Evaluating Support Guidelines

What They Do, and How They Came to Do It

New Jersey Legal Services Annual MeetingNovember 21, 2006

IRA MARK ELLMAN, Sandra Day O’Connor College of Law Arizona State UniversityTara O’Toole Ellman Private Consultant

Outline

Arizona’s Guidelines as ExampleHow 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 ANIMATIONArizona's Basic Child Support Obligation Table (Dollars per Month)

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$0 $4,000 $8,000 $12,000 $16,000 $20,000

Parents' Combined Monthly Gross Income ($)

Co

mb

ined

Su

pp

ort

Ob

lig

ati

on

($/m

on

th)

1 child

2 children

3 children

4 children

5 children

6 children

Source: "Arizona Child Support Guidelines Adopted by the Arizona Supreme Court Effective January 1, 2005" URL: www.supreme.state.az.us

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

Arizona's Basic Child Support Obligation Table (Dollars per Month)

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$0 $4,000 $8,000 $12,000 $16,000 $20,000

Parents' Combined Monthly Gross Income ($)

Co

mb

ined

Su

pp

ort

Ob

lig

ati

on

($/m

on

th)

1 child

2 children

3 children

4 children

5 children

6 children

Source: "Arizona Child Support Guidelines Adopted by the Arizona Supreme Court Effective January 1, 2005" URL: www.supreme.state.az.us

CHART 2 SUPPORT RATES

The support rate Dad pays on his income depends onthe parents’ combined income.

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

Total support obligation divided by combined income

CHART 2 CONTINUEDSupport 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 high at low incomes, fall steeply

as income rises

Plummet at $4200 Low at high

income, fall slowly above

$8100

The Effects of Falling RatesDads 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

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

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

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

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

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 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 $1000IN THREE SITUATIONS (ONE-CHILD)

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%

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

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

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

ParentsSimilar Incomes, Similar OutcomesBig 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 familyOf the same total size as our separated

familyAnd 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 measuredhow good is our measure?

The Method’s Implementation

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

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)

Use of Marginal Expenditure is a Child Support Policy ChoiceChild Support Amounts

Necessarily Involve a Tradeoff BetweenNCP’s desire to avoid support of

CPChild’s claim on NCP Support

A Marginal Measure Yields Where Parents Are Equal Earners

Both Have Base ExpendituresAllocation 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 intactNot what separated families need nowSome expenditures excluded to define

“consumption” Looks for measure of marginal outlay

Works fine for Equal Earning ParentsFavors 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 usedEngel: 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 themPSI 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? NoBoth Under-reporting and over-reporting

Income Underreporting Problem well-known among economists Lower half report expenditures in

excess of income PSI solution:

ignore excess expendituresLower 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:

66,12155,240

10,900 Average NetIncome

All Expenditures*

Implied Savings

*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

ParentsConsultant’s Task: estimate marginal

expenditures on child in intact families

Conclusions 2 & 3

Method used to pursue mistaken task is conceptually flawedRelies on arbitrarily chosen estimator

Conceptually flawed method relies on flawed data that yields regressive support table

Summary Conclusion

Consultant currentlyEmploys bad dataTo implement a conceptually

flawed methodOf determining an irrelevant fact

We should probably do something different