Evaluating Support Guidelines What They Do, and How They Came to Do It New Jersey Legal Services Annual Meeting November 21, 2006 IRA MARK ELLMAN, Sandra Day O’Connor College of Law Arizona State University Tara O’Toole Ellman Private Consultant

Outline Arizona’s Guidelines as Example  How to Tell What They Do Analysis: Why Do They Do It?  How Does the Consultant Generate the Numbers?  Why Does This Method Yield These Results?

CHART 1 ANIMATION POVERTY US MEDIAN HH 80TH PERCENTILE HH 95TH PERCENTILE

HOW MUCH MONEY.. HOW MUCH MONEY PEOPLE MAKE Some useful reference points: Poverty level for 2-adult, 1-child household: $1,207 Median income for all US households: $3,550 80th Percentile for all US households: $7,001 95th percentile for all US households: $12,500 All above in dollars per month in 2002

CHART 1 BASIC TABLE

CHART 2 SUPPORT RATES The support rate Dad pays on his income depends on the parents’ combined income. Total support obligation divided by combined income

CHART 2 CONTINUED Rates high at low incomes, fall steeply as income rises Plummet at $4200 Low at high income, fall slowly above $8100

The Effects of Falling Rates Dads with the same income pay different rates.  Mom’s rising income lowers Dad’s rate, not just his dollar amount. Is this reasonable? A policy choice on which people may differ.

SUPPORT RATE EXAMPLES Examples: Dad earns $3,000, mom earns nothing: Dad pays 20% or $600 Dad earns $3,000, mom also earns $3000: Dad pays 14% or $420

POVERTY LEVELS Comparing Outcomes Across Households: Difficult A common method uses official poverty level One adult and one child = $1,033. Household at $2,066 is at 200% poverty level An imperfect measure, but often used Good measure for lower income families Simple to understand.

CHART 3 INTRO MIDDLE INCOME Mom’s Income Share Situation: Middle Income Household with One Child Intact family was at 300% of poverty level Possible outcomes for Mom and Child BEFORE payments. Outcomes AFTER payments

CHART 5 LOW INCOME MOM Mom earns 30% of combined income, or $1065, near poverty level. After $468 payment, Mom and Child at 150% of poverty Payment helps, but not nearly enough to restore old living standard. Situation: Low income Mom from a middle-income intact household.

INCOME SHARES Outcome Comparisons Show: Child’s Living Standard Depends Mainly On Custodial Parent Income

LOW INCOME MOM A LOW INCOME MOM EARNING $1000 IN THREE SITUATIONS (ONE-CHILD)

HCART 4 TWO CHILDREN Keeps middle class life style with high earning Mom. Falls near poverty with low earning Mom. How two middle- class children can have very different outcomes: Conclusion: Where noncustodial parent earns the majority of income, our guidelines do not protect children from large declines in living standard when their parents separate.

Conclusions Child’s Living Standard Depends on CP $ If CP Earns Much Less Than NCP, Child’s Living Standard Is Much Less than Marital Parents  Similar Incomes, Similar Outcomes  Big Income Difference, Big Outcome Difference

Part II: How Did It Get This Way? How Does Consultant Generate These Numbers? Why Does His Method Yield These Results?

Method: Initial Overview Try to Measure How Much  The average intact family  Of the same total size as our separated family  And the same total parental income  Spends on their children Obligor Pays Proportionate Share Q: Why Does This Method Yield Such Problematic Results?

The Answer Depends Upon The definition of child expenditures  what number does consultant seek? The Method’s Concept How, so defined, are they measured  how good is our measure? The Method’s Implementation

HOW ARE CHILD OUTLAYS DEFINED? From PSI Report, Pg. 6

What Are the Marginal Expenditures?* *Illustrative (not actual data)

Use of Marginal Expenditure is a Child Support Policy Choice Child Support Amounts Necessarily Involve a Tradeoff Between  NCP’s desire to avoid support of CP  Child’s claim on NCP Support

A Marginal Measure Yields Where Parents Are Equal Earners  Both Have Base Expenditures  Allocation of Marginal Expenditures Protects Both the Child and the NCP Where NCP Earns Much More  CP and Child Both Lack the Base: Where CP Earns Much More  Child and CP Are Better Off than NCP Before receipt of support payments

 Children and Custodial Parent Are One Household and Share a Living Standard  Compromise therefore necessary between two valid claims:  1. Child Support must be adequate to provide child with an appropriate living standard  2. Child Support should benefit the child and not the custodial parent  Marginal Measure Weights Claim 2 Basic Policy Choice:

Expenditure Definition: Summary Backward Looking, Not Forward  Asks what families spent when intact  Not what separated families need now  Some expenditures excluded to define “consumption” Looks for measure of marginal outlay  Works fine for Equal Earning Parents  Favors Higher Earning Parent When Incomes are Disparate.  Does not consider child’s outcomes Next: Do we measure it accurately?

Part II: How Did It Get This Way? How Does Consultant Generate These Numbers? Why Does His Method Yield These Results? So far: How the Definition Yields Poor Outcomes for Poor CPs, even with NCPs with Higher Incomes Now: Impact of the Implementation: Measuring Marginal Expenditures

Accuracy of Measure: 2 Issues Is the Measurement Method Sensible? Do We Have the Data Needed to Do It? First, the method

From PSI Report, Pg. 6

Source of Equivalence Table Two living standard estimators used  Engel: families are equivalent when the same percent of their outlays go to groceries  Rothbarth: Adults equivalent when spending same amount on adult items

Points to Ponder Different estimators reach very different results: see NJ PSI report pg II-6. No empirical basis for choice between them  PSI chooses Rothbarth because its results match Betson’s intuition that Engel too high. Pg II-7. Now to the data

CES Data Links income, expenditures, and family composition Panels interviewed every three months Do panel members accurately report their income and outlays?  No  Both Under-reporting and over-reporting

Income Underreporting Problem well-known among economists Lower half report expenditures in excess of income PSI solution:  ignore excess expenditures  Lower half spends 100% of their income Likely effect: increase child outlay estimates at lower income levels (because they are really higher income)

Expenditure Underreporting Particular problems in higher incomes Indicator: implied savings rate implausible Households from $70 to $90,000 gross: *Expenditures include pension plan contributions

…Expenditure underreporting Likely Effect: child expenditure estimate declines as income rises  In NJ, for 2 Children: Declines to 19 % of net income, from 38%, Pg II-11 Conclusions: Data Problems  Yield regressive child support schedule  Cast doubt on Rothbarth measures

Why the recent decline in Expenditure Estimates at High Incomes? Change in parental values? Upper income parents spending less on their children? Cost of children’s goods (neighborhoods?) gone up less than the goods in general? Or an artifact of the data problems (E.g., increase in high income underreporting?)

Conclusion 1 Current approach misconceives task  Real task: guidelines that properly balance competing policy concerns Child well-being Fair allocation of Support Burden Between Parents  Consultant’s Task: estimate marginal expenditures on child in intact families

Conclusions 2 & 3 Method used to pursue mistaken task is conceptually flawed  Relies on arbitrarily chosen estimator Conceptually flawed method relies on flawed data that yields regressive support table

Summary Conclusion Consultant currently Employs bad data To implement a conceptually flawed method Of determining an irrelevant fact  We should probably do something different