Understanding Child Support Guidelines

Presentation to the Arizona Child Support Guideline Committee June 27, 2008 © 2008 Ira and Tara Ellman

Overview: Four Parts

     What

do

our current guidelines really do?

A look at the numbers they produce What

should

the guidelines do?

   Some possible principles What principles are favored by Arizona citizens?

How do they compare to current reality?



Why

do the current guidelines do what they do?

Examining the theory of current guidelines, and  why it necessarily produces these results What is the alternative?

 How could we do them differently?

2

Part I: A look at current guidelines

 The Classic Choice: Income Shares v. POOI  Wisconsin: Gross Income POOI State  Support equals flat percent of Dad’s Income  17% for one child,  25% for two, 29% for 3  34% for 5 or more  Mom’s income not considered  Income Shares: Mom’s income considered  But does it matter? Let’s find out.

3

POOI v. Income Shares

 Assume Dad earns 1000, Mom earns 500  Assume POOI and Income Shares states both set support at 17% for one child, as does Wisconsin  POOI: 17% of $1000 = $170 in support  Income Shares: longer route to same place  Total Parental Obligation = 17% of $1500  17% of $1500 = $255  Dad pays 2/3 (1000/1500) of $255  Which is $170 4

POOI v. Income Shares, continued

 So why does the choice of POOI v. Incomes shares matter?

 Answer: it’s the

rate structure

,

not

the fact that we look at both incomes  POOI:

flat

rats  Income Shares:

declining

rates  Example: Arizona 5

Arizona Support Rates, 2005 Guidelines 0.60

0.50

0.40

0.30

0.20

0.10

0.00

$0

Support Obligation as a Proportion of Combined Income Rates start high, fall steeply Plummet at $4200 Low and slowly falling above $8100

$2,000

Children

$4,000 $6,000 $8,000 $10,000

Combined Monthly Gross Income

1 2 6 $12,000 $14,000 6

Arizona & Wisconsin Rates, 1 Child

Support Obligation as a Proportion of Income For One Child

0.60

0.50

0.40

0.30

0.20

0.10

0.00

$0 $2,000 $4,000 AZ $6,000 $8,000

Monthly Gross Income

$10,000 wisc. average rate $12,000 $14,000 7

Arizona & Wisconsin Rates, 2 Children

Support Obligation as a Proportion of Income For Two Children

0.60

0.50

0.40

0.30

0.20

0.10

0.00

$0 $2,000 $4,000 $6,000 $8,000

Monthly Gross Income

$10,000 AZ wisc average rate $12,000 $14,000 8

Arizona & Wisconsin Rates, 5 Children

Support Obligation as a Proportion of Income For Five Children

0.60

0.50

0.40

0.30

0.20

0.10

0.00

$0 $2,000 $4,000 AZ $6,000 $8,000

Monthly Gross Income

$10,000 Wisc. Average Rate $12,000 $14,000 9

One

Effect of AZ’s Falling Rates

 Dads with the same income pay different rates.  Mom’s rising income lowers Dad’s

rate

, not just his share of joint obligation.

 Might seem fair to some, unfair to others.

SUPPORT RATE FOR ONE CHILD Custodial Income $0 $500 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 Non-Custodial Parent's Income $500 $1,000 $3,000 $7,000

n.a.

0.23

0.22

0.20

0.19

0.17

0.15

0.14

0.23

0.22

0.21

0.20

0.18

0.16

0.14

0.13

0.20

0.19

0.18

0.16

0.14

0.13

0.12

0.11

0.13

0.12

0.12

0.11

0.11

0.11

0.10

0.10

Compare Two Dads Who Both Earn $3000 1. Mom earns nothing: Dad pays 20% or $600 2. Mom earns $3000: Dad pays 14% or $420 10

Second

Effect of AZ’s Falling Rates

 Poor Mom realizes limited benefit from Dad’s rising income.  Dad’s rising income

lowers

his rate  Reduces the impact of his rising share of their joint obligation

SUPPORT RATE FOR ONE CHILD Custodial Income $0 $500 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 Non-Custodial Parent's Income $500 $1,000 $3,000 $7,000

n.a.

0.23

0.22

0.20

0.19

0.17

0.15

0.14

Compare Two Moms Who Both Earn $500 1. Dad earns 1000: pays 22% or $220 2. Dad earns 7000: pays 12% or $840 0.23

0.22

0.21

0.20

0.18

0.16

0.14

0.13

0.20

0.19

0.18

0.16

0.14

0.13

0.12

0.11

0.13

0.12

0.12

0.11

0.11

0.11

0.10

0.10

What is the impact of this result?

11

Gauging Impact of Support Amounts

 How does the support amount affect each of the two households?

 Gauging that is not easy. You must compare  Households of different composition  Which therefore need different amounts of money to achieve the same living standard.  But for lower income households, the official poverty threshold is one common measure   Simple to understand Often used and therefore “standard” 12

Understanding Poverty Threshold

   Developed in 1963 by Mollie Orshansky, a statistician in the Social Security Administration (formerly a Research Clerk with FDR’s Children’s Bureau It’s basically the cost of minimal grocery market basket times 3. “Updated” annually by Census Bureau for price of the market basket   Actual poverty judgments range from 125% to 180% of the “poverty threshold” But “poverty threshold” still a standard benchmark 13

Some Monthly Income Benchmarks

    Poverty level  

2002 2007

2-adult, 1-child household: $1,207  “200 % Poverty” $ 2,414 Single person $ 780 $1,391 $ 2,782 $ 899 Median income  for all US households: $3,550 80th Percentile income  For all US households: $7,001 95th percentile income  for all US households: $12,500 14

CHART 3 INTRO MIDDLE INCOME RANGE OF CUSTODIAL HOUSEHOLD OUTCOMES EXAMPLE OF ONE-CHILD FAMILY WITH $3550 COMBINED INCOME

(MEASURED AS PERCENT OF POVERTY LEVELS)

Intact family was at

500%

300% of poverty level

450%

Situation: Middle Income Household with One Child

400% 350%

Outcomes AFTER

250% 200% 150% 100% 50% 0% 0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Custodial Parent's Share of Combined Income

1.0

Custodial HH after pmts

Mom and Child BEFORE

Intact HH

Mom’s Income Share

15

CHART 5 LOW INCOME MOM RANGE OF CUSTODIAL HOUSEHOLD OUTCOMES EXAMPLE OF ONE-CHILD FAMILY WITH $3550 COMBINED INCOME

(MEASURED AS PERCENT OF POVERTY LEVELS)

Payment helps, but not

500%

nearly enough to restore old living standard.

and Child at

350%

150% of poverty

300% 250% 200% 150% 100% 50% 0% 0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Custodial Parent's Share of Combined Income

1.0

Custodial HH before pmts

Mom earns 30% of

Custodial HH after pmts

Situation: Low income Mom from a middle-income intact household.

16

Three Moms with 1 Child Each Earns $1000

LOW INCOME Combined $1500 MIDDLE INCOME Combined $3500 HIGH INCOME Combined $7000 NON-CUST INCOME $ SUPPORT RATE SUPPORT PAYMENT CUST. PCT POVERTY $ NON CUST. PCT POVERTY 500 22% 110 107% 50% 2500 6000 19% 13% 471 781 142% 173% 260% 668%

Low Income Dad High Income Dad

Why Doesn’t Higher Income Dad Help More? Answer: Rates Fall as Dad’s Income Rises

17

HCART 4 TWO CHILDREN RANGE OF CUSTODIAL HOUSEHOLD OUTCOMES EXAMPLE OF ONE-CHILD FAMILY WITH $3550 COMBINED INCOME How two middle- class

500%

children can have very different outcomes:

450%

Falls near

400%

poverty with Mom.

300% 250% 200% Custodial HH before pmts 150% 100% Intact HH

style with high earning Mom .

50% 0% 0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Custodial Parent's Share of Combined Income

1.0

Conclusion: Where noncustodial parent earns the majority of income, our guidelines do not protect children from large declines in living

18

standard when their parents separate.

Overview: Four Parts

      What

do

our current guidelines really do?

A look at the numbers they produce  What

should

current guidelines do Some possible principles    What principles are favored by Arizona citizens How do they compare to current reality?

Why

do the current guidelines do what they do?

Examining the theory of current guidelines, and  Why it necessarily produces these results What is the alternative?

 What is the alternative?

How could we do them differently?

19

Goals of Support Guidelines

 Protect Child Well-Being  Especially important for low income CP’s  Recognize Dual Parental Support Obligation  Explains why we require support even when CP has adequate income for child  Avoid Gross Disparities in Living Standard  Explains why we go beyond basics  Balance above against Earner’s Priority Principle 20

1. Measurable Child Well-Being

B A The solid or the dashed line?

21

Well-Being, continued Empirical literature suggests the solid line--but •Value judgments cannot be avoided •` What counts as well-being?

• Long v. Short term? • How to measure and aggregate?

22

Well-Being, continued

Possible Working Assumptions

 Curve steep to Point A, the “minimum decent living standard”—perhaps 150% of poverty threshold  Curve begins to flatten at Point B  Perhaps 60 th to 80 th Percentile of household income  As well-being returns decline, so does the

child well being rationale

for any support claim on obligor.

23

Possible Well-Being Principle

 First Purpose of Child Support is to Ensure Child Well-Being  The lower is the custodial household income,  the more well-being a support dollar buys  And therefore the stronger is justification for requiring support from the obligor  Summary:

The lower the CP income, the more we should ask of the obligor

24

Dual Obligation Principle

 Explains why we require support even when  CP has more money than NCP  CP has lots of money  Multiple reasons for Dual Obligation  Moral claims   Fairness to CP Maintain obligor’s authenticity as parent  Dual Obligation says little about

how much

 Fair share of the well-being amount  Nominal may be enough when WB not at issue 25

Gross Disparity Principle

 Fairness claim for child, not Well-Being claim  Shield innocent victim of break-up from disproportionate living standard loss  Fairness argument more powerful if child   Had enjoyed higher standard for some time Sees Obligor’s new family enjoying high standard   Problem: Windfall benefit to CP Compromise: Avoid “Gross” Disparity 26

Gross Disparity, continued Two Possible Gross Disparity Principles  Version One: where family was intact  Child’s living standard should not decline too much more than Dad’s  Version Two: where there was no long-term intact family  Child’s living standard should not be grossly inferior to Dad’s  When Relevant? When there is  A high-income obligor, and  We are at flatter end of the Well-Being curve 27

Earner’s Priority Principle

 Everyone keeps what they have unless there’s a very good reason to take it from them.

 Especially the poor.

 For poor obligors: Self-support reserve trumps even child well-being  For higher income obligors  Gross Disparity a less powerful counterweight to EPP than child well-being:   Hence we allow some disparity  Validates objection to “hidden alimony” But Child Well Being is “a very good reason” 28

EPP continued

Possible EPP Principles

 For low-income obligor:  Award only nominal amounts from impoverished obligors  Never reduce obligor income below poverty levels.

 For higher income obligor  The award should preserve a living standard advantage over CP household,

if

child well being not at risk:  child has a “decent minimum”

or

 Something more than decent minimum 29

Overview: Four Parts

     What

do

our current guidelines really do?

A look at the numbers they produce  What

should

current guidelines do Some possible principles   What principles are favored by Arizona citizens How do they compare to current reality?



Why

do the current guidelines do what they do?

Examining the theory of current guidelines, and  Why it necessarily produces these results What is the alternative?

 How could we do them differently?

30

What Do Arizona Citizens Believe?

How Do You Ask?

 Attitudes or support amounts?

 We asked about both  Their relationship provides insights  But ultimately, amounts matter most  Do not anchor  If you want to know what people think, do

not

first tell them what others think 31

Who We Asked

 Members of Pima County jury pool  65% to 70% response rate to long forms  This data based on N of 407, of whom:  55% were women  62% were married, 35% were divorced  69% had children  12% had paid support, 18% had received it  97% graduated high school, 25% had B.A.

 5.6% earned less than $15,000  46% earned more than $60,000 32

Of the 30% who have been in the child support system, nearly all the Obligors were men, and nearly all the Custodial Parents were women 33

What We Ask: Support Amounts

 One child (9 year old boy)   Mom is CP, Dad is support obligor Son “lives mostly with Mom, but Dad sees him often”  Dad earns $6000, $4000, or $2000 a month in “take-home pay”.  Mom: $5,000, $3,000, or $1,000  Everyone asked about all nine income combinations  Rs either

Name

or

Choose

a support amount 34

The Exact Question

We want to know the amount of child support, if any, that you think Dad should be required to pay Mom every month all things considered. What will change from story to story is how much Mom earns, and how much Dad earns. There is no right or wrong answer; just tell us what

you

think is right. Try to imagine yourself as the judge in each of the following cases. Picture yourself sitting on the bench in a courtroom needing to decide about what should be done about ordering child support in the case and trying to decide correctly. To do so, you might try putting yourself in the shoes of Mom or of Dad or both, or imagine a loved one in that position.

35

Respondents’ Average Support Function 1. Three lines, not 1 —Mom’s income matters and POOI 2.

implicitly rejected Rates on Dad’s income higher when Mom’s income lower Low income mom High Income mom 36

Lesson One

 Respondents agree that as Mom’s $ ↓  Dad should pay more in dollars, and  The

rate

go up applied to Dad’s income should  This is not POOI.  Is it Income Shares?

 Do they believe Dad’s rate should go down as

his

income goes up?  No. See next chart 37

Support Payment as Percent of Dad’s Income Mom’s Income is $1,000 monthly

30% 25% 20% 15% 10% 5% 2 4

Dad's Income in Thousands

6

Survey Means Arizona Guideline s

38

Support Payment as Percent of Dad’s Income Mom’s Income is $3,000 monthly 30% 25% 20% 15% 10% 5% 2 4 Dad's Income in Thousands Survey Means Arizona 6 Guidelines

39

Support Payment as Percent of Dad’s Income Mom’s Income is $5,000 monthly Support Payments As Percent of Dad's Income: CP Income is $5000

30% 25% 20% 15% 10% 5% 2 4

Dad's Income in Thousands Survey Means Arizona Guidelines

6 40

Rate Rules

Method

POOI Income Shares Pima County Citizens

As Mom’s Income Rises

Unchanged

As Dad’s Income Rises

Unchanged Go Down Go Down Go Down Unchanged 41

Key Points on Rates

  Pima County citizens reject

both

POOI & Income Shares They believe in a “flat tax” for child support  Income Shares Guidelines have a

regressive

rate structure  They believe the flat rate on Dad should be higher when Mom’s income is lower  This is not POOI either  This view about

rate structure

shared by men and women: no difference between them  But how does this translate to support $ ?

42

Child Support Payments CP Income $1,000 1300 1100 900 survey median 700 Guidelines 500 300 100 0 2 4 6 Survey 25th Percenttile 8 Non Custodial Parent Income

43

Child Support Payments: CP Income $3000 1300 1100 900 700 500 300 100 0 2 4 6 Non Custodial Parent Income survey median guidelines Survey 25th Percentile 8

44

1300 1100 900 700 500 300 100 0 Child Support Payments: CP Income $5000 survey median guidelines 2 4 6 Non Custodial Parent Income ($000) Survey 25th Percentile 8

45

What About Other Income Share States?

• Which one to pick?

• Studies by Jane Venohr found that – There are 12 net income, income share states – Of these, Iowa had the median child support amounts • So, how do our respondents mean support amounts compare to the support levels required in Iowa?

46

Iowa Support Amounts Compared to Respondents’ Preferred Amounts

CP Income

↓ 1000

NCP Income

→

Survey Iowa

2000

461

456

4000

956

804

6000

1451

1122

3000

Survey Iowa

379

404

748 748

1117

966

5000

Survey Iowa

298

374

541

668

784

954

•Middle Cell: amounts

Identical

•Top Row (Poor Moms): Public wants higher amounts •Bottom Row (Comfortable Moms) Public wants lower 47

Key Points on Amounts

• Respondents generally favor amounts higher than Arizona guidelines • Compared to Iowa they want – Higher amounts for low-income CPs – Lower amounts for high-income CPs – This follows from Well-Being and EPP principles, consistent with Dual Obligation – We must ask about higher NCP to find out about Gross Disparity • Men and Women

agree

on this rate

structure

– But do they agree about

amounts?

48

cp 5,000 males $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 Child support by gender of respondent cp 5,000 females cp 3,000 males cp 3,000 females cp 1,000 males cp 1,000 females

Mom has $1000 $3000

2,000 4,000 Dad's Income 6,000

49

Further Data On the Way

        Two children, higher incomes for NCP Gender reversals Attitudes about support principles and how they relate to support amounts Are amounts affected by whether the parents were married, or the length of their relationship Impact of visitation arrangements on amounts Impact of visitation frustration on support amounts Anchoring Effects: a possible way to tame gender differences Impact of Showing subjects the parties’ post-transfer incomes 50

Overview: Four Parts

     What

do

our current guidelines really do?

A look at the numbers they produce  What

should

current guidelines do Some possible principles   What principles are favored by Arizona citizens How do they compare to current reality?



Why

do the current guidelines do what they do?

Examining the theory of current guidelines, and  Why it necessarily produces these results What is the alternative?

 How could we do them differently?

51

What Current Guidelines Are Not

or

, Guideline Myths



Not

estimates of the cost of raising a child  Can’t be, because what a child costs depends on the living standard you want to buy for him or her 

Not

estimates of what it takes to provide a child with the marital living standard  That’s not often practical or possible 

Not

based on estimates of   what custodial households need, or what it’s fair to expect noncustodial parents to pay  So then —where do they come from?

52

Where the Guideline Numbers

Do

Come From

 From a very complicated theory that starts from a simple idea  The Simple Idea: Base Guidelines on What Parents

Spend

on children in

Intact

Families  The Complicated Theory arises because:  How do you decide

what counts

as a child expenditure?

  How do you

measure

the expenditures you want to count?

The Devil —and the Policy—is in these details 53

The Two Key Questions

 1. How are child expenditures defined?

 what is consultant trying to measure?  This is a matter of

Concept

 2. How are expenditures, so defined, measured?

 Is our measure any good?  This is a question of

Implementation

54

The Concept: Which Expenditures?

 Why do we care what parents in intact families spend on their children?  We might think it tells us  how much money the CP needs to provide the child with the living standard enjoyed by the intact family  If that purpose, we should measure  all parental expenditures that

confer a benefit on the child

 Question: What did PSI measure?

55

Which expenditures?, continued

What PSI measured

 The numbers in the current support grid are based on a measure of what  The average

intact

family  With the same parental incomes as the parents  And the same household composition  Spends  But

which

expenditures of that family?  Answer: the

marginal child expenditures

56

HOW ARE CHILD OUTLAYS DEFINED?

From PSI Report, Pg. 6 57

What Are the Marginal Expenditures?*

4000 3500 3000 2500 2000 1500 1000 500 0 Couple 1 child 2 children 3 children Food Toys, Clothes Utilties Rent Cars Total

*Illustrative (not actual data) 58

Effect of Marginal Expenditure Measure: Two Examples

 Assume family earns and spends $3000 monthly, two parents and one child  Assume the

marginal

expenditures on the child are $500 —the extra amount they spend on account of the child.  This is 17%, the Wisconsin figure  For Income Shares, it would become the “basic support obligation”  Example 1: Dad and Mom both earn $1500  Example 2: Dad earns $2500, Mom $500 59

Marginal Expenditure Examples

     Example 1: Mom and Dad each earn half, each responsible for half the $500, or $250 After support payment  Mom and child have $1500 + $250 = $1750  Dad has $1500 - $250 = $1250  Both worse off, but probably about equally worse off Example 2: Mom earns $500, and Dad earns $2500 Dad pays Mom 25/30 or 5/6 or $417 So after payment  Mom and child have $500 + $417 = $917  Dad has $2500 - $417 = $2083  Dad is doing fine, Mom and child in deep DD 60

Why Marginal Expenditure Yields This Result

   Allocating marginal expenditures works when both parents have the base income If parent’s incomes are very disparate, the low-income CP Mom lacks the base   Support pays for the extra bedroom, but she can’t buy the rest of the apartment Dad retains

all

of his contribution to intact family’s base expenditures —and continues to enjoy it If Dad’s income is much lower, even his share of the marginal expenditures may be very high burden 61

How Are Marginal Expenditures Estimated?

 This is the

implementation

issue  Is there an established way to estimate marginal expenditures?

 No  How did PSI do it?

62

From PSI Report, Pg. 6

63

Source of Equivalence Table

Two

equivalence scales

used 

Engel

: families are equivalent when the same

percent

groceries of their outlays go to 

Rothbarth

: Adults equivalent when spending same

amount

on adult items  The two estimators yield different results, and there is no way to test either. We use Rothbarth 64

How Does Rothbarth Work?

    Assume we have a couple who spend $50,000 a year. We want to know their marginal expenditures on their child We find that the

average

couple, with one child who spend $50,000 a year, spend $1,000 on

adult goods

.

We find the

average

childless couple that spends $1000 on adult goods  Assumption: their living standard is equivalent If that childless couple’s

total expenditures

are $40,000, then the first couple’s marginal expenditures on child are  $10,000 (50,000 less 40,000) 65

Rothbarth Problems

 Only data is CES (more on that later)  No data on “adult expenditures” except for expenditures on alcohol, tobacco, and adult clothes  Alcohol and tobacco self-reporting off, and potentially odd  Adult clothing cost about $1400 for households with income of $65,000 (2 %).  Slight errors in the report have big effect here 66

More on CES Data

 Estimators require data linking income, expenditures, and family composition  Only such data is the CES  Data collected from panels interviewed every three months  Do panel members accurately report their income and outlays?  No  Both Underreporting and over-reporting 67

Income Underreporting

 Problem well-known among economists  Affects lower incomes especially  Lower

half

income report expenditures in excess of  PSI recognizes this but has no solution 

Likely effect:

increase child outlay estimates at lower income levels 68

Expenditure Underreporting

   Particular problems in higher incomes Indicator: implied savings rate implausible Households from $70 to $90,000 gross: 10,900 55,240 66,121

Average Net Income All Expenditures* Implied Savings

*Expenditures include pension plan contributions 69

Expenditure underreporting, cont



Likely Effect:

lowers estimate of child expenditures at upper income levels  To 21 % of net income, from 38% at lower income levels, Conclusion: Data Problems  yield regressive child support schedule  Cast doubt on Rothbarth measures 70

Why the recent decline in Expenditure Estimates at High Incomes?

 Change in parental values? Upper income parents spending less on their children?

 Costs of children’s goods gone up more than the goods in general?

 Or an artifact of the data problems (E.g., increase in high income underreporting?) 71

Summary

    Current guidelines have rapidly declining rates This rates structure produces problematic results when parents have disparate incomes   Seem inconsistent with likely goal of protecting child well-being Seem wrong to Pima County respondents We get these rates arise from a method that  Inexplicably assumes support should be based on marginal expenditures in intact families  Necessarily relies on problematic data to estimate marginal rates Conclusion: we ought to use a different method 72

Summary, continued

 Our real task is not to estimate marginal expenditures on children in intact families that no longer exist or never existed  It is rather to set support rates that properly balance the competing policy concerns  Child well-being  Avoid gross disparities  Fairly allocate Support Burden Between Parents  Avoid impoverishing obligor 73

Overview: Four Parts

     What

do

our current guidelines really do?

A look at the numbers they produce What

should

the guidelines do?

   Some possible principles What principles are favored by Arizona citizens How do they compare to current reality?



Why

do the current guidelines do what they do?

Examining the theory of current guidelines, and  why it necessarily produces these results What is the alternative?

 How could we do them differently?

74