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

Understanding Child Support Guidelines

Presentation to the Arizona Child Support Guideline Committee

June 27, 2008

© 2008Ira and Tara Ellman

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

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

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

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

Support Obligation as a Proportion of Combined Income

0.00

0.10

0.20

0.30

0.40

0.50

0.60

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000

Combined Monthly Gross Income

Pro

po

rtio

n o

f C

om

bin

ed

In

co

me

1 2 6Children

Rates start high, fall steeply

Plummet at $4200

Low and slowly falling above $8100

Arizona Support Rates, 2005 Guidelines

7

Arizona & Wisconsin Rates, 1 Child

Support Obligation as a Proportion of IncomeFor One Child

0.00

0.10

0.20

0.30

0.40

0.50

0.60

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000

Monthly Gross Income

Pro

port

ion

of In

com

e

AZ wisc. average rate

8

Arizona & Wisconsin Rates, 2 Children

Support Obligation as a Proportion of IncomeFor Two Children

0.00

0.10

0.20

0.30

0.40

0.50

0.60

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000


Pro

port

ion

of In

com

e

AZ wisc average rate

9

Arizona & Wisconsin Rates, 5 Children

Support Obligation as a Proportion of IncomeFor Five Children

0.00

0.10

0.20

0.30

0.40

0.50

0.60

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000


Pro

port

ion

of In

com

e

AZ Wisc. Average Rate

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.

SUPPORT RATE FOR ONE CHILD

$500 $1,000 $3,000 $7,000Custodial Income

$0 n.a. 0.23 0.20 0.13$500 0.23 0.22 0.19 0.12

$1,000 0.22 0.21 0.18 0.12$2,000 0.20 0.20 0.16 0.11$3,000 0.19 0.18 0.14 0.11$4,000 0.17 0.16 0.13 0.11$5,000 0.15 0.14 0.12 0.10$6,000 0.14 0.13 0.11 0.10

Non-Custodial Parent's Income

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

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

$500 $1,000 $3,000 $7,000Custodial Income

$0 n.a. 0.23 0.20 0.13$500 0.23 0.22 0.19 0.12

$1,000 0.22 0.21 0.18 0.12$2,000 0.20 0.20 0.16 0.11$3,000 0.19 0.18 0.14 0.11$4,000 0.17 0.16 0.13 0.11$5,000 0.15 0.14 0.12 0.10$6,000 0.14 0.13 0.11 0.10

Non-Custodial Parent's Income

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

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

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

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

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)

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Custodial Parent's Share of Combined Income

Perc

en

t o

f P

overt

y L

evel

Custodial HH before pmts

Custodial HH after pmts

Intact HH

100 pct of poverty level

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

CHART 5 LOW INCOME MOMRANGE OF CUSTODIAL HOUSEHOLD OUTCOMES

EXAMPLE OF ONE-CHILD FAMILY WITH $3550 COMBINED INCOME(MEASURED AS PERCENT OF POVERTY LEVELS)

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0


Perc

en

t o

f P

overt

y L

evel



Intact HH


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

Three Moms with 1 Child Each Earns $1000

NON-CUST INCOME $

SUPPORT RATE

SUPPORT PAYMENT

$

CUST. PCT POVERTY

NON-CUST. PCT

POVERTY

LOW INCOME

Combined $1500 500 22% 110 107% 50%

MIDDLE INCOME

Combined $3500 2500 19% 471 142% 260%

HIGH INCOME

Combined $7000 6000 13% 781 173% 668%

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

Low Income

Dad

High Income

Dad

18

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

(MEASURED AS PERCENT OF POVERTY LEVELS)

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0


Perc

en

t o

f P

overt

y L

evel



Intact HH


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



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?

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

1. Measurable Child Well-Being

A

B

The solid or the dashed line?

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

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 60th to 80th 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

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

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

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

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

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

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






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

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

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

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

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

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

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

5%

10%

15%

20%

25%

30%

2 4 6Dad's Income in Thousands

SurveyMeans

ArizonaGuidelines

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

39

5%

10%

15%

20%

25%

30%

2 4 6Dad's Income in Thousands

Survey Means

ArizonaGuidelines


40

Support Payments As Percent of Dad's Income: CP Income is $5000

5%

10%

15%

20%

25%

30%

2 4 6

Dad's Income in Thousands

SurveyMeansArizonaGuidelines


41

Rate Rules

Method As Mom’s Income Rises

As Dad’s Income Rises

POOI Unchanged Unchanged

Income Shares Go Down Go Down

Pima County Citizens

Go Down Unchanged

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

Child Support PaymentsCP Income $1,000

100

300

500

700

900

1100

1300

0 2 4 6 8

Non Custodial Parent Income

Su

pp

ort

Paym

en

t

surveymedian

Guidelines

Survey25thPercenttile

44

Child Support Payments:CP Income $3000

100

300

500

700

900

1100

1300

0 2 4 6 8

Non Custodial Parent Income

Su

pp

ort

P

aym

en

t

surveymedian

guidelines

Survey 25thPercentile

45

Child Support Payments:CP Income $5000

100

300

500

700

900

1100

1300

0 2 4 6 8

Non Custodial Parent Income ($000)

Mo

nth

ly S

up

po

rt P

aym

en

t ($

)

surveymedian

guidelines

Survey 25thPercentile

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

Iowa Support Amounts Compared to Respondents’ Preferred Amounts

CP Income

↓

NCP Income

→

2000 4000 6000

Survey 1000

Iowa

461

456

956

804

1451

1122

Survey 3000

Iowa

379

404

748

748

1117

966

Survey 5000

Iowa

298

374

541

668

784

954

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

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

Child support by gender of respondent

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

2,000 4,000 6,000

Dad's Income

Ch

ild

Su

pp

ort

cp 5,000 males cp 5,000 females cp 3,000 males cp 3,000 females cp 1,000 males cp 1,000 females

Mom has $5000Mom has $3000

Mom has $1000

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






52

What Current Guidelines Are Notor, 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

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

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

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

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

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

58

What Are the Marginal Expenditures?*

0

500

1000

1500

2000

2500

3000

3500

4000

Couple 1 child 2 children 3 children

Food

Toys, Clothes

Utilties

Rent

Cars

Total

*Illustrative (not actual data)

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

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

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

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

From PSI Report, Pg. 6

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

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

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

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

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

Expenditure Underreporting

Particular problems in higher incomes Indicator: implied savings rate implausible Households from $70 to $90,000 gross:

66,12155,240

10,900 Average NetIncomeAll Expenditures*

Implied Savings

*Expenditures include pension plan contributions

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

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

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

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



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


Documents

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