Passing the generational buck - government policy for children

Public Interest, Wntr, 1994 by Laurence J. Kotlikoff, Jagadeesh Gokhale

IN THIS ARTICLE we will investigate the U.S. government's treatment of children. We will begin with a look at the flow of transfer payments to children, and then consider the government services purchased on their behalf. We will also consider the benefits and services that today's children will receive in the future, as well as the taxes they will pay when they become adults. By doing so, we seek to answer this question: Are today's children being treated fairly compared with other generations? To address this issue, we will rely on a new method called generational accounting, which compares the "lifetime net tax burden" (taxes paid minus transfer payments received) of different generations. With its lifetime perspective, generational accounting overcomes the difficulty encountered with the usual comparisons between two generations, namely that the two generations are at different stages of their life cycles. To understand this difficulty, imagine a country with a longstanding policy of transfer payments to children, financed by taxes on the elderly. While the usual comparison would suggest that children are being treated favorably compared to the elderly, such a comparison ignores the fact that the elderly received the same when they were young, as well as the fact that the children will pay the same taxes when they are old. Thus from a lifetime perspective, the children are being treated just as favorably as the elderly.

How are children in America actually being treated compared to adults and the elderly? The evidence we will consider includes the rising poverty rate of children over the past two decades and the decline in the elderly poverty rate over the same span, as well as an accompanying rise in the consumption level of older generations compared to that of younger ones.

Poverty in America

Twenty percent of American children live in poverty. The rate among Hispanic children is 37 percent; among blacks it is 45 percent. Moreover, because there is considerable mobility in and out of poverty, we can surmise that if 20 percent of American children are poor at any given moment, substantially more than 20 percent experience periods of poverty before reaching adulthood.

This rate is considerably higher than in the past. In 1970, for example, only 15 percent of children were poor. Yet at the same time that poverty rates have been rising for children, they have been declining for older Americans. In 1970, almost one quarter of Americans aged 65 and older were officially poor. Today's figure is about 12 percent.

The difference in poverty trends between young and old raises the question of the equity of government policy. Still, other factors besides government action seem to be at play in raising child poverty rates. One of the most important factors is the increase in the fraction of America's children living with a single parent. In 1989, 73 percent of all American children, 67 percent of Hispanic children, and 38 percent of black children lived with both parents. The respective 1970 figures: 85 percent, 78 percent, and 59 percent. Rates of child poverty are far higher among single-parent than among two-parent households. Almost 50 percent of children living with a single parent are poor, compared to only 10 percent of children living with two parents. All told, about two in every three poor children live in single-parent families. The increase in children living with one parent can be traced to two factors--the increase in the U.S. divorce rate and the increase in the fraction of children born out-of-wedlock. Today, 13 percent of Americans aged 35 to 44 are divorced, compared to only 3 percent in 1960. As a consequence, two children in five now grow up in divorced families.

The increase in the fraction of children born to unmarried women is even more dramatic. In 1970 just over 10 percent of children were born to unwed mothers; today, the figure is over 25 percent. This explosion of out-of-wedlock births has affected both whites and minorities. In the case of whites, the 1970 share of births to unwed mothers was 6 percent; it was 18 percent by 1988. In the case of blacks, the share of births to unwed mothers grew from 38 percent in 1970 to 64 percent in 1988.

Consumption then and now

The increase in the poverty rate of children relative to that of adults suggests a deterioration in the relative living standards of children, but is not conclusive for the simple reason that impoverished children make up only a portion of the entire population of children.

One way to assess the change in living standards of all children vis-a-vis all adults is to consider changes over time in the age-consumption profile. Consider, for example, the average consumption of children aged 10 versus the average consumption of adults aged 70. In 1972-73, the consumption of children aged 10 averaged 37 percent of the consumption of 70-year olds. But by 1987-90, it averaged only 31 percent. Thus, the consumption of 10-year olds relative to that of 70-year olds fell by over 16 percent across the two periods. What explains the recent increase in the relative consumption of the elderly? The answer is that over the past twenty or so years their income has grown much more rapidly than that of other age groups. In 1968, income per elderly household averaged 43 percent of income per household aged 35-44. By 1984, this figure had risen to an average of 54 percent. Thus the income of the elderly relative to that of households aged 35-44 rose by 26 percent over the sixteen-year period. It rose by an even larger percentage--45 percent--relative to that of households aged 25-34.