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May 10 2018

Social Security-based paid parental leave is worth considering

American Enterprise Institute
featuring Kristin A. Shapiro

In a recent Tax Notes article, our colleagues Michael Strain and Alan Viard raise a number of concerns about the idea of funding paid parental leave through Social Security. The idea, proposed by Kristin Shapiro and one of us, would allow a worker to claim 12 weeks of paid parental leave, with the benefits calculated based on the Social Security Disability Insurance benefit formula and paid by the Old Age program.

The advantage of the proposal, relative to several other ideas, is that it imposes no new taxes on workers or employers, nor does it mandate that employers provide leave on their own. Instead, workers would qualify for the benefit through continued employment for four calendar quarters prior to claiming the benefit. The Social Security benefit formula is progressive in that median earners would get a wage replacement rate of 59%, while low income earners would get a 68% replacement rate. In exchange for 12 weeks of paid parental leave, workers would need to delay retirement by approximately 25 weeks, as a way to pay back Social Security, including interest, for benefits received earlier in life.

As with any proposal, there are obvious concerns about how such a policy would play out in practice. For instance, the proposal does not expand job protection to those not already covered under the Family and Medical Leave Act, who are typically low-wage workers. The experience from states like California suggests that if such workers are not guaranteed job protection, they are less likely to take paid leave, especially for extended periods of time, because they are unsure about having a job to return to. There are also concerns about opening up Social Security to multiple uses beyond retirement and disability. And finally, there is the question of the fiscal solvency of the Social Security program itself. These issues need to be addressed.

The case for paid family leave

But we begin with what seems a rather significant takeaway from the Strain-Viard paper. The authors conclude their piece by saying, “We are not persuaded of the need for any federal paid parental leave benefit.” In other words, part of their objection to the Social Security-based paid leave proposal is not the link to Social Security but to the idea of paid parental leave in the first place.

This objection is curious given that there is overwhelming evidence to this effect, summarized in the AEI-Brookings Paid Leave Report, and decades of research studying precisely how state programs have worked and not worked well, and why there is a need for a federal policy, especially for low-wage workers.

At the risk of repetition, paid parental leave matters because changing family demographics mean that in most households there is no stay-at-home parent. The ability to take time off from work to care for a newborn or adopted child is critical. It’s important not just for the child’s health, but also for maternal health and for bonding between the father and the child. Parental leave is important because it allows women to remain attached to the labor force and to have higher work hours and earnings two to three years after the birth of a child. Paid parental leave is associated with a smaller wage gap between mothers and non-mothers.

Labor force participation rates have stalled for American women since the 1990s relative to the OECD, and in part this can be attributed to the relative lack of family-friendly workplace policies, including paid parental leave. There are many obvious advantages to having access to paid parental leave, which are important because there are economic implications for families, but also because we value the ability to balance work and family needs. Very few, if any, are mentioned in the Strain-Viard paper, perhaps because the focus is squarely on the costs associated with such policies.

While it is important to have experimentation at the state level on paid leave policies, having a federal policy will allow for uniformity in access to leave for workers in every state. Even today, 25 years after the Family and Medical Leave Act, only five states and the District of Columbia have adopted paid leave programs. And each state differs in the type of coverage it offers. California does not offer job protection as part of its paid leave program but offers six weeks of paid leave. Rhode Island does include job protection but only offers four weeks.

As a result, even today, access to leave varies dramatically across income groups, regions, and industries. Despite some progress at the state level, as of March 2017, only 15% of workers have access to defined paid parental and family care leave. According to the 2012 FMLA report, 53% of those with family income below the median received no pay while on leave. A report last year from Pew Research found similar overall rates of pay while on leave, and that 62% of households with incomes below $30,000 received no pay while on leave. According to the American Action Forum, only 18.7% of workers with incomes below $30,000 received any pay during parental leave.

So there is a clear need for a paid parental leave benefit, especially at the federal level, to guarantee a basic minimum level of coverage for all workers, regardless of which states adopt such policies and the forms that they may take.

Paid leave’s implications for business and low-wage workers

We also object to the statement that “By subsidizing time away from work, the proposal would increase the number of workers who claim leave and the number of weeks that they claim. . . . Even FMLA-exempt companies would experience increased disruption of their operations, as workers would likely take time off even without the benefit of job protection.” There are several problems with this statement.

First, allowing new parents to feel comfortable taking time off when they need to is a feature of the proposal, not a bug. The objective is to not penalize workers who otherwise could not afford to take the leave. This means low-wage workers. Access to paid leave is not an issue for most workers who have relatively higher incomes. Many of us have very generous employer-provided paid leave that comes with job protection. The problem we are trying to solve is how to improve paid leave access for the lowest-wage workers or have a paid leave program that is well targeted toward these workers.

Second, state programs have provided evidence on how employers and employees react to paid leave policies. Research shows that employers are not unduly burdened by new paid leave programs, and while employees are better off getting some pay while on leave, most still do not use up the entire duration available. Further, lack of job protection does affect these low-wage workers. Most workers surveyed reported that they rush back to work if they don’t have a job protection guarantee. So empirically, the statement that even those employers without FMLA protection would be burdened seems not to hold up.

And finally, the statement, “the program could eventually be modified to extend FMLA to currently exempt employers, introducing significant additional burdens,” ignores how tough it is to pass legislation in this policy area. It ignores the reality that in 25 years, there has been no change to the FMLA and only six states (including DC) have managed to pass any legislation in this area. While policymakers should beware the slippery slope, they also should recognize that changes in this area has been exceedingly slow and modest.

Tangible benefits, speculative concerns

Strain and Viard also make several criticisms relating to how the parental leave component would related to the rest of the Social Security program, particularly in light of Social Security’s substantial long-term financing shortfall. On one hand, the authors argue that Congress might not enforce the retirement benefit offset necessary to maintain the budget neutrality of the paid leave proposal, in particular because many who claim parental leave may be low-income women. At the same time, Strain and Viard suggest that Congress might respond to Social Security’s projected insolvency in 2034 by cutting retirement benefits across the board by 20% or more. Since the retirement age increase specified for parental leave beneficiaries is calibrated to the scheduled benefits under current law, a deep benefit cut would mean that the parental leave benefits would not be fully repaid.

But either of these cases is highly speculative, not to mention inconsistent with one another. Congress has not been unwilling to enforce increases in the Social Security retirement age; indeed, the normal retirement age is currently in the process of moving from age 65 to 67 and even progressives appear to have acquiesced to that change. However, there is almost no chance that Congress would allow a dramatic across-the-board cut in benefits, even if Social Security’s trust fund were exhausted. By far the most likely outcome is that, barring other reforms, Congress would continue to transfer general tax revenues to Social Security, even as it does so today to repay the Treasury bonds held in the Social Security trust fund.

Bottom line

In sum, the evidence suggests that paid parental leave has much to offer for parents, children, and even employers. While other means of funding paid parental leave are possible, a Social Security-based paid leave proposal is worth considering.

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