Data and Construction of Economic Table

1. Data and Construction of Economic Table Washington Child Support Group December 2007 Session I

2. Topics • Quick Review of Past Session • Data -- Consumer Expenditure Survey • Constructing the Economic Table • Segue to Second Session

3. Quick Review • Income Shares Model -- Normative Standard is to continue the spending the children at a level consistent with would had be spent if the family remained intact. • Implementing the Income Shares Model • Allocating total spending of the family to the children: USDA, Engel, and Rothbarth Methods • USDA and Engel provide very close estimates • Rothbarth and Engel provide lower and upper bound for the estimates of child rearing costs • Moving from Net Income to Spending on Children other than child care and excessive medical expenditures

4. Implementing Rothbarth • Need to be able to estimate the relationship between spending on Adult Goods, Total Spending and the number of children • Sample size and the variability of levels of total spending and number of children will be important • Definition of adult goods: Broad (clothing, alcohol, tobacco, entertainment, savings) or Narrow (clothing) may influence our ability to estimate precisely the needed relationships Adult Goods No Children 1 child AG Spending on Children TS Total Spending

5. Consumer Expenditure Survey • A nationally representative sample of consumer units (families) collected to understand how Americans consume. Its main statistical function is to provide information to update the budget share weights used in the Consumer Price Index. • Only US survey aimed at how Americans spend. • Each consumer unit is interviewed five times, once to collect background information then four times more to collect information on expenditures during the quarter, current family members, and income • My research examines annual expenditures and consequently I have restricted my sample to those units with at least three quarterly interviews.

6. 2006 Report • Data was from the 1st quarter of 1998 through the 1st quarter of 2004 (most recently available data is through the 4th quarter of 2005). • Sample Restrictions: • Must contain a married couple between the ages of 18 and 60 years old • The unit does not have any other adults (18+) living in the unit even if the member is an adult child of the married couple. • Distribution of Sample: Number of Children: 0 1 2 3 4 5+ 3,338 1,778 2,611 1,116 311 91

7. Distribution of Total Spending(July 2003 Dollars) Number of Children 0 1 2 3+ Average Expenditures $44,728 $46,140 $49,834 $48,341 Expenditure at 5th percentile $15,553 $15,766 $18,493 $17,170 25th percentile 27,270 27,916 31,275 28,440 50th percentile 38,759 40,175 44,460 42,248 75th percentile 54,854 57,837 61,934 59,600 95th percentile 93,265 94,340 97,562 102,247 To put in $2007 (October), multiple the above numbers by 1.138. For example, the 95th percentile for childless couples would be $106,136 in today’s dollars.

8. Limitations of Data • Can be used only to estimate the cost of children when there are 1, 2, and 3 children -- not enough sample for 4 or more children in the family to provide reliable estimates • Estimates limited to families who spend roughly $110,000 or less. But remember that families who spend $110,000 a year will have net incomes in excess of $150,000 a year or $12,500 per month. • The public use data codes clothing spending on family members more than 15 years old as adult clothing. If the unit had O children over 15 years old, I recoded adult clothing to be equal to 2/(2+O) times the amount of adult clothing report in file.

9. Net Income Family Spending Spending on Child Care, Excessive Medical (CEX) Use CEX to estimate the relationship between Net Income and Total Spending Savings From Net Income to BCSO Table Rothbarth, Engel, USDA Estimates BCSO Table Spending on Children

10. Previous PSI Report • Used Engel and Rothbarth estimates from my 2000 report • Estimated relationship between net income and total spending, percentage of spending devoted to child care and excessive medical spending using a sample from the 1996 to 1998 CEX • Inflated all dollars amounts to reflect 2004 dollars • The table would change if updated to reflect my estimates from the 2006 report and use more recent CEX data to update the needed relationships to move from net income to the BCSO table

11. Example: Net Income = $4,583 (month)Midpoint of $50,000 to $60,000 Interval • Based upon the 1996 to 1998 data, families with children in this income interval (adjusted for inflation) consumed 88.2% of their net income. Consequently at $4,583 of net income, the family is expected to spend $4,042. • Based upon the Rothbarth estimates from the 2000 report, the family is expected to spend 25.5% of the family’s total spending on one child. Hence total spending on the child is $1,031. • As percentage of total spending, child care was 1.7% and excessive medical spending was 3.5% per child (computed using the 1996-8 CEX data) Subtract: .017(4,042) + .035(1,031) = $105 • BCSO amount = $1,031 - $105 = $926 or 20.2% of net income (this amount differs from the PSI report because of rounding of the entries in Exhibit I-1.

12. Low Income “Adjustment” TS/NI 1.0 Net Income (NI)

13. Construct net income intervals At the midpoint of each interval, compute as previously done the BCSO entry We could assume the spending was the same within the interval but this would lead to discontinuities as well as other problems The table reflects an linearization of the midpoints. In Exhibit I-2 of the PSI report, they report at the midpoint two numbers: the BCSO entry divided by the midpoint and the slope of the green line (marginal percentages) Smoothing the Table BCSO Net Income

14. Segue • Child Support Models: Collection of normative judgments whose purpose is to determine a level of child support to be paid by one parent to the other parent for the purpose of providing financial resources to raise the children. • Disagreement over whether the child support award can arise for two factors: • Disagreements over the model -- whether the normative judgments that have been made are truly appropriate • Disagreements over whether the model has been appropriately implemented -- for example, one can disagree over whether the Economic Table truly represents the spending of two parents in an intact family on the children without disagreeing whether Income Shares is the appropriate model

15. Income Shares versus POI • Income Shares: The financial obligation of the parents should equal what they would have spent on the children had the family remained intact • Percentage of Income (POI) • Parents should continue to spend the same proportion of their income on their children as they would have had the family remained intact • AND the percentage the poor pay should not be more than the more wealthy pay -- the percentage should be the same for all families with the same number of children

16. Normative Judgments versus Assumptions • Normative Judgments can’t be verified on the basis of objective observation -- Data can’t resolve the differences between alternative value judgments • Assumptions are often made to implement a model, however, in theory assumptions should be able to be verified by examining data or used to decide which one of the competing assumptions is ‘best’. However, it is not always possible to acquire appropriate data to test an assumption.

17. Rothbarth • As total spending increases, adults spend more on themselves • Holding total spending constant, adults without children spend more on adult goods • Adult goods are a reasonable indicator of the standard of living (preferences of adults for adult goods are separable from other consumption groups: shared consumption and child goods) Adult Goods No Children 1 child AG Spending on Children TS Total Spending

18. Next Session Alternative Child Support Models • Income Shares • Percentage of Income (POI) • Melson • Cost Shares • ALI (American Legal Institute)