Could a $70,000 baby bonus solve South Korea’s fertility crisis?

By Tyler Cowen

As the global fertility crisis continues to accelerate, so does anxiety over what to do about it. A smaller world population may be fine in the short run, but it would not be good for it to asymptotically approach zero, and many citizens presumably do not want their countries to lose their geopolitical influence due to population decline. And in many cases, there is national debt to be paid off, which requires more young people to pay taxes and finance the pensions of the old.

Some countries are taking action. South Korea, which has the world’s lowest total fertility rate — just above 0.7, far below the replacement level of 2.1 — is pondering a radical solution: baby bonuses of 100 million won each, or about $70,000. For perspective, that is about twice South Korea’s annual per-capita income. At current birth rates, the plan would cost more than $16 billion a year; if it is successful, it will cost even more.

In principle at least, these kinds of policies are self-financing. Most babies born today or over the next few years will grow up to be taxpayers. In the long run, the birth subsidies in net terms need not cost anything at all. If, for instance, you pay two years’ average income to a family to have another child, you might plausibly expect to later receive about 45 years of tax receipts.

Credit: Bloomberg

But will such policies actually result in population growth? After all, the government may end up making a lot of payments to families which would have had children anyway. Imagine that, after putting the policy into practice, only one-tenth of the kids born were induced by the subsidy. In that case, in expected-value terms, the two years’ investment of per-capita income yields only one-tenth of the calculation presented above — that is, 4.5 years of additional tax receipts. Given that those receipts are discounted for a rather distant future, and perhaps constitute only about a third of income, in fiscal terms this is not a profitable deal.

You still might think it is worth spending money to increase the number of Korean babies. After all, people in prosperous countries are on average happy, and that is worthwhile in itself, quite aside from their contribution to the public till. Still, if addressing public budget imbalances is one of the motivations for this policy, it could make fiscal problems worse.

Unfortunately, it’s impossible to say how much impact the Korean subsidies would have, as there is no precedent. The closest would be Hungary’s subsidies to childbearing, including income-tax exemptions and amounting to about 5 per cent of GDP. These policies were instituted only a few years ago, but there is some evidence of rising fertility rates in Hungary, albeit at 1.6 still well below replacement.

When birth subsidies get smaller, most of the evidence is not encouraging. The Nordic countries provide various kinds of free child care and benefits for parents, such as paid workplace leave. Those policies are generous by global standards, yet the resulting birthrates are not impressive. Similarly, evidence from the US indicates that the so-called “shifting priorities” of younger generations — about life choices and societal norms — influence decisions about family size far more than any changes in childrearing costs or subsidies. France also has a subsidy plan in mind, but it probably isn’t big enough to work. Singapore has tried subsidies as well as nudges, such as government-sponsored dating cruises, to no avail.

It shouldn’t be a huge surprise that the smaller subsidies don’t work. Having children changes everything you do and how you do it. If you are not interested in that life-altering transformation, a birth subsidy isn’t going to make a difference. Subsidies might convince a couple with two children to have a third, because now the additional child is easier to afford. The problem of course is that so many families are not having two kids to begin with.

Peer expectations are another factor here. If most families had three kids, more people might seek to meet that standard and the subsidy could help them do so. So one way the subsidies could work is by creating a critical mass of large families and changing social norms for everyone.

In any case, the Korean and Hungarian birth-subsidy experiments deserve both praise and scrutiny. Even if they just slow but do not arrest the trend toward much older and smaller societies, they are still worth pursuing. We all will learn from the results. There isn’t enough social experimentation in the world, and humanity has to try something to avoid disappearing.