Family finances under familism

My blog suggestion yesterday that ‘working couples with children’ deserve ‘much less’ welfare assistance attracted some questioning in the post’s comments. NPOV asks

is this from the starting point that you believe almost everyone deserves “less”, and couples with children deserve “much less” because they already get more than everyone else?

Certainly my starting point is the classical liberal one that people are entitled to keep their earnings unless there is some strong reason to tax it away from them. Among the reasons given for taxing, redistribution of cash to families seems to me to be among the weakest. It is not specifically aimed at meeting any need that is generally agreed upon, such as for education or healthcare. It is given to people with incomes that are well above average, who are quite capable of giving their children food, clothing and shelter without any outside help at all.

Though some family welfare meets genuine needs, much of it is redistribution between family types irrespective of need. Recent years have seen a significant improvement in the financial position of families relative to single people and couples without dependent children (though people in the latter still generally have the most to spend on themselves).

This can be seen in the equivalised disposable income measures in the ABS Household Income and Income Distribution survey. What equivalised income measures do is try to account for the fact that the number of people in the household affects living standards. Though there are economies of scale in living together, it recognises that children and non-working adults add expenses to the household. Obviously there are contestable assumptions here, such as what weight to give each household member. But the process gives us a way of comparing the financial position of different kinds of households.

For example, in the 2000-01 survey a couple with their eldest child under 5 had a median equivalised disposable income of 78.5% of a lone person under 35. The family’s median gross income was 59% higher, but the extra mouths add expenses so equivalised income is lower.

By the time of the 2005-06 survey things had changed a lot. The couple with their eldest child under 5 had increased their gross earnings advantage to 91% more than that of a single person under 35. Their equivalised earnings were now slightly above that of the lone person, though only by 1%.

Similarly, the family with young children has improved its position relative to couples without children aged under 35. In 2000-01, the loss of some or all of the mother’s income and one or more extra mouths to feed meant that in equivalised terms the family’s median income was only 61% of that of the childless couple. By 2005-06, this had increased to 75%.

This is not all due to welfare changes – more women working and general prosperity contributed. But the Howard government’s familist policies certainly would have played a part.

The logic of the familist position, in combination with entitlement feminism, seems to me to be that people should suffer no financial disadvantage from having kids. If the baseline is younger couples we are not there yet. But already young families have pulled ahead of young singles living alone in equivalised terms, despite the former’s higher expenses.

Even for egalitarians, these trends should be of some concern: that too much is going to people who are already relatively well off in financial terms, simply because they decide to add to their emotional well-being and spend some of their money on children. Though the public’s view of these things is not based on any intellectual egalitarianism or classical liberalism, the support for means testing of family benefits revealed in yesterday’s Newspoll suggests that there is something counter-intuitive about welfare for the affluent, even where kids are involved. I’m I hard person to impress where Commonwealth budgets are concerned, but I think I will like the small steps away from family welfare to be announced this evening.

32 thoughts on “Family finances under familism

  1. I don’t accept the position “people should suffer no financial disadvantage from having kids”, but, as I’ve said elsewhere, no do I accept it’s fair that the entire burden of raising the next generation, which is obviously critical to the continuing function of our society and the economy, should fall on the parents. Like most things in life, it’s about striking a reasonable balance. Health and schooling are already very heavily subsidised, so I think a case can be made that there isn’t much need for large payments to parents, except in cases where parents are obviously struggling to afford providing for their kids. On that basis, I’d probably argue for a very minimal per-child non-means-tested payment designed to partly cover the unavoidable costs of food and clothing that children bring. For special needs children, or parents that are unable to work for various reasons, extra payments would be justifiable.
    I’m not sure if that qualifies as couples with children receiving “much less” support than they do now.

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  2. Oh, also, regarding your “people are entitled to keep their earnings” – surely the vast majority of couples receiving the baby bonus are net tax payers, so the baby bonus is just a “hand-back”? In other words, if anything it would be better to give every tax-paying couple $5000 every few years, no matter what. Of course, it would be better still to scrap the bonus and reduce income tax rates correspondingly. But “scrapping the bonus” in and of itself actually decreases the percentage of earnings kept.

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  3. NPOV – While families with kids have higher market incomes than average, and therefore do pay a fair bit of tax, they are not on average net income tax payers. According to the most recent ABS figures, for 2003-04, they paid $325 a week in income taxes and received back $391 in benefits and social services.

    I agree that there is lifetime churn in all this, with only the affluent childless significant net losers. But in my view better to keep taxes low and avoid churn.

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  4. Your figures seemed a little unbelievable until I realised that $391 included the “in kind” value of public education. The total in cash is only $110 a week, meaning that their net taxation is $225 on average, or 15% of income. Couples without children earn $956 per week, receive $132 worth of cash benefits, and are taxed at $196, for net tax rate of less than 7%.
    If you leave out education, then couples with children receive somewhat less in total benefits (cash + in kind) than couples without children, despite earning more on average.

    So if you take the position that education is a public good, and therefore the cost of educating the next generation should be shared among all income earners, it’s not clear that couples with children do come out ahead.

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  5. That couples without children figure is no use for our purposes here, because there will be so many old age pensioners in it. It’s not ideal either, but the couple aged less than 35 a few pages on is a better comparison because they are of child-rearing age. They get negligible social welfare and pay $354 in taxes.

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  6. Yes, that does change the equation somewhat. What would be truly interesting is the average total life-time income, tax and benefits of all couples who have never had children, vs those that have.

    FWIW, on seeing how valuable the in-kind benefits are rated as, I’d support a system that gave no cash benefits to parents with kids except in cases of genuine need.

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  7. NPOV @ 6

    Why would you want to do that? And if you did, to whom would you allocate the taxes paid by the children as they became adults?

    Should the tax I have paid over my lifetime be reduced by the child related benefits (including schooling) my parents received for me? How does one reasonably calculate net tax across generations like this?

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  8. spog, no, I’m just interested in the average tax:benefit ratio for those who have children vs those who never have any. Certain childless people are fond of stating that they don’t see why they should be subsidising the choices of others to have children – but it would be good to see exactly, on average, how great this subsidy actually amounts to. If childless individuals on average earned less in their lifetime than those with children, then it would even be possible that those with children are actually subsidising those without (as in general, with progressive income tax, higher income earners subsidise lower income earners).

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  9. But, NPOV, what does having children have to do with earning more money? On your reasoning, if the only people who had children were rich, it would still make sense for the poor to pay parents’ child-raising expenses because the poor were in net terms better off by the existence of (rich) parents. I suppose it comes down to the assumption that being poor is not really a condition people choose whereas having children is.

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  10. “But already young families have pulled ahead of young singles living alone in equivalised terms, despite the former’s higher expenses. ”

    Andrew – I don’t quite understand what you mean by higher expenses, here. If it is the higher expenses consequent on living alone, that is surely what equivalising is supposed to do?

    This whole life cycle question is, to me, a critical one. Most of the childless couples contributing in net terms to the living standards of families with children either will be families with children in the future, or have been in the past. Perhaps that is why most people apparently have so little problem with the fact that, at any point in time, there is a net flow from the childless (which is a misnomer, really – it really means without co-resident dependent children) to those with children.

    I understand that there is a small and growing group of people who will be forever childfree, but I am not convinced at all that as a group they suffer lower living standards than people who do have children.

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  11. To be even more nit-picky, I’m not sure how informative it is to know how the average financial position of a single person living alone or a childless couple relates to the average financial position of a family with children. Surely, to know whether people are being treated fairly or unfairly it is important to have ‘all other things equal’.

    Given that government transfers (cash and non-cash) to families are unlikely at the level of the average family to go anywhere close to meeting the full direct costs associated with the children, it seems to me improbable that a family with children will be better off than a single person or a childless couple with the same level of income before taxes and transfers.

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  12. Having children has a lot to do with earning more money – the more money you earn, the more you can afford to have. Indeed, if we removed all family benefits, I would fully expect to see a pattern of lower-income families tending to have less children. OTOH, I don’t expect higher-income families to have much more children, because spending money and time on children precludes putting that money towards income-generating investments, and that time towards earning an income.

    Are there stats available for # children vs income in Australia?

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  13. This paper seems to roughly back my hypothesis: as of 1996, fertility was highest in the middle-income brackets. Though if anything it seems to be weighted slightly towared the lower-middle-income brackets – I’d suggest that without family benefits being paid, the highest fertility rate would be the middle-income bracket.

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  14. My take is slightly different, NPOV. If we had no general system of transfers to families with children, it is highly likely that we would still have an income support system that gave more money to people with children than to people without.

    In that world there would be two groups who could have as many children as they liked without suffering a significant reduction in their standard of living – the very rich and the very poor. It would be the ones in the middle who would be likely to limit the size of their families according to what they could afford.

    I don’t know if anyone has researched the link between income and number of children. It might be a bit difficult, I suspect, to control for all of the things you would need to control for, including whether the same income has the same real value in families with different numbers of earners.

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  15. And, of course, any analysis would need to control for people are in the life cycle. Remembering that ABS statistics about the number of children in the family relate only to the number of dependent children (that is, children under 15 and full-time students aged 15-24) who are currently living in the same household as their parents. They are not a count of the number of children in any given family.

    My understanding is that women are likely to have more children if they a) have less education b) live in the country and c) living in SA or Tas (among other factors that I can’t immediately recall). All of those things would be associated with having lower rather than higher incomes.

    I believe that couples on income support also have slightly more children on average, while single parents have fewer. But again, it is important to remember that point in time comparisons often don’t tell you all that much – the majority of single parents do not have any more children while they are single parents, but may subsequently have more children if they repartner (ie their period of single parenthood is effectively an interruption to their child bearing).

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  16. (FWIW, that paper actually argues quite forcibly that without any family benefits, our fertility would fall dangerously low. I’m not sure I entirely agree with that conclusion, given there’s plenty of scope for maintaining a stable population via immigration).

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  17. backroom girl, your “the poor could afford to have as many children as they liked without suffering a drop in their standard of living” statements assumes:

    a) no matter how many children you have, the benefits are enough to pay for their full cost – including the cost of upgrading to bigger houses
    b) continually having more children doesn’t reduce the opportunities to return to work (which surely it does)

    And even if it both those assumptions were true, it doesn’t imply that people will continue to have children knowing that their standard of living won’t fall, as surely most poor people are hoping to improve their standard of living. Of course, they may consider lots of children to be as valuable as more disposable income, but there’s not a lot of evidence that many Australians would do so.

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  18. Rajat, I’m certainly not suggesting it would still make sense for the childless poor to pay rich parents’ child-raising expenses were we in that hypothetical situation.
    The overarching prerogative is for subsidies to flow from those that can afford them to those that can’t.
    Family benefits only “make sense” as long as we have a situation where there isn’t a significant difference in income between childless couples vs those with children.
    And, at any rate, while I’m happy to put forward arguments why they “make sense”, I actually agree that those arguments aren’t a strong enough justification for them, especially given that the major cost of child-rearing, i.e. education, is already so heavily subsidised. If we had a fully private education model, then subsidies (e.g. vouchers) would definitely be required.

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  19. NPOV – these things are of course relative. But to the extent that the income equivalisation formula is similar to the one that is implicit in our structure of income support payments, then it goes without saying that adding an extra person to the household will not have a detrimental effect on the measure of living standards we are using here (ie equivalised income).

    I’m not really saying that there are lots of people on benefits who just keep on breeding no matter what – I’m really saying that people on middle incomes have a stronger financial incentive to limit the size of their families, because having children is likely to reduce their equivalised income (quite significantly if one parent gives up work or moves to part-time work).

    As to whether having more children reduced opportunities to return to work, no doubt it does, but that depends on there having been an intention to return to work in the first place. I suspect that mothers who don’t intend to return to work are likely to have more children than those who do intend to return to work, rather than the causality working the other way.

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  20. And of course, all of this discussion is actually just about income, rather than standard of living which is affected by many other things that vary significantly across households(eg the value of home production, but also additional costs various kinds).

    And let’s not forget the value of psychic income that parents get from their children, though the assumptions that this is something that affects all parents equally and is also to the relative detriment of non-parents seems to me a little far-fetched.

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  21. backroom girl, well it may be the case that those on middle incomes have a strong incentive to limit the size of their families, but that’s not what the stats seem to show.
    Those on middle incomes are actually the biggest breeders.

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  22. I’ll have to have a more detailed look at Peter McDonald’s paper, but unless it contains a proper regression analysis, I’m not convinced that you’re not just seeing a correlation between incomes in the middle of the life cycle and the period when children are most likely to be living at home.

    The other thing, of course, is that a consideration of financial incentives only takes you so far. People have children for all kinds of other reasons, but I suspect that for most people the biological desire to be a parent is probably just as well satisfied by having two children as by having four. And of course lots of people with larger families didn’t really do it on purpose, etc

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  23. Well there’s at least one shortcoming with his numbers – they’re 1996, when family benefits were presumably somewhat less generous. So it may well be that the numbers now are quite different. If they are, and since then the fertility of the lowest-income families has increased considerably, I’d say the benefits are definitely a bad idea, as it would mean that the next generation of Australian are more likely to have grown up in (relatively) low income families. Of course I could be cynical and suggest it may well have been Howard’s intention all along to breed a generation of battlers that would be more likely to be conservative voters. Of course that won’t help the Liberals much, because the ALP are no less conservative anyway these days.

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  24. “But already young families have pulled ahead of young singles living alone in equivalised terms, despite the former’s higher expenses. ”

    Andrew – I don’t quite understand what you mean by higher expenses, here. If it is the higher expenses consequent on living alone, that is surely what equivalising is supposed to do?”

    I meant the higher expenses of having kids. From memory, a young child is classed as 0.3 of the single person in terms of added expenses to the household. So in order for the household with the child to have the same living standard as the household without the child they would need to earn/receive significantly more than the single household, which in fact they now do. Though people with kids have more expenses, they have virtually the same disposable income as a single person.

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  25. You know I don’t think that that was ever Howard’s intention at all. I think he really sincerely believed that deep down most women just want to be at home with their children and that pushing more money their way would “help” them have as many children as they wanted.

    It’s just that he totally miscalculated the amount that you would actually have to give middle-income families in order to significantly change their behaviour. Women who understand the direct and opportunity costs associated with having children were never going to start popping them out in return for the Baby Bonus and a bit of extra FTB.

    It certainly would be interesting to know whether and how the socioeconomic profile of mothers has changed over the past 10 years. But I would go for more reliable indicators of SES, like education and occupation, rather than simply income.

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  26. Sorry Andrew, I really did get things the wrong way around, didn’t I? My apologies.

    I stand by my more substantial nitpick though – that comparing the average household in each group (even if in terms of equivalised income) is not necessarily all that meaningful.

    And my previous comment was meant for NPOV of course.

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  27. BG – I think the lone person data is likely to include people who are on average younger than those with children under 5, so there is likely to be some age effect.

    But I think there are issues here, with a growing minority missing out not just on jobs and money, but also relationships and families. Bob Birrell has been tracking this for some time. Public policy, however, is increasingly rewarding those who whose lives have in fact already turned out well – members of intact families. Of course I am not a philosophical egalitarian, but I think even people who are should have good reason to question this.

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  28. b. girl – no I don’t think that was Howard’s motive either: again, to be cynical, it assumes he cared enough about the long-term future of the Liberal party to implement such expensive policy. You may be right that it was largely his desire to allow women that wanted to stay at home do so. But if so it wasn’t communicated very well – to be honest we were quite surprised when we realised how much in FTB we would get. My wife had already made the decision not to work full-time anyway, purely because on my income we could afford it. The baby bonus and FTB certainly had no bearing on it.

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  29. Indeed, NPOV, you and your wife represent what in technical terms is known as the ‘deadweight’ cost of policy initiatives (ie the cost of paying people whose behaviour doesn’t change one iota). Most people regard deadweight cost as simply money down the drain.

    While I think it is true that the Baby Bonus would cause very few people to deliberately have more children than they would have had anyway, there have possibly been other behavioural changes. For example, the availability of additional assistance may enable people to start their families earlier than they otherwise would have. And to the extent that they do that, some could end up having more children in total just by having more time in which to complete their families. But I agree that the effect would be pretty marginal in aggregate and all of the evidence suggests that this is the case.

    On the other hand, I am pretty uncomfortable with the very idea of providing a positive financial incentive for people to have more babies. This is because I’m not sure that people who would respond to such an (in the end, fairly minimal) incentive are the best people to be encouraging to have more children. As we have discussed, they almost certainly would not be drawn from the higher parts of the income distribution.

    To me though I think that changing people’s behaviour one way or another is hardly ever the best rationale for any policy intervention. I tend to think of behavioural outcomes as the necessary consequences of policies that you implement for other reasons. So if the purpose of the Baby Bonus is to compensate mothers for various costs associated with giving birth to the next generation, because you (society) think that is worthy of compensation, then it can be evaluated in those terms as success or failure. And in the process you can take account of behavioural side-effects, both good and bad.

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  30. Actually, paying people to do something they would already do is not a deadweight loss. It is a wealth transfer. After all, the money paid to NPOV and his wife does not disappear. A deadweight loss arises when people respond to inefficient incentives, such as prices being above or below efficient levels. Having said that, raising taxes to fund transfers does impose an excess burden (ie deadweight loss).
    As for changing people’s behaviour through policy, presumably that is the whole idea behind carbon taxes.

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  31. Rajat, I guess I was thinking specifically about income transfer policies rather than policy more generally. And I used the term deadweight cost, rather than deadweight loss. As I understand it, and I am not an economist so don’t quote me, if the objective of a policy is to change people’s behaviour but most of the people to whom the policy is applied don’t change their behaviour, then the money that is transfered to them is money that didn’t need to be spent in the first place. If deadweight cost isn’t the right term, I’m sure there is another one.

    I guess the point I have been belaboring all along has been that it was never very likely that the Baby Bonus would result in lots more middle-class babies born and it was always conceivable that is would result in more babies born into less than ideal family environments. But, if you simply want to compensate mothers in some sense for the additional costs they incur as a result of having children you can do that, without having any specific behavioural goals in mind. I don’t think the baby bonus is the best-designed policy to achieve that objective though.

    It is worth remembering though that the only reason that we have a Baby Bonus was that the previous government didn’t want to implement any kind of paid maternity leave safety net for the group of women who clearly did forgo income in order to stay home with their newborn babies.

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  32. Well, there’s certain an administrative loss – it would have been presumably cheaper to simply not take the tax from us in the first place just to give it back to us again!
    Indeed, it’s not clear why we can’t simply declare dependents as a tax-deduction, ideally when we fill out our PAYG forms.

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