AESG Insights: The Economics of Falling Birth Rates
THE ECONOMICS OF DECLINING US FERTILITY
Recent proposals such as “baby bonuses” and expansions to the Child Tax Credit have cast increased attention on the issue of declining birth rates in the US. The AESG and its director Melissa S. Kearney have repeatedly highlighted the significant social and economic consequences of the country’s falling birth rate and considered what it will take to reverse current trends.
CAUSES AND CONSEQUENCES
Fertility rates in the US have fallen from a recent peak of 69.5 births per 1,000 women 15-44 years old in 2007 to 54.4 in 2023. In their 2022 AESG paper, The Causes and Consequences of Declining US Fertility, Melissa Kearney and Phillip Levine examined the key forces driving this trend, along with its economic implications.
Absent a significant change in immigration patterns, slower birth rates will lead to slower population growth, and eventually a decline in the working-age population. This shift brings important fiscal implications, particularly for funding entitlement programs including Social Security and Medicare. Because such programs are funded through payroll taxes on current workers, a shrinking ratio of workers per retiree will exacerbate strains on entitlement funding. This ratio has already fallen from 4.0 workers per beneficiary in 1964 to 2.7 today. If fertility rates remain near current levels, funding gaps will grow wider, and workers could see tax increases of 20% to maintain the program’s solvency.
More broadly, a decline in the working-age population can hamper economic growth through slower rates of innovation and business dynamism. With a constant share of the workforce dedicated to research and development, for instance, a smaller workforce produces fewer innovations that in turn can increase all workers’ productivity and raise living standards.
Kearney and Levine found “no evidence that any particular policy, economic factor, or social trend has changed in recent years in a way that could explain the steady, widespread decline in US birth rates.” Instead, they attribute this decline to shifting priorities across recent cohorts of young adults.
They draw on these findings in their evaluation of the effects of “pro-natalist” policies, which incentivize childbearing through the provision of additional income to families based on their number of children. Kearney and Levine looked at evidence from countries that have implemented policies such as “baby bonuses” and concluded that such efforts tend to produce only modest increases in birth rates. Further, they wrote that it is unlikely that incremental policy reforms of this type would lead to a large enough increase in US birth rates that could return the total fertility rate to replacement levels in the near future.
However, more recent research by Kearney and co-author Lisa Dettling does find a strong link between the large expansion of homeownership in the middle of the 20th century and the size of the baby boom at that time. Specifically, Kearney and Dettling find that the adoption of the low down payment, long-term, and fixed-rate mortgage in the US (standardized by the FHA and the VA), which made homeownership more accessible to young families, led to 3 million additional births from 1935-1957, roughly 10 percent of the excess births in the baby boom. They find evidence across countries that the availability of low-down payment mortgages “set the stage” for the higher birth rates. This evidence suggests that while incremental policies, like small baby bonuses or a higher child tax credit, will not change the country’s fertility trajectory, policies that produce a meaningful impact exist. However, in order for such policies to be effective, they will either be significantly more expensive than current proposals or involve large-scale change.
From Kearney and Dettling 2025
SOLUTIONS
As Kearney wrote in an essay for The Dispatch, “we should not blithely declare that falling birth rates are of no real consequence, or even something to be celebrated. An increasingly aging and childless culture poses problems for individuals, families, and nations.” She argued that, if the decline in birth rates is the result of conscious choices made by new generations of Americans, there are still steps policymakers can take to mitigate the economic fallout. Comprehensive immigration reform and policies meant to promote innovation and productivity are two ways policymakers can respond to the economic realities brought about by below replacement-level fertility.
However, Kearney also considers an alternative scenario about declining fertility: that there are other constraints leading Americans to choose not to have children. If falling birth rates are a reflection of social constraints, such as family unfriendly policies, lack of egalitarian norms in marriage, and unequal divisions of household labor, then policymakers should consider meaningful efforts to address the realities that Americans are reacting to.
In light of renewed recent attention, Kearney appeared on CBS Mornings this week to discuss these trends. “On an aggregate level, the decline in birth rates in the US does pose challenges for us as an economy and society,” she said. “I think the conversation we should be having is are there things we could be doing as a society to make parenthood feel more accessible to people who would want to have children if they weren’t forced to essentially bear the responsibilities on their own.”