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

2. 2 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?

3. 3 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.

4. 4 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

5. 5 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

6. 6 Rates start high, fall steeply Plummet at $4200 Low and slowly falling above $8100 Arizona Support Rates, 2005 Guidelines

7. 7 Arizona & Wisconsin Rates, 1 Child

8. 8 Arizona & Wisconsin Rates, 2 Children

9. 9 Arizona & Wisconsin Rates, 5 Children

10. 10 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. 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

11. 11 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 Compare Two Moms Who Both Earn $500 1. Dad earns 1000: pays 22% or $220 2. Dad earns 7000: pays 12% or $840 What is the impact of this result?

12. 12 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”

13. 13 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

14. 14 Some Monthly Income Benchmarks Poverty level 2002 2007 2-adult, 1-child household: $1,207$1,391 “200 % Poverty” $ 2,414$ 2,782 Single person $ 780$ 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

15. 15 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

16. 16 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.

17. 17 Three Moms with 1 Child Each Earns $1000 Why Doesn’t Higher Income Dad Help More? Answer: Rates Fall as Dad’s Income Rises Low Income Dad High Income Dad

18. 18 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.

19. 19 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?

20. 20 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

21. 21 1. Measurable Child Well-Being The solid or the dashed line?

22. 22 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?

23. 23 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. Well-Being, continued

24. 24 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

25. 25 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

26. 26 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

27. 27 Gross Disparity, continued 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 Two Possible Gross Disparity Principles

28. 28 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”

29. 29 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 EPP continued

30. 30 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?

31. 31 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

32. 32 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

33. 33 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

34. 34 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

35. 35 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.

36. 36 Low income mom High Income mom 1.Three lines, not 1—Mom’s income matters and POOI implicitly rejected 2.Rates on Dad’s income higher when Mom’s income lower Respondents’ Average Support Function

37. 37 Lesson One Respondents agree that as Mom’s $ ↓ Dad should pay more in dollars, and The rate applied to Dad’s income should go up 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

38. 38 Support Payment as Percent of Dad’s Income Mom’s Income is $1,000 monthly

39. 39 Support Payment as Percent of Dad’s Income Mom’s Income is $3,000 monthly

40. 40 Support Payment as Percent of Dad’s Income Mom’s Income is $5,000 monthly

41. 41 Rate Rules MethodAs Mom’s Income Rises As Dad’s Income Rises POOIUnchanged Income SharesGo Down Pima County Citizens Go DownUnchanged

42. 42 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 $ ?

43. 43

44. 44

45. 45

46. 46 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?

47. 47 Middle Cell: Identical Top Row (Poor Moms): Public wants higher amounts Bottom Row (Comfortable Moms) Public wants lower amounts

48. 48 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?

49. 49 Mom has $5000 Mom has $3000 Mom has $1000

50. 50 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

51. 51 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?

52. 52 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?

53. 53 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

54. 54 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

55. 55 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?

56. 56 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 Which expenditures?, continued

57. 57 HOW ARE CHILD OUTLAYS DEFINED? From PSI Report, Pg. 6

58. 58 What Are the Marginal Expenditures?* *Illustrative (not actual data)

59. 59 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

60. 60 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

61. 61 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

62. 62 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?

63. 63 From PSI Report, Pg. 6

64. 64 Source of Equivalence Table Two equivalence scales 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 The two estimators yield different results, and there is no way to test either. We use Rothbarth

65. 65 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)

66. 66 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

67. 67 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

68. 68 Income Underreporting Problem well-known among economists Affects lower incomes especially Lower half report expenditures in excess of income PSI recognizes this but has no solution Likely effect: increase child outlay estimates at lower income levels

69. 69 Expenditure Underreporting Particular problems in higher incomes Indicator: implied savings rate implausible Households from $70 to $90,000 gross: *Expenditures include pension plan contributions

70. 70 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

71. 71 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?)

72. 72 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

73. 73 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

74. 74 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?