Wednesday, June 21, 2006

Baby Bonus Blunder?

Australians live longer and have fewer children than they used to. In fact, most of the 30 countries in the Organization for Economic Co-operation and Development (OECD) show the classic signs of ageing: rising life expectancy and falling fertility rates. Life expectancy at birth measures the number of years an average person in a population can expect to live. The fertility rate for a population is the average number of childbirths per woman of child-bearing age. Longer life expectancy and lower fertility rates mean that retirees make up a larger share of OECD populations. The graphs below shows the OECD's estimates and projections for life expectancy and the fertility rate.

In OECD countries, retirees receive public benefits, like Social Security or Medicare in the United States, that are financed with taxes from active workers. As a population ages, the ratio of retirees to workers rises--the pool of beneficiaries expands as the tax base shrinks. The pressure on public finances in OECD countries will continue to rise unless the countries adopt policies that raise tax revenues or cut benefits. A host of possible solutions exists, not all of them politically palatable: increasing taxes on workers, cutting retiree benefits, increasing the retirement age, or opening borders to more immigrant workers.

In 2004, the Australian government tackled declining fertility rates head on with a cash-for-babies policy. In May of 2004, the government announced Australian parents would receive A$3,000 (US$2,200) for newborns delivered on or after July 1, 2004. Time will tell whether Australia's baby bonus is large enough to noticeably increase fertility rates, but economists Joshua Gans and Andrew Leigh found that the baby bonus announcement had a big impact in the short term (download their research paper here). How do you think Australian parents with late June due dates responded to the government's announcement? Read Gans and Leigh's opinion piece in The Australian to find out.

1. On which day during the past 30 years were the most Australian babies born? Why?

2. According to Gans and Leigh, roughly 1,000 births were moved as a result of the 2004 baby bonus announcement. Of those, how many births were moved by more than three weeks? How is it possible to postpone births? How did the baby bonus announcement affect Australian maternity wards?

3. Despite the evidence of delayed births resulting from the 2004 announcement, the Australian government recently announced that the baby bonus will rise to A$4,000 on July 1, 2006. How, according to Gans and Leigh, should maternity wards and expectant mothers cope with the transition to the higher bonus? What can the government do to avoid similar disruptions in the future?

4. The rapidly expanding career opportunities for women in OECD countries present would-be moms with tougher trade-offs. Take a career detour to raise-up kids or continue pursuing the corner office? We know that the baby bonus announcement has a big reshuffling effect on birth dates in the short term, but its long-term effects on the kids-career tradeoff and fertility rates are less certain. Do you think Australia's baby bonus will offset a significant portion of the opportunity costs of childbirth faced by working women?

5. Can you think of other policies that would reduce the ratio of benefit-receiving retirees to tax-paying workers? Should the retirement age rise with life expectancy? How would more open immigration policies affect the ratio of retirees to workers? How would more immigration affect racial inequality if immigrants are of a different race than native-born workers?

Topics: Incentives, Trade-offs, Ageing populations

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