia B. Isaacs — Thu, 05 Nov 2009 09:16:00 -0500

SUMMARY

The United States spends 2.4 times as much on the elderly as on children, measured on a per capita basis, with the ratio rising to 7 to 1 if looking just at the federal budget. The tilt toward the elderly is stronger in the United States than in many other countries, although all OECD countries spend more, per capita, on the elderly than on children. Viewed from a life-cycle perspective, it is not unfair to spend more on the elderly than on children because all individuals progress from being children to working-age adults to elderly adults. However, our current system of public expenditures is unfair to younger generations, defined as birth cohorts rather than age groups: the vast and growing size of unfunded health and retirement benefits will require today’s children to bear a heavy tax burden when they grow up to be working-age adults. For our children’s sake, we should restrain growth in elderly benefits and pay our share of taxes.

This issue brief is drawn from a series of three working papers on spending on children and the elderly.

The first, How Much Do We Spend on Children and the Elderly?, is descriptive in nature and provides estimates of public spending on children and the elderly, as well as information on private support for these two age groups.
The second, A Comparative Perspective on Public Spending on Children, investigates whether the United States invests less in children than other rich countries and whether there is a common cross-national pattern of spending more on elderly than on children.
The third, Public Spending on Children and the Elderly from a Life-Cycle Perspective, tackles a challenging question raised by the observed spending patterns in the earlier papers, namely: does it make sense for our country to be spending so much less on children than on the elderly? While such a question sometimes raises issues of intergenerational warfare, the paper addresses it through a life-cycle framework.

The issue brief summarizes the three papers, which provide further detail and references for the information.

The author of the series, Julia B. Isaacs, is the Child and Family Policy Fellow at the Brookings Institution. The papers benefited from the excellent research assistance of Emily Monea and the helpful comments of Isabel Sawhill and Ron Haskins.

Comments by Henry Aaron, Senior Fellow, Economic Studies

Children and The Elderly: Not Children or the Elderly

Julia Isaacs argues in the four papers referenced on this site that spending on the elderly is excessive and is crowding out spending on children. I hold that this contention is incorrect as a matter of fact and that it sets up an either/or contest that can only be destructive to the interests of both children and the elderly. At the same time, it remains true that the United States today leaves unexploited opportunities for investing in children that would yield large returns, boosting economic growth and reducing inequality.

The U.S. ratio of spending on different age groups provides little or no information about the fairness with which public policy treats different age groups. First, the ratio in the United States is not out of line with that in other developed nations. Second, most of the difference between spending between age groups is attributable to health care spending and pensions. Health care spending rises naturally with age, so that equally generous coverage will result in much larger spending on the old than on the young. Third, current retirees on the average have paid payroll taxes that, in present value terms, equal or exceed the value of the pensions they will eventually receive. Furthermore, the economic status of the elderly and of children differs little or not at all, based on poverty measures that take adequate account of out-of-pocket health care spending.

Pitting the interests of the elderly and disabled against those of children is politically short-sighted, because advocates of public outlays for children and for the elderly have long been - and should remain - allies against those who believe that the role of government should be limited to providing for defense and public safety, and little else. Advocates of a restricted role for government remain a sizable and influential group in American politics. In a nation of two-party politics, progress is based on building and sustaining coalitions. If those who share the view that government should intervene actively to promote social welfare - for children, the disabled and poor, and the elderly - engage in fratricide, each of those groups will suffer.

Read Henry Aaron's complete commentary »

Comments by Eugene Steuerle, Institute Fellow, Urban Institute

Read Eugene Steuerle's complete commentary »

Downloads

Download the Issue Brief

Authors

Julia B. Isaacs

Supporting Young Children and Families: An Investment Strategy That Pays

Julia B. Isaacs — Thu, 08 Jan 2009 16:44:00 -0500

Increasingly, research has demonstrated that investing in high-quality services for young children and their parents produces significant returns, both to individuals and to the larger economy. For instance, biomedical research shows that the development of neural pathways in the brains of infants and toddlers is influenced by the quality of their interactions with other people and their surroundings. Rigorous evaluations of a number of early childhood programs reinforce the lessons of brain research. Children who participate in effectively designed preschool programs achieve more in elementary school, are less likely to be held back a grade or to need special education, and are more likely to graduate from high school. Addressing gaps in skills at an early age gives more children from disadvantaged families a fighting chance to achieve the American Dream.

Despite this growing body of research on the importance of the early years on development and achievement, the federal government has provided little direct support to young children and families. However, there has been a significant change at the state government level, with a majority of states adopting public pre-kindergarten programs and other forms of early childhood intervention. In addition, attitudes toward public investment in the pivotal early childhood years are shifting, and the time is ripe for federal leadership in developing policies to support young children and their families as a key part of a domestic policy agenda. Below, I outline three policy proposals that have proved cost-effective and that can help to reduce burdens on young families.

Downloads

Download

Authors

Julia B. Isaacs

Publication: The Brookings Institution and First Focus

Economic Stimulus and the Budget Deficit

Isabel V. Sawhill — Tue, 09 Dec 2008 16:18:00 -0500

In these tough times, the economy needs a stimulus, regardless of the impact on the deficit, says Isabel Sawhill, senior fellow and co-director of the Center on Children and Families. But prudent action needs to be taken to address runaway entitlement spending and that agenda should reconsider our intergenerational spending priorities.

Transcript:

"In 2009 we are probably going to have an enormous deficit. It’s going to be unprecedented. It could well be over a trillion dollars. We already are projecting something like 600 billion dollars for next year before all the bad stuff happened before it was clear that we were in such a deep recession, before all the bailout packages, before any kind of stimulus was added to the mix. So we should all be prepared for a very large deficit, could be as much as 7% of GDP, its going to add very greatly to the national debt, but it’s the right thing to do. Economists like me really don’t worry about deficits during a recessionary period we believe that that’s what’s needed to kick start the economy again. The problem will be the burden that we are leaving for the future and the much larger that also exists once the recession is over, and that long term deficit is being driven by the aging of the population and rising health care costs, and that’s what we should be worried about and we should be worrying about it now because it is upon us and we need to start thinking about how to fix the problem even if we phase it in gradually."

"...There is absolutely no political courage to take on either Social Security or Medicare, and so I am not naïve enough to think its going to happen anytime soon, but this is where the big dollars are, and there is no other way to get budget under control. We do need to raise revenues, and we do need to sprout the regular discretionary spending the annually appropriated spending including for defense that the government does, but we are not going to be able to do it all. Plug the very large hole we have in the long term budget by one of those means alone. We are going to have to do it all, in other words everything has to be on the table, reigning in entitlements, raising revenues, and scrubbing the rest of the budget. "

"...I think that the big social insurance programs like Medicare and Social Security were put in place in a very different time in this country’s history basically back in the 1930’s and 1960’s when Medicare came in the elderly were one of the poorest segments of the population that’s not true anymore. The poverty rates amongst the elderly are now much lower than they are amongst the working age population and their children also incomes of the elderly have grown more rapidly than the incomes of working age families you basically have stagnant wages recently for working age families, so for all kinds of reasons I think we do need to revise what I call the intergenerational contract and gradually over time reallocate more resources to younger Americans paying for it with some sacrifice on the part of seniors. I am a senior myself, so I can talk about this, but I think a country that gives priority to its old and over its young doesn’t have much of a future."

Video

Economy Needs Stimulus and Prudent Action on Entitlement Reform

Why We Need to Cut Seniors' Benefits

Isabel V. Sawhill — Fri, 24 Oct 2008 14:58:00 -0400

In an interview with George Mannes of Money Magazine, Isabel Sawhill discusses the big three of entitlement programs - Medicare, Social Security and Medicaid - and their potential to wreak havoc on the country's finances (and yours) unless we scale them back.

Question: You talk about fixing the unwritten agreement between younger and older generations - the "intergenerational contract." What's broken?

Answer: The existing contract assumes that the working-age population is going to be able to support the older population - the retired population - out into the future and should do so. And that's not a sustainable assumption.

Q. Why not?

A. Forty-two percent of federal spending now goes to three programs, with the major share to the elderly.

Two or three decades from now, those three programs will be as large as the federal government is today.

Let's say someone is now paying 25% of their income in taxes. To maintain the commitments we've made to the elderly, they would have to pay 50%.

Q. What's the solution?

A. We need those who can afford it to contribute more to their own retirement costs.

Take Social Security: Right now the benefit formula provides a pretty good retirement income to those who make more than $100,000 a year.

I don't think that the working-age population should continue to fund benefits for seniors who are so well off.

Read the full interview »

Authors

Isabel V. Sawhill

Publication: CNNMoney.com

Supporting Young Children and Families: An Investment that Pays

Julia B. Isaacs — Mon, 15 Sep 2008 12:00:00 -0400

SUMMARY

In the United States, public investment in children typically does not begin until they are age five or six and enter a public school system. Until that time, we regard the care of young children as the almost exclusive domain of parents, relying on them to provide a good environment – one that will promote healthy physical, intellectual, psychological, and social development. Good care early in life helps children to grow up acquiring the skills to become tomorrow’s adult workers, caregivers, taxpayers, and citizens.

Yet today, many parents, early in their own careers and family life, are stretched thin, in both time and money, trying to care for their young children. Whether a single mother working the night-shift at a fast-food restaurant, or a busy executive dashing home before the child care center closes, parents across the socioeconomic spectrum struggle to balance both their children’s developmental needs and the demands of their employers.

For families with children under age six, time is especially scarce if both parents work or if there is a working single-parent. Yet, two-thirds of young families fit one of these models. Money is scarce for the 40 percent of these families that have incomes below 200 percent of the poverty line – less than $34,000 a year for a family of three. And, there is a double squeeze on the 22 percent of families where parents work outside the home and are low-paid.

Despite the challenges facing young families, the federal government has provided little direct support. At the state government level, however, there has been a significant change. A majority of states have now adopted public pre-kindergarten programs and other forms of early childhood intervention. Attitudes toward public investment in the pivotal early childhood years are shifting, and the time is ripe for a new president to provide federal leadership in developing policies to support young children and their families as a key part of his domestic policy agenda.

The president should work with Congress to expand early childhood programs that have proved cost-effective and to promote tax and workplace policies to reduce burdens on young families. More specifically, he should:

Provide federal funding for high-quality, center-based preschool programs for three- and four-year-old children, that are open to any family that wishes to enroll a child and fully subsidized for the poorest families;
Send nurse home visitors into the homes of all first-time pregnant women in economically impoverished families to promote sound prenatal care and the healthy development of infants and toddlers through age two; and
Support young families at all income levels through a federal-state initiative to provide up to 12 weeks of paid parental leave after birth or adoption.

View the entire volume: “Big Ideas for Children: Investing in Our Nation’s Future” »

Downloads

Download

Authors

Julia B. Isaacs

Publication: First Focus

Impacts of Early Childhood Programs

Julia B. Isaacs and Emily Roessel — Thu, 04 Sep 2008 09:14:43 -0400

OVERVIEW

From neuroscientists to economists, a range of researchers have focused attention on the critical importance of children’s early years. At the same time, business, education, and political leaders have underscored the goal of ensuring that young children enter school “ready to learn,” so that they can succeed in school and as the next generation of workers and citizens. Ideals of equal opportunity provide further impetus for addressing gaps in skills at early ages, so that children from disadvantaged families have a fighting chance to achieve the American Dream.

As a result, there have been increasing calls on federal and state policy-makers to expand public investments in early childhood education. The goal of this set of research briefs, Impacts of Early Childhood Programs, is to provide policy-makers with a user-friendly summary of up-to-date, high-quality evidence on several early childhood interventions and their impact on children and families.

New research on early childhood programs continues to emerge. Recent studies demonstrate that state pre-kindergarten (pre-K) programs have had positive effects on children’s readiness to learn, with large impacts in some states. Findings from the National Head Start Impact Study, released in 2005, provide more rigorous evidence than previously existed of Head Start’s positive impacts on children. An earlier national evaluation of Early Head Start also found a range of small positive impacts on very young children’s cognitive skills, behavior, and health.

Long-lasting impacts of early childhood model programs from the 1960s, 1970s, and 1980s are still being reported in follow-up studies. Children participating in Chicago Child-Parent Centers were followed to age 24 in a study released last year, and a 2005 study tracked former participants of Perry Preschools to age 40. Recently issued follow-up studies of nurse home visiting programs also document ongoing positive impacts several years after at-risk mothers and their infants graduate from the programs.

Child and family impacts for these five programs – State Pre-K, Head Start, Early Head Start, Model Early Childhood Programs, and Nurse Home Visiting – are summarized in Table 1 below. As shown in the table, all five early childhood education programs have had positive impacts on children’s cognitive skills and/or school outcomes, with the largest effects reported from some state pre-K programs and the model center-based programs.

Most early childhood interventions also have had positive impacts on children’s emotional and behavioral outcomes, including long-term reductions in criminal behavior. There also is some evidence of improvements in children’s health and safety, and some programs have had positive effects on the children’s parents.

Examples of specific improvements (e.g., reduction in special education, higher rates of high school graduation) are provided in the accompanying set of five research briefs, as well as information on the quality of research on each program and pertinent federal legislation. Taken individually or as a set, the research briefs provide evidence-based assessments of the effectiveness of five major early childhood interventions.

Individual Briefs:
State Pre-K »
Head Start »
Early Head Start »
Model Early Childhood Programs »
Nurse Home Visiting »

Download the Full Report »

Downloads

Download

Authors

Julia B. Isaacs
Emily Roessel

Revising the Intergenerational Contract

Emily Monea and Isabel V. Sawhill — Mon, 09 Jun 2008 12:19:13 -0400

The list of issues on the progressive agenda for 2009 is long: universal health care, slowing climate change, improving public education, aiding foreclosed homeowners, rebuilding our crumbling infrastructure, and ending the war in Iraq. These are all important and vital efforts, especially after eight years of George W. Bush. But the sad fact is that the money to pursue any of these objectives doesn’t exist. With a deficit approaching three quarters of a trillion dollars in the next decade, neither the will nor the way exists for future big-ticket initiatives.

Rolling back the Bush tax cuts for the wealthy or curbing earmarks won’t pay for all of the campaign proposals being advanced by the Democratic or Republican presidential candidates. And no candidate has a credible plan to address the large deficits that are projected for 2009 and beyond.

What we do know is that there are three basic policy responses to this situation: allow deficits to balloon to still higher levels, cut spending in addition to forgoing new initiatives, or raise taxes well beyond anything currently contemplated. In the absence of a longer-term strategy, any new administration will likely muddle through with a mix of all three, and in the process fail to address either the nation’s domestic problems or its fiscal conundrum. What’s needed instead is a fundamental rethinking of the intergenerational contract—what the government provides to whom—and when in their lives the government provides it.

Right now, the intergenerational contract favors the old at the expense of the young. It operates under the premise that the wide base of working-age Americans can, and should, support the relatively small number of Americans in retirement. But over the coming decades, there will be far more older Americans, including many in their sixties and seventies, who can work and who, with proper planning, should have sufficient assets to contribute far more to supporting themselves than was possible in the past. Right now, thanks to the current contract, older Americans are the only group in our society that has access to universal, fee-for-service medical care. Younger Americans do not have such access, have seen their incomes stagnate in recent years, and yet will be expected to pay for the current generation’s morally indefensible fiscal policies. As a result, without a major change, working-age families and their children will not receive the kind of help that will eventually make the nation more productive. And a country that gives priority to its elderly over its young is arguably a country that doesn’t have much of a future.

Downloads

Download

Authors

Emily Monea
Isabel V. Sawhill

Publication: Democracy: A Journal of Ideas

The Frayed American Dream

Julia B. Isaacs and Isabel V. Sawhill — Wed, 28 Nov 2007 08:35:37 -0500

A sharp rise in income inequality in the United States over the past few decades has created large gaps between the haves and the have-nots. Yet public tolerance—if not acceptance—of these gaps is still widespread. One reason may be the belief on the part of many Americans that plenty of opportunity exists to get ahead, especially for one’s children. But what is the evidence that children do better than their parents, giving them a true shot at the American dream?

Based on some interesting new research conducted at Brookings, and released by the Pew Economic Mobility project, most of today’s adults are better off than their own parents were when they were growing up. Specifically, two out of three people have higher family incomes than their parents did in the late 1960s and early 1970s. The converse: one third remains worse off.

Moreover, much of the gain in income across generations is due to the fact that far more families now have two earners. Men’s earnings have grown little, if at all; but women have entered the labor force in record numbers and their earnings have risen along with their greater involvement in the work world. So, yes, today’s families are better off than their own parents were in the late 1960s or early 1970s. But they are also working more and struggling with the greater time pressures of juggling work and family responsibilities.

Not only are these gains in family income primarily the result of a second paycheck, they are not equally distributed across the population. The good news is that those who started out in the bottom fifth of the income distribution have a good chance of surpassing their parents’ incomes. We find that 82 percent of those born into poverty are absolutely better off than their parents in the sense that they have higher incomes in inflation-adjusted terms, though the gains are usually quite small. In fact, only 36 percent of them make it into the middle class or higher (that is, the top 60 percent in terms of family income) and a paltry 6 percent reach the top rung on the ladder where one fifth of their contemporaries reside.

If one happens to have been born into a family that was both black and poor, the odds that one will move up the economic ladder are even worse. Moreover, one of the most provocative findings of the new research is that African-American parents in the middle class have great difficulty in passing on their affluence to their children, who often end up falling below their parents in income and economic status.

Is a 36 percent chance of making it into the middle class or higher enough to sustain the hope embodied in the American dream? Will the one-third who are downwardly mobile continue to support open borders and the other hallmarks of a market economy? And, should African-Americans be content with having less opportunity than whites to improve their lot and pass on the achievements of one generation to the next?

Our answer is that America could and should do better. Many members of the middle class are only one earner away from poverty. Children from poor and minority families are not achieving economic success in large numbers. Research done at Brookings and elsewhere shows that outcomes for children can be improved through home visiting to new parents, early childhood education, more qualified teachers in every classroom, along with more access to health care and to a college education, all of which could help families across the country realize their aspirations. Opportunity does exist in America. It is the opportunity to repair a frayed American dream.

Authors

The Intergenerational Balancing Act: Where Children Fit in an Aging Society

Isabel V. Sawhill — Wed, 17 Oct 2007 12:00:00 -0400

Today’s children face unprecedented challenges. The world they inherit will be less safe, more environmentally precarious, and less economically secure than the one inherited by their parents. Less safe because of the Global War on Terror – a war seemingly without end. Less healthy because of global warming and other environmental challenges. And less economically secure because of globalization and a very low savings rate in the U.S.

Since I am an economist, I want to especially focus on this third challenge, but I also want to emphasize that it is the combination of all three that is especially troublesome. My theme is very simple: We need to do what we can to modify some of these trends, but since we won’t be able to control them completely, we also need to equip the youngest generation to cope with all three.

The economic challenge has two major dimensions. The first is globalization. Globalization has both a bright side and a dark side. On the bright side, the world economic pie will grow, and the slices of the pie that go to each country including the U.S. should be bigger. On the darker side,

wage levels in different countries will tend to converge;
the overall pie will be bigger, but the U.S. share of the pie will be smaller than in the past, and;
many workers will face job dislocation or lower wages as a result of the transition.

To compete in this new economy, children will need higher levels of education and strong interpersonal and problem-solving skills. Much has been made of the importance of education in this new environment, and it bears emphasis. But keep in mind that the only jobs that can’t be sent offshore are the ones that involve direct interaction with other people and the ability to come up with new solutions to old problems. So interpersonal skills and creativity will be in especially great demand.

Downloads

Download

Authors

Isabel V. Sawhill

Publication: Child Trends Annual Kristin Anderson Moore Lecture

Priority or Afterthought? Children and the Federal Budget

Julia B. Isaacs and Phillip Lovell — Thu, 01 Mar 2007 00:00:00 -0500

A country's priorities are reflected in its budget. Most people agree that "children are our future," but there's less agreement on how well we are preparing the next generation to lead us into that future. Many argue that it is important to invest in children and youth, building their knowledge and skills so they can be productive workers and citizens. But are we investing enough in them?

A recent study of federal expenditures on children from 1960-2017, conducted by Urban Institute researchers Adam Carasso, C. Eugene Steuerle, and Gillian Reynolds, calls into question the extent to which we, as a country, are making children a priority in our budget.¹

While federal expenditures on children have grown over the past four and a half decades with the rest of the federal budget, the share of domestic spending focused on children has fallen 23 percent, from 20.1 percent in 1960 to 15.4 percent in 2006.
Children’s programs are not structured to compete for scarce federal dollars. They do not grow with the economy or even infl ation; whereas other programs are indexed to economic growth.
By 2020, spending on children could dry up completely. If entitlement spending continues unchecked and all tax cuts are retained, spending on the non-child portions of Medicaid, Medicare, Social Security, defense, foreign affairs, and interest on the debt could completely consume federal resources, leaving nothing available for children.

How has spending on children changed over time?

Federal expenditures on children have increased over time, though not as rapidly as spending on major entitlement programs focused on the elderly.

As a share of domestic federal expenditures, spending on children fell from 20.1 percent to 15.4 percent of domestic spending between 1960 and 2006 – a decline of 23 percent.² By comparison, the percentage of spending focused on the elderly through Social Security, Medicare, and Medicaid has more than doubled, growing from 22.1 percent to 45.9 percent (see Figure 1).³

Downloads

Download

Authors

Julia B. Isaacs
Phillip Lovell

Publication: First Focus

Cost-Effective Investments in Children

Julia B. Isaacs — Mon, 01 Jan 2007 00:00:00 -0500

How can we balance the budget in the next five years? In a series of papers on budget choices, Brookings analysts examine options for reducing domestic discretionary spending, pruning the defense budget, raising revenues, and investing additional resources in children. An overall deficit reduction plan uses the ideas developed in this series to balance the budget in the next five years. All five papers in this series, and more information about the Budgeting for National Priorities project, can be found at www.brookings.edu/budget.

Summary

Based on a review of benefit-cost evidence, this paper identifies four areas of investment that merit expanded federal funding even in a time of fiscal austerity. America's future economic well-being will benefit from targeted investments to ensure that children have the skills to become tomorrow's adult workers, caregivers, taxpayers, and citizens. Target areas for a package of proposals totaling about $25 billion annually and $133 billion over a five-year period are the following:

High-quality early childhood education programs for three- and four-year-old children ($94 billion over five years);
Nurse home-visiting programs to promote sound prenatal care and the healthy development of infants and toddlers ($14 billion over five years);
School reform with an emphasis on programs in high-poverty elementary schools that improve the acquisition of basic skills for all students ($17 billion over five years); and
Programs that reduce the incidence of teenage pregnancy ($8 billion over five years).

Introduction

American children are facing an uncertain economic future. Rising spending for health and retirement benefits for an aging population, combined with falling tax revenues after several rounds of tax cuts, have led to a fiscal crisis. If the current generation fails to take on the responsibility for balancing the budget, future generations will pay the cost—plus interest—of paying off the debt and addressing unfunded financial commitments. Balancing the budget will require a combination of reductions in entitlement spending, reforms in defense and other discretionary spending, and increases in revenues. While the major focus of a responsible, future-oriented budget plan should be deficit reduction, a good budget strategy also needs to make targeted investments in programs that will improve America’s future economic well-being. Chief among these is effective investments in children to ensure they have the skills to become tomorrow’s adult workers, caregivers, taxpayers, and citizens.

Downloads

Download

Authors

Julia B. Isaacs

The Future of Children: Fall 2006 : Opportunity in America

Isabel V. Sawhill and Sara McLanahan, eds. — Sun, 03 Sep 2006 12:00:00 -0400

Brookings Institution Press and Woodrow Wilson School of Public and International Affairs at Princeton University 2006 196pp.

This semiannual journal provides research and analysis to promote effective policies and programs for children. In this volume, the nation's leading scholars on social mobility focus on the extent to which children’s chances of success depend on the circumstances into which they are born. The following articles are featured:

Introducting the Issue
Isabel Sawhill and Sara McLanahan

Intergenerational Social Mobility: The United States in Comparative Perspective
Emily Beller and Michael Hout

Intergenerational Mobility for Women and Minorities in the United States
Melissa S. Kearney

Making It in America: Social Mobility in the Immigrant Population
George J. Borjas

Early Childhood Development and Social Mobility
W. Steven Barnett and Clive R. Belfield

U.S. Elementary and Secondary Schools: Equalizing Opportunity or Replicating the Status Quo?
Cecilia Elena Rouse and Lisa Barrow

The Role of Higher Education in Social Mobility
Robert Haveman and Timothy Smeeding

Children's Health and Social Mobility
Anne Case and Christina Paxson

"Culture" and the Intergenerational Transmission of Poverty: The Prevention Paradox
Jens Ludwig and Susan Mayer

Event transcript: "Opportunity in America: Does Education Promote Social Mobility?" September 19, 2006.

ABOUT THE EDITORS

Isabel V. Sawhill

Sara McLanahan

Sara S. McLanahan is professor of sociology and public affairs at Princeton University, where she is also director of the Center for Research on Child Wellbeing. She is coauthor of Growing Up with a Single Parent (Harvard, 1994).

Ordering Information:

{9ABF977A-E4A6-41C8-B030-0FD655E07DBF}, 978-0-8157-5563-0, $24.95 Order

The Effects of Investing in Early Education on Economic Growth

Isabel V. Sawhill, Jeffrey Tebbs and William T. Dickens — Sun, 30 Apr 2006 00:00:00 -0400

Abstract

Many in Congress and the administration have called for new investments in education in order to make the United States more competitive, with President Bush stressing the importance of education in preparing young Americans to "fill the jobs of the 21st century." Yet advocates of early childhood education have only recently stressed the economic benefits of preschool programs, and it has been difficult to win support for these short-term investments given the long-term nature of the benefits to the economy.

This policy brief analyzes the impact of a high-quality universal preschool policy on economic growth, concluding that such a policy could add $2 trillion to annual U.S. GDP by 2080. By 2080, a national program would cost the federal government approximately $59 billion, but generate enough additional growth in federal revenue to cover the costs of the program several times over.

Policy Brief # 153

Economists have long believed that investments in education, or "human capital," are an important source of economic growth. Over the last 40 years output has risen about 3.5 percent a year. Growth in the productivity of labor, the major driver of increases in wages and standards of living, has measured about 2.4 percent per year. The contribution of education to labor productivity growth is estimated in different studies to be between 13 and 30 percent of the total increase. Whatever the contribution of education to growth in the past, investments in human capital may rise in importance relative to investments in other forms of capital as we transition to a post-industrial, knowledge-based economy.

Why might a more highly-educated work force increase economic growth? A more educated labor force is more mobile and adaptable, can learn new tasks and new skills more easily, can use a wider range of technologies and sophisticated equipment (including newly emerging ones), and is more creative in thinking about how to improve the management of work. All of these attributes not only make a more highly skilled worker more productive than a less skilled one but also enable employers to organize their work places differently and adjust better to changes necessitated by competition-by technical advances or by changes in consumer demand.

Just as a firm with better educated workers can perform better in these dimensions, so too can an economy with a better educated workforce. Skills beget more skills and new ways of doing business, workers learn from one another, and firms adapt their technology and their use of capital to the skills of the available work force. The benefits of having a more educated work force accrue to everyone, not just to the organization where these individuals happen to work. Further, these kinds of indirect (or spillover) effects for the firm or the economy as a whole may be especially important in an increasingly competitive global marketplace. Imagine an economy lacking in people able to read directions, use a sophisticated copier or a computer, or understand prevailing norms of behavior. Even if a single organization in that economy were able to find or import such skills, other organizations would not be able to invest in certain kinds of equipment or certain kinds of businesses with any assurance that it could make the investment profitable. Beyond that, a more educated work force may produce a less crime-ridden and healthier environment with better functioning civil institutions and all the benefits that flow to the business sector from that environment.

Past Work on Education and Growth

In 1957, Nobel Laureate Robert Solow described the growth of national income as having three sources: increases in the stock of physical capital (machines and buildings that are used to produce goods and services), increases in the size of the labor force, and a residual representing all other factors. This residual contributed considerably more to per capita growth than the increase in the capital stock. Solow dubbed the residual "technical progress" and noted that increasing levels of education were one of the factors that contributed to its growth. Using the same basic approach as Solow, but explicitly accounting for the role of education, Edward Denison estimated that between 1929 and 1982, increasing levels of education were the source of 16 percent of the growth of total potential output in the nonresidential business sector (and 30 percent of the growth in the productivity of people employed in that sector). A more recent study by Dale Jorgenson and Kevin Stiroh puts the contribution of education to economic growth at 8.7 percent of total growth over the period 1959 to 1998 and 13 percent of growth in output per worker.

Over the last two decades more attention has been paid to the theory of how education might affect economic growth and this work has implications for how we might model the impact of increased educational attainment. The "neoclassical" or "exogenous growth" studies described above assume that the immediate impact of increasing the amount of education per worker by 10 percent would be to increase GDP by only about 4 to 5 percent. Also, in the type of model used in those studies an increase in the rate of investment leads to an increase in the level of GDP, but in the long run has no effect on the rate of growth of GDP. More recent research using models where growth is endogenous suggests that both the direct and indirect effects of education on growth could be substantially larger. In some of these models the direct impact of a 10 percent increase in the amount of education that people get could be as much as 7 or 8 percent, and an increase in the rate of investment in education could produce a permanent increase in the rate of growth.

Prominent economists, including two recent chairmen of the President's Council of Economic Advisers, hold sharply divergent views on the validity of these different models of economic growth. In order to proceed with our analysis without wading into this largely unsettled debate, we develop a single model that allows a broad range of assumptions about the importance of education for economic growth.

The Effects of Preschool Enrollment on Later Educational Attainment

We first estimate the effects of a specific preschool policy intervention on educational attainment and then analyze the effects of that additional education on economic growth relative to the projected growth path in the absence of the policy. In the particular simulation reported in this policy brief, we analyze the growth effects expected from a high-quality, national preschool program for all three- and four-year-old children. The best evidence about the effects of such an intervention on educational attainment comes from a set of small-scale experimental programs that featured random assignment and longitudinal evaluation of study participants. For this simulation, we use results from studies of the Perry Preschool Program, which delivered a high-quality program to a small group of disadvantaged children in Ypsilanti, Michigan in the 1960s, to determine the magnitude of the effect of high-quality preschool. We then adjust these results for the probable attenuation associated with delivering the program to a much broader and less disadvantaged group of children.

The Perry Preschool program provided low-income three- and four-year-old children with center-based care, two-and-a-half hours per day, five days per week for thirty weeks each year. The center-based care was supplemented on a weekly basis with one-and-a-half hour home visits by the child's instructor. The Perry program was characterized by high instructor quality, as well as remarkably low student-teacher ratios. Study participants were selected on the basis of their low socioeconomic status (SES). In order to assess the effects of the program, program participants were randomly selected from a larger group of qualified children and the experiences of both those who took part in the program and those who did not were monitored on a periodic basis until the present-day, with study participants most recently surveyed at the age of forty.

At age twenty-seven, participants in the program were found to have levels of educational attainment 0.9 years greater than non-participants. We utilize this finding as the primary input to our economic growth model. It's worth noting, however, that this difference in educational attainment likely understates the productivity improvements of program children, who also experienced gains in non-cognitive characteristics, including persistence and diligence. Also these narrow economic benefits were supplemented by numerous other benefits, including reduced rates of teenage pregnancy and dramatically lower rates of criminal activity relative to children who did not receive the program.

Projecting the effects of implementing a small scale program like Perry on a national level requires a number of assumptions in addition to the impact of the program on those who take part. First, a universal preschool program, if not compulsory, will not serve the full set of eligible children. Second, many of the children potentially served by this new policy initiative may already be enrolled in existing preschool programs, whereas most of children in the no-program group evaluated in the Perry study did not receive any early childhood education. Presumably, the impact of the program will be smaller for these children. Third, universal preschool programs will serve children that are less disadvantaged than those in the Perry Preschool experiment. It is not clear whether students with higher SES will experience comparable gains in educational attainment. Finally, preschool administrators may experience considerable difficulty in maintaining an equally high level of program quality in a program enrolling millions, rather than dozens, of children.

Based on experiences in Oklahoma and Georgia, scholars at RAND estimated that participation in a high-quality, voluntary, universal public preschool program would reach 70 percent of eligible children. Currently, 52 percent of three- and four-year-olds are already enrolled in preschool of some kind. Of those children who are already enrolled in preschool, roughly half are enrolled in public programs and half are enrolled in private programs. We assume that out of every 100 children, 70 will enroll in the proposed Perry-type program. These 70 children will be comprised of all of the children previously enrolled in public programs, approximately half of the children previously enrolled in private programs, and 60 percent of the children previously not enrolled in any preschool program.

We assume that children who would not have attended any preschool in the absence of this universal program now reap 100 percent of the benefits estimated for Perry (the full 0.9 year gain in educational attainment). We also assume that children who attended public preschool programs in the absence of this policy initiative will receive 50 percent of the effect, as the new initiative should be higher in quality than the average public program. For example, only 20 of the 38 states that provide any public preschool require lead teachers to hold a baccalaureate degree, whereas our proposed program requires all lead teachers in all states to possess such credentials. Finally, we assume that children previously enrolled in private preschool programs receive no additional educational benefit.

With regard to the possibility of differential program effects on children from more and less advantaged households, we turn to evidence from Oklahoma's universal preschool program, which has recently been subjected to a quasi-experimental evaluation. That study, by William T. Gormley Jr., and others, found strong (and nearly comparable) gains across all income classes (though the children studied were still very young). These results indicate that children from both low and high income families may receive roughly comparable educational gains from participation in high-quality preschool programs. Similar findings have recently been reported in a study by W. Steven Barnett, Cynthia Lamy, and Kwanghee Jung at the National Institute for Early Education Research that evaluated preschool programs in Michigan, New Jersey, Oklahoma, South Carolina, and West Virginia.

In light of this evidence, we did not believe that it was necessary to reduce the effects further. Moreover, since nearly 20 percent of children under age six live in families below the poverty line, many of the remaining children who newly enroll in the universal program could conservatively be categorized as "at risk." Under these assumptions, we calculate that the average increase in educational attainment for all children due to the preschool program will be 0.36 years.

How Educational Attainment Affects Economic Growth

The model tracks the number of years of education attained by each birth cohort and increases it for cohorts that received the preschool program. Take as an example a preschool program that covers half the population and causes people who attend to get an additional half year of education. This would cause an increase of a quarter of a year in the education of those in the first cohort to receive the program. However, for the first thirteen to fourteen years the program has no effect on growth as the first cohort of students who received the program are moving through elementary and secondary school. Eventually, there is an increase in the number of years of education these students obtain, which has two effects. First, since they are staying in school longer this reduces the size of the labor force and has a temporarily negative impact on output. However, once these students graduate their additional schooling enhances their productivity, yielding a positive impact on output. As time passes, and more students who have been in the preschool program graduate, the impact of the program on the size of the labor force remains roughly the same but the impact on the productivity of the workforce grows as larger fractions of the population receive the extra education. The direct effects continue to rise until the first cohort to receive the preschool education reaches retirement age.

These direct effects of increased education on output are augmented by the fact that some of the increased income generated by increased growth is reinvested in both physical and human capital. These dynamic feedback effects on physical and human capital accumulation go on year after year with the persistence of the growth effects depending on the assumptions made about the immediate impact of human capital on GDP.

Results

As discussed previously, the current state of macroeconomic research does not allow us to pin down a single value for the impact of education on GDP. Instead we test three different values spanning what we consider to be the plausible range. We label these "High Estimate," "Low Estimate," and "Preferred Estimate." Our preferred estimate is not an intermediate value, but one conforming to the assumptions made in the particular growth model that we find most compelling.

Figure 1 displays the year-by-year predictions for all three impact assumptions relative to what economic growth would have been without the preschool program over a 75-year time horizon. The baseline per capita growth assumptions are drawn from the 75-year projections of the Social Security Trustees. To estimate growth effects we must make numerous assumptions about the growth process. To choose our preferred assumptions, we turn mainly to historical averages. In particular, we rely heavily upon data from the National Income and Product Accounts of the Bureau of Economic Analysis and the March Current Population Surveys reported by the Bureau of Labor Statistics.

The first effect of the policy initiative is to reduce the supply of labor when the first participants reach the age at which they would normally enter the labor force but instead extend the time they spend in school. This effect begins in 2025. However, when they enter the work force, they are more productive due to the additional education and that has a positive effect on output. By 2046, under all three assumptions, the positive effects start to outweigh the negative effects. At the high end, the effects turn positive as early as 2038. From here, the effects rapidly increase in magnitude, as additional treated cohorts enter the labor force and increased economic growth starts to result in positive dynamic feedbacks.

Table 1 reports estimates of the effect of the program on GDP for the 45-, 60-, and 75-year time horizon. Under the preferred estimate, by 2080, GDP increases by 3.50 percent, or 2,034 billion 2005 dollars, producing an extra $7,699 per capita.

These findings are robust to a wide range of reasonable values for key assumptions. While we conduct a full battery of sensitivity analyses, we find that the conclusions of the model are most heavily influenced by two key factors. First, the model is keenly sensitive to assumptions about the program's take-up rate and the additional benefits received by those already receiving some form of preschool education, as well as any attenuation of effects associated with moving from a small and targeted program to one that serves all three- and four-year olds.

In addition, the results are also highly sensitive to the expected rate of return on education. It is possible that we have overestimated this return if employers not only value the knowledge people obtain in school, but also utilize educational credentials to identify individuals with high innate levels of ability. Concurrently, however, it is possible that we have underestimated the return to an investment in preschool in that we have not included the productivity gains for those Perry Preschool participants whose educational attainment was unaffected, but who nonetheless were more successful in the labor market as measured by their higher earnings.

Conclusion

The model predicts substantial gains in GDP, and in the stocks of physical and human capital, across a wide range of assumptions about the growth process. With our preferred assumptions, we predict an increase in GDP in 2080 of over $2 trillion (2005 dollars)-an increase of about 3.5 percent. Further, we must emphasize that these growth effects are all in addition to the well documented social benefits of early education programs.

To put these gains in perspective consider that federal revenue is likely to increase by about 20 percent of the total increase in GDP, or by about $400 billion (.20 x $2 trillion). We estimate that in 2080 the net cost of the program to the federal government will be $59 billion for a net fiscal surplus of $341 billion. At the same time, there are substantial costs that must be paid in the first few decades of the program and in this first report on our project, we have not attempted to determine the net benefits from the additional growth caused by this policy initiative. However, such estimates, along with other extensions of the model, are feasible. If we are underinvesting in education for some fraction of our population now, additional net benefits could be achieved by increasing the amount of education people get. This is more likely to be the case to the extent that spillover (or external) effects of education are important and to the extent that individuals fail, for various reasons (lack of financial liquidity, short-sightedness), to make investments for their children whose benefits accrue over the longer-run.

Because most of these benefits are longer-term while the costs of mounting the programs are more immediate, the political system tends to be biased against making such investments. However, any business that operated in this way would likely fail to succeed. A similarly dim prospect may be in store for a country that fails to take advantage of such solid investment opportunities.

Table 1. Effects of Universal Preschool for Three- and Four-Year-Olds On Gross Domestic Product (GDP)

Low Estimate
	% Increase in GDP	Dollar Increase in GDP (2005 dollars)
2050	0.20%	$62 billion
2065	0.92%	$391 billion
2080	1.34%	$778 billion

Preferred Estimate
	% Increase in GDP	Dollar Increase in GDP (2005 dollars)
2050	0.88%	$270 billion
2065	2.34%	$988 billion
2080	3.50%	$2,034 billion

High Estimate
	% Increase in GDP	Dollar Increase in GDP (2005 dollars)
2050	1.02%	$314 billion
2065	2.65%	$1,123 billion
2080	4.02%	$2,340 billion

Figure 1. Effects of Universal Preschool for Three- and Four-Year-Olds On Gross Domestic Product (GDP)

This work was funded by the National Institute for Early Education Research with a grant from The Pew Charitable Trusts – Advancing Quality Pre-Kindergarten for All.

See related paper: The Effects of Investing in Early Education on Economic Growth

Downloads

Download

Authors

Debt is Cheating Our Children's Future

Isabel V. Sawhill — Sun, 23 Apr 2006 00:00:00 -0400

Now that we have all gone through the painful process of paying income taxes, let's stop and think what tax-paying – and the federal fiscal environment – may be like 25 years from now.

If we think we have it bad, our children and grandchildren face potential tax and financial burdens that will be crippling if nothing is done to reduce our nation's growing debt.

A recent AARP Bulletin, belying the stereotype of the greedy senior, put two naked toddlers on its cover and superimposed on their backs the grim headline "$156,000 in debt." That's the amount that every American child already owes, on behalf of his or her country, if you add our $8.3 trillion national debt, plus unfunded commitments to Medicare, Social Security and other entitlement programs.

That's nearly three times the average household's net worth and about four times the average American's annual income.

And it's all because of our fiscal profligacy – or should we say immorality?

We're the grown-ups who should be taking care of America for future generations. Instead, we're bequeathing a fiscal mess of biblical proportions.

This is not just an abstraction or a problem that will go away with faster economic growth, cutting government "waste," or as one focus-group participant recently suggested, requiring the Bush daughters to spend less on designer shoes.

To put it in more personal terms, rising deficits will slow economic growth and reduce the average family's income by $1,800 by 2014, drive up interest rates (costing the average American an additional $2,000 per year in mortgage interest), and force average taxes to rise by $7,000 by 2030 if we keep our current promises to the elderly.

Moreover, deficits have other perverse effects. As our debt grows, we will soon pay one-quarter of our taxes on interest on that debt - with that money going to our creditors, half of whom are Chinese, Japanese, Saudis and other foreigners. That, of course, is if they don't dump our T-bills and send our financial markets tumbling.

The second perverse effect: The more we spend on entitlements and debt service, the less there is to spend on investments in the future. When people talk of cutting nondefense "discretionary spending" - i.e., everything that government does other than support the big entitlement programs and defense - they're talking about less than one-fifth of the federal budget. Yet, it is these investments - not just in scientific research, transportation and other infrastructure or environmental protection, but also in children themselves - that are increasingly shortchanged.

The 77 million 0-to-18-year-old Americans are our future. If we don't invest in their education, health and general well-being, we might as well say that we don't care about their future or the future of the United States. Without the best education, health and other opportunities - which our society is more than wealthy enough to provide - America may well fall behind in global competitiveness.

Secondly, by piling up 12-figure deficits, we constrain our children's and grandchildren's freedom. If most public spending when they are adults is devoured by entitlements and debt service, they will be unable to make the political choices promised by a democracy on what they want to spend their tax dollars. And if their incomes fall, and their taxes and interest payments rise, that will financially constrain their historic American freedom to the "pursuit of happiness."

Is this what we want? No one in his or her right mind would say yes, but that's the course we're on.

The glimmer of good news is that this is not inevitable. It's like the future shown in Charles Dickens' A Christmas Carol – what might be, if nothing is done. With political leadership and public outcry, a can-do country like the United States can reform its entitlement programs, cut wasteful spending and find ways of raising new — but not onerous — revenues.

Look into your child's or grandchild's eyes and think of their future when you consider what our president and Congress must do.

Authors

Isabel V. Sawhill

Publication: Kansas City Star

Domestic Entitlements and the Federal Budget

Isabel V. Sawhill — Wed, 15 Feb 2006 00:00:00 -0500

Mr. Chairman, Mr. Spratt, and Members of the Committee:

I am Isabel Sawhill, Senior Fellow and Director of Economic Studies at the Brookings Institution. I am pleased to have this opportunity to testify but want to emphasize that my testimony represents my personal views and not those of the Brookings Institution or any of its other scholars, trustees, advisers, or funders. Let me begin by summarizing my testimony.

Overview

In efforts to restore fiscal balance, it's important to focus on entitlements for a number of reasons:

Entitlements are where the big dollars are.
They are growing rapidly.
Given the unsustainable deficits that this growth implies, there are only three possible options: restructure entitlements, eliminate most of the rest of government, or raise taxes to unprecedented levels.
Sooner or later, entitlements will have to be addressed—and sooner is much better than later.
As long as entitlements are left off the table, all of the pressure will fall on discretionary programs.
That pressure is likely to lead to underinvestment in the next generation and to cuts in programs for low-income families.

What might be done?

In the long-run, new but politically contentious ideas should be considered and debated, such as:
- Moving toward income-relating benefits but in ways that protect the vulnerable
- Increasing the normal retirement age
- Moving from defined benefits to defined contributions in retirement and health programs
- Making the contributions mandatory
- Using public health programs to introduce greater efficiency and effectiveness into the entire health care system
- Raising existing taxes by broadening the tax base for both payroll and income taxes and adding a value-added tax to the mix
Why Focus on Entitlements?

At present, 84 percent of the federal budget is for entitlements, defense, homeland security, or interest on the debt. Any effort to achieve a reduction in spending by focusing on the remaining 16 percent is unlikely to be very effective. For example, a 1 percent cut in nominal non-security discretionary spending for one year reduces total spending by only 0.17 percent. Over five years, it reduces total spending by 0.89 percent.
In the short-run, Congress should consider a temporary suspension (or partial suspension) of indexing of both benefits and taxes that would remain in effect until a preset deficit reduction goal is achieved. I estimate that this would save $150 billion over three years (2007-2009).

Downloads

Download

Authors

Isabel V. Sawhill

Publication: Testimony before the House Committee on the Budget

How Public Spending Neglects Children

Isabel V. Sawhill — Sun, 16 Oct 2005 00:00:00 -0400

A conflict between the generations is brewing. The stakes are enormous.

Exploding costs for the three big entitlement programs (Medicare, Social Security and Medicaid), along with an aging population and insufficient tax revenues, portend endless deficits and rising government debt.

Often lost in these discussions are the impacts on children. There are 77 million Americans under age 19 and 36 million Americans over 64. But the mix is changing. By 2030 America will be older than present-day Florida, and walkers may well exceed strollers.

The impacts on children are twofold: First, if we do not rein in deficits by reforming entitlement programs and introducing new revenues, children will pay for our profligacy. Children born today, for example, would face a lifetime tax rate of about 50 percent.

Second, we are shortchanging children by not spending enough on their health, education and care. Currently, Washington spends about 4½ times more on the average elderly American than on the average child. If we include state and local governments, which pay most education costs, per capita spending on the elderly is almost twice that for children.

One area where more money would provide unambiguous benefits is preschool education. Others include enhancing salaries to attract the best teachers (but with pay more closely linked to performance), expanding subsidies for child care and health care for low-income working families, and expanding after-school programs in low-income neighborhoods.

The United States has made immeasurable strides in improving the lives of our senior citizens — and should continue to do so. But we must rein in spending on the elderly, raise revenues and invest in our youngest citizens.

Authors

Isabel V. Sawhill

Publication: Minneapolis Star-Tribune

Budget Deficits, Social Security, and Younger Generations

Peter R. Orszag — Mon, 13 Sep 2004 00:00:00 -0400

Thank you for inviting me to discuss the effect of budget deficits on young adults. Debates over the federal budget may seem quite removed from the hectic lives of adults below the age of 35, who are struggling to finish school, decide upon a career and find a job, and in some cases to start a family.

The reality, though, is that policy-makers in Washington are making decisions with substantial implications for these young adults, for it is disproportionately younger generations who will inherit the consequences of our fiscal policies. In other words, we have become used to thinking about how environmental policy leaves a legacy for younger generations. But fiscal policy also leaves a legacy. And on our current fiscal path, policy-makers are simply not doing right by today's young adults.

Young adults deserve a better future than the one implied by today's national saving rate of less than two percent of national income, which is the lowest since 1934. That low saving rate, which reflects our elevated budget deficit, necessarily carries one of two possible implications: Either we reduce the amount we invest at home to two percent of income, which would starve young Americans of the computers, buildings, and other productive capital they will need to enjoy better standards of living in the future. Or if we do invest more than two percent of our income, we must borrow the difference from foreigners — which would leave younger generations increasingly indebted to other nations. Either way, today's young Americans are the ones who will pay the price for our current unwillingness to pay our way.

Let me illustrate the point. Under reasonable projections, the budget deficit over the next decade will amount to about $5 trillion. Compared to a balanced budget, these deficits will reduce national income in 2015 by $2,000 or more annually per household, on average.

Budget deficits have another adverse effect on younger Americans, who disproportionately tend to be in debt. Data from the Survey of Consumer Finances suggest that almost a fifth of households headed by young adults have negative net worth — for example, because their student loan and credit card debts exceed their assets. Standard estimates suggest that the budget deficits projected over the next decade will raise interest rates by about one percentage point, which will impose additional costs on young households in debt.

The 2001 and 2003 tax cuts

A key factor in this inauspicious budget outlook is the effect of extending the 2001 and 2003 tax cuts. Young adults should be demanding that policy-makers explain precisely how the tax cuts will be financed, since continuing to borrow to pay for them will just shift the costs to the future — when today's young adults will bear a significant share of the burden. The less older generations pay toward the government's bills, the more younger generations will have to pay, and vice versa.

The choices for financing the tax cuts are not attractive — which is perhaps why no one has put forward a credible proposal to do so. For example, just to finance the revenue losses in 2014 — and not even cover the interest costs on the tax cuts before then — requires an 11 percent cut in all non-interest spending; a 49 percent cut in all spending other than interest, defense, homeland security, Social Security, Medicare and Medicaid; or an 80 percent cut in all domestic discretionary spending, such as for environmental protection, education, and homeland security.

If we're not willing to pay for the tax cuts through the types of changes I just described, we shouldn't keep charging them to the nation's credit card and leaving young Americans with the bill.

Social Security

I'd like to close with a short discussion of Social Security. Social Security faces a long-term deficit. Restoring long-term financial balance to Social Security is therefore necessary, but it is not necessary to destroy the program in order to save it — especially since the Social Security deficit is not the primary explanation for the nation's long-term budget imbalance. The tax cuts and particularly the projected increases in Medicare and Medicaid are much more important factors.

I would emphasize two key aspects of the Social Security debate to younger Americans. First, despite the misleading claims of some Washington charlatans, there are no free lunches — someone has to pay. So younger Americans should be asking how we should finance the necessary changes across different generations, and across different people within generations.

These questions are particularly important because many of the Social Security reforms that are advanced as benefiting today's young Americans would actually impose the greatest costs on them. For example, replacing the current Social Security system with a fully-funded individual account program requires someone to pay. One possible financing scheme is to cut off our parents and grandparents from the benefits they are already receiving or are planning to receive in the near future, but that seems neither likely nor desirable. The most plausible alternative, at least within an honestly funded plan, would require today's young workers to pay twice: Once to make sure that their parents and grandparents are protected, and again to build up their own retirement funds.

In other words, it is precisely today's young workers who would bear the brunt of the so-called transition costs in moving to an individual account system. Such proposals are often misleadingly presented as benefiting today's young workers, whereas in reality they would impose substantial additional costs on today's young workers in exchange for generating significant benefits to far-distant generations. A recent reform plan that Professor Peter Diamond and I have put forward is aimed at a more even distribution of the necessary costs across different generations in the future while also eliminating the projected deficit in Social Security.

A second point is equally important. The image of Social Security solely as a retirement program is inaccurate: The program provides a key layer of financial security during other particular times of need, such as disability or the death of a family member, and about one-seventh of beneficiaries are younger than 62. Social Security thus provides not only benefits to our parents and grandparents, but also insurance to today's younger workers. This is valuable, since today's 20-year-olds have more than a one-in-five probability of receiving disability benefits before age 67. And the benefits that are paid out from Social Security are protected against inflation and the risk of stock market collapses. Many individual account reform proposals reduce disability and young survivor benefits. Individual accounts do little to offset such reductions, since workers becoming disabled or dying young have typically not had time to build up their accounts — and some proposals do not give disabled workers access to whatever modest balances they have accumulated in the accounts. Especially as the private retirement system on top of Social Security shifts from a defined benefit to a defined contribution one, it makes little sense to engineer a shift to individual accounts within the core layer of financial security provided by Social Security.

Thank you once again for inviting me to testify this afternoon, and I look forward to your questions.

Authors

Peter R. Orszag

Publication: House Budget Committee Forum

Investing in Children

Isabel V. Sawhill — Thu, 01 Apr 1999 00:00:00 -0500

Projected government budget surpluses of $2.6 trillion over the next decade are guaranteed to renew the debate over the best use of federal funds. We should use a portion of these funds to provide quality child care and preschool education to low-income children, including those whose mothers now must work because of welfare reform. This can be accomplished by reorienting child-care subsidies and tax credits toward low-income working families and by investing more in high-quality preschool programs for their children. A carefully executed program that provided one or two years of early education to children in families earning modest incomes would pay for itself by improving children's future opportunities. Such assistance would simultaneously reduce hardship for the so-called working poor.

For the second consecutive year, the president has proposed a major increase in funding for child care and early childhood education. The 1998 proposal foundered when Congress failed to approve tobacco taxes designated to pay for it. But the more than fifty bills introduced in the 105th Congress demonstrate widespread support for publicly financed child care. The debate mainly has centered on the federal government's role in funding care, the quality of care, and the income targeting of assistance. Policymakers also question whether stay-at-home and working mothers should receive the same benefits. Clinton has proposed a child-care tax credit to provide additional assistance to nonworking parents with children less than a year old.

Three major federal programs fund child care and early childhood education (Figure 1). The Child Care and Development Block Grant provides money to states to subsidize child-care expenses for families with working parents earning less than 85% of the state median. The Child and Dependent Care Tax Credit is a nonrefundable credit for expenses for the care of a dependent child less than thirteen years old. Head Start provides early childhood education and development services to low-income preschool children. The federal government spent approximately $11 billion in FY98 on these and other, smaller programs.

Current budget caps severely constrain any new initiatives in this area, but in the coming decade, child care and early education are likely to vie for resources with other federal spending priorities. Funding these programs for preschool children potentially enhances school performance and future productivity, promotes work and self-sufficiency among those once dependent on welfare, and boosts the net incomes of the poor. The challenge is to design and implement programs that can achieve these objectives.

Government vs. the Family

Many question the role government should play, if any, in the early education and care of children. More than two decades ago, President Nixon labeled federally funded child care a communal approach to child rearing inconsistent with a more family-centered approach. But times have changed. Sixty-two percent of mothers with preschool age children are now in the labor force, compared to 37% in 1975. Growing numbers of single-parent families also strengthen the need for subsidized care. Finally, the welfare reform bill of 1996 requires most low-income mothers to work and seek at least custodial care for their children.

Although its constituency has grown enormously, publicly financed child care should be viewed through another lens—its effect on the well-being of children. Almost no one disputes the importance of a good education at public expense for children beginning when they are five or six years old, but it is commonly assumed that younger children are better off at home. This assumption needs to be questioned. A study sponsored by the National Institute of Child Health and Development (NICHD) has followed 1,364 healthy children since their birth in 1991, and has found no evidence that out-of-home care is either more harmful or more beneficial to children than is parental care.

Despite this evidence, many believe the wholesale movement of mothers into the workforce will inevitably hurt children, and that society should not encourage this trend. Because stay-at-home mothers pay a heavy price in lost income for their decision, many people favor providing the same assistance to nonworking and employed mothers. But the tax code already favors such stay-at-home mothers. Two families with identical incomes pay the same taxes no matter how many people work and no matter what work-related expenses they incur. In addition, nonworking parents with sufficient tax liabilities can receive a $500-a-year tax credit for each child. If further tax credits are provided to stay-at-home mothers, they should be structured to benefit those with family incomes so low that they owe no taxes. It is hard to argue that only better-off mothers should be encouraged to stay home.

Availability, Affordability, and Quality

Working parents use centers, relatives, family day-care centers, and babysitters as custodians for their children (Figure 2). Debate has centered on the availability, affordability, and quality of such care. In recent decades, the supply of paid care has expanded rapidly in response to the need, with only limited increases in price. Access to care presents challenges mainly to parents with infants or nonstandard working hours.

Child care costs each household an average of $4,000 a year. These costs can be prohibitive for low-income families--many spend one-quarter or more of their incomes on child care, and others are forced to use unpaid care of dubious quality. Government child-care subsidies have grown rapidly in recent years, but most child care and preschool education remains privately funded. A 1997 government estimate puts the proportion of eligible low-income children receiving federal subsidies at roughly 10 percent, although this proportion may be higher now due to increased federal and state child-care spending resulting from welfare reform. Because many states give preference to mothers moving off welfare, low-income working families with no ties to the welfare system are the least likely to receive assistance.

Quality is harder to evaluate than costs or availability. Many child-development experts believe the quality of child care influences sociability, cooperation, self-control, and language development. The NICHD study of children through age three suggested that variations in quality have small effects on children. Home environment was much more important. Moreover, the effects of care did not vary with the type chosen (for example, center care vs. care in a neighbor's home), the age children entered care, or the amount of time in care. These findings were based on careful observations and measurements of the quality and quantity of child care. Independent observers who did not know whether the child received out-of-home care assessed children's social competencies and behaviors.

Regardless of the role quality child care plays in development, no one wants children to be placed in harmful environments. A number of studies have found that a distressingly high proportion of centers lack characteristics associated with good outcomes, such as small groupings of children and high ratios of adults-to-children. A smaller number of child-care providers fail to meet even minimal safety and health standards.

Should Subsidies be Targeted?

To help families pay for better care, the federal child-care block grant targets families with incomes below 85 percent of a state's median. As more middle-class and upper-middle-class women have entered the workforce, however, a political constituency has developed for broader-based subsidies in the form of tax credits. The cost of these credits has grown fivefold since the mid-1970s. The Child and Dependent Care Tax Credit (CDCTC) provides as much as $1,400 per year to a family with two children, regardless of income. Forty-five percent of the CDCTC goes to families with adjusted gross incomes of more than $50,000 (Figure 3). Because the credit is not refundable, it provides no benefit to those who earn too little to take advantage of it--less than about $25,000 a year for a family of four.

The case for targeting any new child-care subsidies to low-income families is strong. Single-parent families, for whom employment is a necessity, not a choice, head many poor households. Welfare rules introduced in 1996 require most mothers to work. Child-care subsidies are an indirect way of making work pay. If used as an opportunity to educate children as well, subsidies can be a good investment. New assistance could be financed, in part, by taking the politically difficult step of limiting eligibility for the existing $2.5 billion child-care tax credit to families with modest incomes--say, less than $60,000 a year. The savings of about $1 billion could then be used to offset the costs of providing more help to low-income children.

Targeting child-care subsidies on low-income families has considerable merit, but it also makes sense to extend access to all for a sliding-scale fee. A flexible payment plan would reduce the disincentive associated with earning more income and promote a greater mixing of children from different economic backgrounds.

The Growing Commitment to Early Education

Concerns about the quality of care merge with the question of when formal education should begin. The line between child care and early childhood education is ill-defined. No basis exists for thinking that education should begin at age five or six rather than at age three or even younger. Parents who must work need a safe place to keep their children; everyone benefits if the children are also educated.

Research showing that children's brains develop extremely rapidly before age three strengthens the view that even very young children need education, not just custodial care. Early educational experiences--such as being talked to or read to--are important to a child's development and later preparation for school. Some children receive appropriate stimulation and education at home, but others enter school with deficits that are extremely difficult to reverse at a later age. Higher quality, more education-oriented care for very young children, targeted to the most disadvantaged, could help reduce such disparities.

High-quality programs have produced short-term gains in cognitive functioning and longer-term gains in school achievement and social adjustment, according to research. Recent reviews of this literature by the Rand Corporation, by Steven Barnett at Rutgers University, and by a team of researchers at the University of Wisconsin, conclude that early interventions, especially with disadvantaged children, have produced a variety of positive results as children mature. They experience improved school achievement, lower grade retention, fewer special education courses, and reduced crime. Barnett, for example, reviews fifteen model and twenty-three large-scale public programs that enrolled disadvantaged children before they turned five. The researchers examined at least one measure of school achievement or socialization through age eight for both the children enrolled in the program and a control group. The best results came from those interventions that began early, included children from the most disadvantaged homes, and provided intensive education and other services over a lengthy period. In the most successful programs, social benefits that could be monetized greatly exceeded program costs, with net savings to the government of from $13,000 to $19,000 per child, according to the RAND study.

Critics of this literature assert that the gains fade as children age, that the studies are flawed, and that model programs are difficult to take to scale. These critics tend to focus on IQ and ignore the longer-term improvements in school performance found by many studies. However, they correctly gauge the difficulties of expanding programs to scale. Head Start, for example, has borne its share of management and staffing problems, leading Congress and the Clinton administration to earmark an increasing proportion of the funds for quality improvements including higher-paid and better-trained staff. The Head Start experience illustrates the need to expand programs carefully and to avoid replacing strong programs with less expensive ones in an attempt to serve more children.

The importance of early education is increasingly recognized in states where public funding of preschool programs is catching on, albeit at an uneven pace. Other countries also recognize the need to provide children with an educational experience from an early age. In France and Italy, for example, nearly all children three to five years old are enrolled in publicly funded preschools. But perhaps parents themselves provide the most telling indicator of the importance of early education. Families are enrolling their children in preschool programs in record numbers (Figure 4). In fact, the proportion of children from affluent families enrolled in preschool is twice that of those from families with more limited incomes. The children who most need a head start are not always getting it.

Toward a New Federal Commitment to Early Education

Individual families and some states will undoubtedly continue to make investments in young children, and some will argue that a federal role is unnecessary or even counterproductive. There is considerable sentiment in this country for keeping education, including preschool education, as a state and local responsibility. But only the federal government can ensure that all children have equal access to a good education, regardless of where they live. Providing medical care and retirement benefits to the elderly and welfare benefits and food stamps to the poor are time-honored federal commitments. But these programs essentially pick up the pieces after the education system has failed. Any state or community that neglects its children's education imposes large costs on everyone else. A federal commitment to fund more early childhood education would only partially compensate for existing disparities in state education spending, but it would be a move in the right direction.

The Head Start program could be expanded gradually, with careful attention to quality. Head Start serves about 40 percent of eligible children, most of them four year olds, in a nine-month, part-day program that costs about $5,000 per child. More full-day, full-year slots should be provided to meet the needs of working parents. Each child should be enrolled for a longer period, starting when they are infants or toddlers. Although the Early Head Start program currently serves some children under three, it is still very small, enrolling less than 2% of all preschool children from poor families.

Alternatively, a generous tax credit or voucher to be used only in accredited preschool facilities could be provided to low-income families. Standards could be established by states or by the federal government with the advice of professional groups. A tax credit would combine the federal support for education that liberals favor with the school-choice and provider-competition components that many conservatives endorse. The program design should ensure that new funds would not simply supplant existing state resources. It should also include direct support for local institution building and teacher training and certification. A nonprofit group in New York City has launched a new initiative called Satellite Child Care, for example, which supplies training to in-home providers who are given salaries well above average earnings in this low-paying sector. They also receive a computer linked to a supervising daycare center and a variety of professional supports.

Providing preschool to every poor child would be costly. A high-quality, two-year program costing about $8,000 annually per child would total some $30 billion per year if limited to families with incomes of less than $30,000. An equally expensive, high-quality one-year program, limited only to the children of the poor, would cost about $3 billion more than the $4.3 billion the federal government now spends on Head Start. Politics will always argue for serving more children at a lower cost per child. But in the end, the politically satisfying strategy is likely to be self-defeating because inexpensive programs are usually ineffective as well. With limited resources, it is better to provide fewer children a quality program that promises to improve their prospects.

Recent budget debates have emphasized the importance of using projected surpluses to pay down the debt, thereby freeing up funds for private investment. But an investment in people drives the future economy as much as does our savings and investment in tangible capital. If we want to prepare for the retirement of the baby-boom generation, we must not only save more both individually and collectively--but also invest more in those who will pay the costs of that retirement: the children.

Authors

Isabel V. Sawhill