New formula, better results
Australia's child support formula performs poorly in many respects. For example, our system (which applies the "income shares" model used by many American states)
- is complicated, confusing and expensive to administer
- often produces unfair assessments
- discourages hard work from both parents.
These problems can be avoided or greatly lessened. In fact, a host of improvements are possible while better achieving the essential goal, which is to ensure children receive proper financial support from their parents.
Here we explain precisely what has gone wrong by dissecting flaws in the income-shares formula. At the same time, we detail how, by making each parent responsible for half the care of their child, Australia can have a fairer, better system.
To show the performance improvement that can be achieved, we provide a series of child support examples. In each case, support is calculated using 3 different models: time sharing, a hybrid system, and income shares.
As we hope you'll come to appreciate, the new formulas comprehensively outperform the current system. They improve fairness and productivity enormously. And they act to boost the living standards of Australia's children by encouraging parents to be better providers.
Dr Andrew Lancaster
CSA Project Leader
After reviewing the design of Australia's child support system and its formula, here's a summary of the main findings. These are the top 11 biggest design flaws with the scheme (not strictly in order of importance). Every problem can be solved or reduced by adopting a time sharing or hybrid formula.
1. It creates a race to the bottom
Australia's child support system unduly rewards negative behaviours. While child support always has unwanted incentive effects, income sharing creates special problems. For a start, marginalising the other parent can really pay off. A parent with 100% care can expect to profit from having children. Secondly, high-income payers can greatly reduce child support by earning less than their potential or under-reporting income. Finally, recipient parents receive more support if they reduce earnings or don't work at all. By rewarding negative behaviours, the scheme creates all sorts of unnecessary costs to children and others.
2. It's unfair to hard-working parents
Australia's child support formula is generally unfair to parents who earn a good income. Every dollar that's given to one parent because they have a lower income is a dollar taken from the main financial contributor. Higher income parents are unduly penalised because (i) pre-tax income is used in calculations (ii) daily care costs are assumed to be the same across households even though higher income parents likely spend more (iii) lower income carers receive credit for inflated costs and (iv) child support is reduced for recipients on higher incomes. Unfairness because of such miscalculations is bad in itself (higher income parents are people too) but can also cause wider problems. It hurts the households of higher income parents and can evoke reactions such as earning below potential.
3. Care costs are inflated
The costs of care used in child support calculations are inflated on the back of dubious assumptions. Care costs are estimated as if the parents are together (combined income assumption) and save nothing from living with children (cost of children modelling). In reality, many separated parents are single parents. Furthermore, most parents adjust their lifestyles so that, without being any less happy than before, they fit child expenditures within their budget. Inflated care costs result in unfair assessments, usually to the detriment of the payer.
4. Using gross income is wrong
The income shares formula uses gross taxable income rather than net income. This is inappropriate in the context of the current formula. The formula measures a parent's ability to support children by their share of combined pre-tax income (after self-support amounts are deducted). However, the parent with the higher income gives up a greater share of their income in tax. Hence, their ability to support children is over-estimated in the calculations. For example, a parent with double the child support income of the other parent may, in reality, only have 50% greater financial capacity. If they were a payer, they would be paying too much because of a systemic calculation error.
5. The wider costs of support are ignored
Australia's child support scheme is like a doctor who prescribes drugs without selecting a safe dose for the patient. The scheme has a maximum dosage (cost caps for high-income parents) and a low-dose option (minimum rates for unemployed payers). Those are about the only acknowledgements that you can have too much child support. The scheme generally treats child support as intrinsically good. Payments are decided by a convoluted, unrealistic calculation that's inclined to overestimate what's needed. Preventable overdoses are the result. The wider costs of asking for too much support include lost productivity, recipient welfare dependence, reduced living standards for children, financial hardship and even payer suicide.
6. It causes financial hardship
Under the current system, a parent who is unemployed or otherwise on a low income can be required to pay $10k, $20k, $30k or more in child support. A payer parent who was on a high income but then experiences a significant drop in fortunes may be required to continue paying large amounts of support. Child support officers often use their powers to assess payers at their previous earning level (if, under Reason 8, they deem the payer lacks a compelling excuse for an income drop). The worst hardship outcomes could be avoided by capping support from low-income payers to no more than the target level.
7. It's unreformable
Despite its many deficiencies, reform of the child support scheme has proved elusive. The scheme has survived largely unchanged for almost a decade in part because (i) the central assumption, that parent incomes should be shared, is the root cause of many problems (ii) the workings of the scheme are so complicated that it's hard to pinpoint flaws in ways that can be readily understood and (iii) there's no plain logic to justify key parameter changes that would improve performance. The only real way for Australia to have the best possible system is to scrap what's there. The current system is not amenable to much more than unsatisfactory, partial reform (e.g. see Govt response to parliamentary inquiry).
8. The "continuity of expenditure" goal is unrealistic
It may be lovely to think that children with separated parents will have the same living standards as if their parents were together. But it's unrealistic. A child support scheme does not determine family circumstances and has only limited influence on spending rates. A scheme designed for "continuity of expenditure" is, therefore, inclined towards overreach (trying too hard to attain the impossible). The results are less reliable and farther from optimal than is achievable with a genuine plan.
9. It's dishonest about contributions
Australia's "income shares" style of child support is popular with policymakers because, as well as setting lofty goals, it pretends to achieve them. When child support is calculated, it's quietly assumed that both parents are spending on children at the inflated married-couple rate. The implicit assumption allows for a result where, apparently, each parent contributes the same % of disposable income towards the defined standard of living. But behind the theory and complex calculations lies the truth: the scheme systematically overcompensates carers who earn less than the other parent.
10. The cost percentage table doesn't make sense
The scheme has a cost % table that tells a parent what their cost % is based on their care %. The table is both unnecessary and counterproductive. Normally, one would think that, over a large population, about the best estimate of a parent's cost % is their care %. But, instead, the table contains all sorts of heavy, manual interventions. These disrupt an essentially linear relationship between care time and costs (noting that we have 3 fixed points: 0% care = 0% cost, 50% care = 50% cost, 100% care = 100% cost). The table adds complexity while worsening accuracy and fairness.
11. The costs of the children table is pretentious
The detail and precision in the Costs of the Children Table (see here) hints at a scientific basis like the periodic table used in chemistry and physics. But what's really there is an odd artefact of a poorly designed system. The table is concerned with an unreal scenario: separated parents spending like a married couple. Furthermore, it's used to assign a blanket cost of care when we know that costs for each parent depend primarily on their own income, not the combined amount. There are better and simpler ways to calculate child support that avoid the need for any such table.
Alternative approach: how time sharing works
Each parent is financially responsible for half the care of their child.
Child support is for a parent providing extra care (above 7 nights per fortnight).
The payer transfers cost savings from missed care, thereby funding extra care.
Support depends on the payer's capacity to pay and a target standard of living.
Limited income sharing reduces differences in living standards (hybrid model only).
How much does it cost to raise a child? In any calculation of child support, you need to make assumptions about the costs of caring for children. The higher the cost, the greater the potential need for financial assistance.
Current system: combined income
Australia's child support formula determines the cost of caring for a child using the combined income of the parents (as prescribed in the Costs of Children tables). Each parent has the same daily cost of care. If one parent's income rises, care costs rise for both.
The costing method assumes separated parents act like a married couple. When parents are together in a marital relationship, they combine their incomes. The higher their total income, the more they are likely to spend on a child.
The approach came out of a 2005 ministerial taskforce report, which asserted that the 'continuity of expenditure’ principle was "the best starting point for calculating an appropriate level of child support" (2005 report, p. 3). The taskforce offered no other starting point, which also meant that Australia implemented the current scheme without seriously considering any alternatives.
How much can an individual payer afford to contribute in child support? How much is a recipient likely to actually spend on children? What is an appropriate target for the living standards of children in Australia? Under our current system, the answer to all three of these questions depends squarely on the combined-income cost of children.
The combined-income cost measure is the universal cost concept in Australia’s system. It defines the rate at which a payer is required to contribute. It defines the assumed rate of spending on children by the recipient. It also represents the target amount of spending.
The measure is imprecise in its various uses, especially when you consider that it’s based on an unreal scenario in the first place (separated parents spending like a married couple).
- The amount a payer can afford to contribute actually depends just on the payer’s income, not the recipient’s.
- The likely rate of spending by a recipient depends on his or her income and not the payer’s.
- An appropriate target level of support depends on Australian community standards, not on how high or low happens to be the combined income of parents.
There is no good reason why, when considering the costs of children from a certain perspective, you should not construct a measure for the specific purpose. Always relying on the same measure inevitably produces sub-optimal assessments.
As well as being used in an imprecise way, the cost measure brings a general inflationary bias. It overestimates costs in a child support context. Whenever it's used, there's an implicit assumption that separated parents spend on children as if they were part of a married couple.
- One or both parents may be the only adult in their household. Single parents have reduced living standards because they rely on one income and costs aren't shared (e.g. housing and transport).
- Even if a parent has a partner, that person may take only limited responsibility for maintaining the living standards of their partner's children. Hence, spending may still be somewhere close to that for a single-income household.
The combined-income cost method also skews child support assessments. By defining a single rate of spending, assessments are distorted in favour of low-income parents with some care responsibilities.
- For providing a day of care, a low-income parent is credited with spending at the "combined income" rate.
- If the other parent has a significantly higher income, credit for the low-income parent may far exceed what they would realistically spend.
The distortion affects all assessments where there's an income difference and the children regularly overnight with the low-income parent (which is the vast majority of assessments). In our scenario tests, we found that the beneficiary is, in many cases, estimated to profit significantly from having children (instead of being a co-contributor).
The associated wealth transfers are disguised and often large. They are also contrary to the scheme's objectives. The scheme purports to calculate child support so that each parent bears costs in proportion with income. That's not being achieved when one parent is profiting at the expense of the other.
Alternative method: individual parent income
The time sharing and hybrid models contain 3 different cost measures. Each fulfils a specific purpose and does it better than the combined-income method. The measures use the individual incomes of parents rather than combined income.
The cost of children for the payer depends on the taxable income of the payer and is calculated using % rates. A base % is defined so that a payer on the median full-time income has the same daily cost as estimated for the median-income family household in Australia.
The cost of children for the recipient is calculated in the same way using the recipient's income. The measure only affects child support assessments in the hybrid model. For the purpose of presenting final cost-of-children figures, child support is added to a recipient's baseline spending.
A target support level is defined by the daily cost of care in a median-income family household (which equates to the cost for a parent with the median full-time income). The measure defines a community-based standard of living.
How should the child support amount change as the income of the parent with majority care goes up? This question arises because the Australian formula calculates child support based on the relative incomes of parents.
Current system: success penalty
Presently, the amount of child support received by the main carer is withdrawn as his or her income rises. It happens because each parent has an "income share" and is asked to contribute more as income rises.
The rate of withdrawal is low if a parent has 100% care because the parent's income and assumed care costs rise together. Withdrawal of support is more rapid where care is more evenly shared.
Why should child support to the main carer be withdrawn as his or her income rises? With rising income, the parent will normally be spending more on children. Withdrawing child support works against that. And why should the payer contribute less? Their ability to pay is undiminished.
The withdrawal of support reflects the income-sharing design of Australia's system. Child support also serves as spousal maintenance. If child support was purely "child support", a payer's contribution wouldn't be tied to the other parent's earnings.
Is income sharing fairer and better?
Income sharing is where child support depends not just on the payer's income but also on the recipient's income. It's a core design feature of Australia's system. Income sharing is often seen as a fairer and better way of calculating support. But is that perception correct?
To see what income sharing actually does, let's examine its impact on different groups.
Impact by group
For recipients, income sharing acts to increase payments to low-income earners and reduce payments to high-income earners. The less you make, the greater the amount of child support you receive. In rewarding a lack of earnings, income sharing also reduces productivity. It encourages recipients to stay at home rather than work, or to do easier, lower paying jobs.
For payers, income sharing brings a random element to the payable amount. Instead of paying according to own income, payers also contribute according to the other parent’s income. If a payer is lucky and has a higher-earning recipient, less is paid. Conversely, if a payer is unlucky and the recipient has lower earnings, more must be paid. Income sharing also discourages work effort from payers. It adds a penalty to having a higher income and a reward for having a lower income.
For children, income sharing shifts payments in favour of the lower-income parent. That may raise or lower living standards depending on with whom children spend more time. While equalising living standards tends to be beneficial, any gains here are marginal (and could be outweighed by productivity costs). Child support has income-levelling properties without income sharing. Furthermore, most Australian children in the support system see both parents regularly (see table 3.2).
Income sharing is costly to Australians. By incentivising parents to work less, welfare dependence increases (hurting the budget) and national productivity is lower. The community pays in the form of higher taxes and reduced GDP.
In looking at the various impacts, it's apparent that income sharing is far from essential. Three groups are the main beneficiaries and none need special additional help.
- Low-income recipients with high-income payers would receive a good amount of child support with or without income sharing. And they fully qualify for welfare programs such as the Family Tax Benefit.
- The children of low-income recipients with high-income payers are similarly well supported. When living across 2 households, they may benefit little from further taxing of the payer parent.
- Low-income payers with high-income recipients make windfall gains out of income sharing. They pay less than other parents in similar circumstances on similar incomes. But their children may be disadvantaged by the withdrawal of support.
Child support has strong income-sharing properties with or without deliberate "income sharing". It's implicit. As well as payers contributing according to income, recipients will generally spend more on children if they have a higher income. Adding explicit income sharing is prone to causing more problems than it solves. Income sharing introduces unnecessary complexity and hurts productivity by penalising work effort.
Alternative method: exclude main carer income
The income of the main carer (parent with greater than 50% care) could simply be excluded from the system altogether. Child support would then depend just on the capacity of the payer to support the parent providing the majority of care. That's what we've done with the time-sharing model.
By excluding their incomes, every parent with majority care would have full incentives to earn a good living. It would also puts an end to grievances, disputes and case reviews on the issue of carers maximising child support by earning less than they are able.
In the original design of the child support scheme, it was intended that support be independent of the main carer's income. That was the preferred approach of the Advisory Committee to the Minister for Social Services (Stewart 1991, p 147).
In response to lobbying from non-custodial parents, for political reasons it was decided to include consideration of income for high-income custodial parents (effectively, the top 6% for income). This represented a clawback of support from majority-care parents who were working full-time in high-skill jobs. Full income-sharing was introduced in July 2008.
Should a parent with at least 50% care of a child pay support to the other parent?
Current system: support the low-income parent
Under the current system, a parent with at least 50% care of a child may have to pay child support. In fact, they may have to pay child support even if they care for the child 9 nights out of 14.
An equal-time or majority-care parent may have to pay child support because they have the higher income. According to the child support formula, a parent pays essentially if their share of combined income is greater than their share of care time.
I am a Mother who stupidly instigated a verbal agreement that we just go 50-50 for our kids post separation - in care and financial responsibility. 3 years later, I'm trying to do as much overtime as I can to keep a home and give my kids as many experiences as I can while they are young... meanwhile, I'm now paying $594 per fortnightly pay (garnished), as the father has decided that work is too hard, and I can be the cash cow without any accountability for that much being spent on the children. So guess what? It's not just men!!! The system is very broken. I've offered to pay for everything for my children, rejected as the Child Support formula is so much more lucrative. As it stands, I will more than likely be defaulting on my home loan.
Alternative: no majority care, no child support
Child support for a parent with 50% or less care amounts to spousal maintenance, lacks a strong justification, and could simply be disallowed. It's what we've done with the time sharing model.
Think about it for a moment from the perspective of a high-income parent. You have your child 7 or more nights per fortnight. During this time, you are able to buy them nice clothes, take them out to dinner, go to the movies, give them pocket money, and buy books, toys and games. Across the year, you could send them to an elite private school and even take a ski holiday together in the Swiss Alps.
If the other parent has less income, they might spend less on the child (depending on household finances). While with the other parent, your child might have to be content with just watching TV, playing games, doing homework and reading.
Exactly what is the child missing out on over an extended period of time? And why does the parent who is already doing more than their fair share have to also give money to their ex partner?
- Australia has a strong social safety net, universal healthcare and a good public education system.
- A parent with 50% or less contact time can, with very little money, meet their child's needs.
- Conversely, a parent with 50% or more contact time has every opportunity to lift the overall living standard of their child.
How should the income of the payer parent affect the amount of child support? The payer's income is central to calculations in any child support program.
Current formula: double dipping
Australia’s child support formula double dips (twice extracts support from) the incomes of parents with less than 50% care. When a payer’s income increases:
- the costs of children rise and the payer is required to contribute towards a higher standard of living; and
- his or her income share also increases, requiring the payer to cover a greater share of the (increased) costs.
Because of double dipping, there’s a tendency towards excessive child support demands on payers with medium to high incomes. At one extreme, a low-income payer may be asked to contribute only a token amount of child support. At the other extreme, a high-income payer may be required to cover 100% of costs towards an extravagant standard of living.
One of the serious implications of double-dipping is that payers are subject to high effective marginal tax rates (high EMTRs). A payer’s EMTR is the % of each extra dollar of income that’s taken in the form of income taxes and child support. Currently, EMTRs are routinely above 50%. High EMTRs can become demoralising to payers, resulting in a loss of earnings and child support.
There’s also unfairness associated with asking payers to contribute large percentages of income. When child support is expressed as dollars paid for each missed night of care, the amounts can run into hundreds of dollars.
Alternative approach: % of payer income
The cleanest and most effective way to link child support to payer income is to make support a simple function of payer income. By simple, we don't mean using a single flat percentage. Tiered rates are required, as happens with income tax. Adjustments to rates are also needed to account for case-specific factors such as the number of children and the payer's care %.
Using income percentages is effective because it provides direct control over how much a payer contributes. Rates can be set so that each payer makes a fair contribution considering his or her financial means, and marginal rates are never excessive. As an added bonus, everyone can see the rates and understand how child support is calculated.
How should the division of care (% of time each parent cares for a child) affect the amount of support received or paid?
Current system: irregular and unfair
The relationship between care time and child support under the current system is irregular and, for that reason, may often produce unfair outcomes.
Suppose parents of 2 children each have a taxable income of $80k. Here's how child support changes with fortnightly care.
7:7 nights ⇒ $0 annual child support
8:6 ⇒ $2,485
9:5 ⇒ $6,626
10:4, 11:3 or 12:2 ⇒ $7,178
13:1 or 14:0 ⇒ $13,805
See the pattern? If not, don't feel bad – neither do we. Apparently, it has something to do with regular and shared care.
Such irregularity creates unfairness and increase the stakes involved with certain care changes.
- If a parent in the above example has 2 nights care per fortnight but then is denied regular contact (say, because the other parent moves interstate), the amount of child support virtually doubles from $7k to almost $14k. The other parent benefits to the tune of $127 for each individual extra night of care.
- Suppose you have your children 9 nights per fortnight but then decide to give the other parent an extra night. If both parents are on $80k, the amount of child support you receive drops from $6,626 down to $2,485. You lose $159 for each individual night of care given up.
Alternative approach: pay by the night
An alternative approach is to calculate a nightly child support rate and multiply this by the number of nights of extra care.
To illustrate, suppose the nightly cost of care is $62 (say, for a parent with 2 teenagers and an income of $90k). The parent would pay $0 in child support for 7:7 care, $62 per fortnight for 6:8 care, $124 for 5:9 care, and so on. The method gives a smooth, linear relationship between care time and support.
While it may be tempting to fiddle with the care-cost schedule (as has been done with the current scheme), that's really a mug's game. Ultimately, you need to get from point A (no support) to point B (maximum support). A straight line is a simple, transparent and sensible way to do it.
- The main non-linear factor one might want to account for is that, because of fixed costs (such as providing a bed), moving from no care to some care has a relatively high cost per night.
- However, at the same time, primary carers save relatively little from having just below 100% care. A special allowance for parents with small amounts of care may encourage some primary carers to oppose co-parenting altogether.
At what point should the amount of child support paid be considered sufficient? Should there be child support targets and caps?
Current system: top-end caps
Under the current system, the amount of child support paid goes up and up with payer income. A payer can face an effective marginal tax rate above 50% from a low income right up to a high income.
The only brake is when cost-of-children caps are reached, which is when the combined taxable income of the parents exceeds around $230k. Even then, child support can continue to rise with payer income because of an income share effect.
The relationship between payer income and child support represents a failure to properly account for the declining value of support. In terms of program effectiveness, it may represent the greatest operational flaw in Australia's system.
Declining value of child support
Cost caps were added to the scheme merely as an acknowledgement that, eventually, the amount of child support must exceed what children actually cost. Child support is treated as always a good thing, at least until it becomes hard to find ways to spend the money.
Actually, child support should be optimised for maximum public benefit. Beyond an optimal level, demanding extra child support does more harm than good. The benefits of placing an extra dollar in the hands of the recipient are outweighed by the costs of getting it there.
- To illustrate, by being asked for too much, a payer might become disaffected and downgrade career ambitions.
- Such a behavioural response leads to lost productivity, which hurts parents, children and the wider community.
As the amount of child support rises, the value of each extra dollar declines because:
- the child's essential needs are already being met
- spending is likely to be less child focused
- the recipient can use child support to replace income
- the payer is more likely to reduce their own spending on the child
- the payer's incentives to earn more are being eroded.
Furthermore, an overly taxing child support scheme contributes to disputes over care.
- Recipients of child support are financially incentivised to seek 100% care when support is too high.
- Recipients may also derive a sense of entitlement – a feeling that parenting is their (paid) job rather than a responsibility that's meant to be shared. Consequently, some may be less inclined to agree to balanced care arrangements.
- On the payer side, failing to secure much time with one's children carries financial penalties under a high-taxing scheme.
Target support level
To account for the declining value of child support, a target level should be adopted. A target provides a neat, visible way of shaping relationships between parent income and child support.
The idea of a target is to establish a support level that meets community standards for adequacy. It represents a transition point. As the target is passed, child support goes from covering the normal expenses for an Australian child to elevating living standards.
- Until the target level is reached, payers should be expected to contribute a substantial % of income towards child support.
- Beyond the target, the marginal % of income taken can be reduced (to lessen the productivity and other costs of child support).
- The target is applicable to support for extra care (time sharing and hybrid model) as well as to support for a low-income carer (hybrid model).
A time-sharing model of child support is simpler than income sharing. For a standard calculation, you need no more than a dozen parameters. This compares to easily 50+ under the existing scheme. Here we set the program parameters.
Threshold income relates to the taxable income of the payer. It's the income that corresponds with the target child support level.
- For incomes below the threshold, payers contribute towards the normal, regular care of children.
- For incomes above the threshold, payers also contribute a premium component that elevates children's living standards.
We propose setting threshold income to median full-time income. Specifically, threshold income is set to annualised median weekly full-time earnings for Australians paid at an adult rate. This represents the gross earnings of the average Australian adult who is employed full-time in a permanent position. It stood at $75,000 (rounded to the nearest $'000) in 2016.
Payers on an income above this mark are earning more than the typical full-time worker. Therefore, they should be asked to pay a premium amount of support.
Target child support level
The target child support level is the support amount for a payer with an income equal to the threshold income. It represents an amount that's sufficient to meet the normal costs of raising a young child in Australia. Note that the target is a base amount, before adjustments are made for the number and ages of children.
The target is set to the estimated cost of a child in a household with the median gross income among households with children (income of around $120,000 in 2016). That works out to $31.64 per night (or $11,550 target spending per year) using the 2017 Costs of the Children table.
Spending by a household with the median income should be considered more than adequate.
- Around half of Australia's children have a lower corresponding standard of living.
- Care costs are also on the high side because of lack of adjustment in the costs table for natural expenditure savings when you have children.
Standard cost rate
The standard cost rate is, for income below the threshold, the % of payer income which counts as the cost of a child. It's the ratio of the annual spending target to threshold income, which is 11,550 / 75,000 = 15.4%. This figure can be interpreted as saying that, for mid to low incomes, the cost of a young child is 15.4% of the payer's taxable income.
Premium cost rate
The premium cost rate applies just to income above the threshold. We propose a setting of slightly below half the standard rate, at 7.2%. This is essentially a halving of the marginal rate in cash terms (if rates were converted to a % of post-tax income). The lower setting for the premium cost rate helps optimise child support by accounting for its diminishing value.
- A higher rate (say, two-thirds of the standard rate) would offer little relief for payers in terms of effective marginal tax rates.
- A lower setting (say, one-third the standard rate) would result in relatively small contributions from high-income payers.
It's debatable whether child support should be capped. It comes down to a question of whether payers on very high incomes should be (i) compelled to finance their children through support payments that are proportionate with income; or (ii) allowed to make their own choices once they have already contributed a large amount of support.
We favour the latter, light-regulation approach. Ultimately, it may be better for children if a high-income parent is free to choose how they distribute wealth. Consequently, an income cap on support is included in line with the current cost cap. No support is payable on income above $180,000. This level is also the start of the top income-tax band in Australia.
The income cap can automatically updated each year by setting it relative to threshold income (i.e. made 180 / 75 = 2.4 times threshold income).
Loadings for number of children
To adjust for the costs of extra children, we set a loading factor of 0.5 for a 2nd child, and 0.2 for a 3rd child. In other words, the cost of children is, compared to the base level, 50% higher if you have a 2nd child and 70% higher if you have 3 or more children.
These loadings approximate the current settings for a median-income household with children. They account for the declining cost of extra children, which can be attributed to both economies of scale and budget constraints.
Child age loadings
To adjust for the higher costs of teenagers, we set loading factors of 0.4 for a teen who is the only child, and 0.15 for each teen in a multi-child household (to a maximum of 2 teens). In other words, costs are 40% higher if your only child is a teen. Where there are multiple children, 1 teen increases costs by 15% while 2 or more teens increase costs by 30%.
Again, the settings approximate the current allowances for a median-income household ($120k total income).
Low-income measures are needed to ensure fair contributions from all payers.
For payers who report a very low income, or choose not to submit a tax return because their income is below the tax-free threshold, a minimum deemed income level can be set to one-sixth of threshold income (equal to $12,500). This is an income level below the current Newstart Allowance for unemployment. The maximum amount payable would be $1,925 (for a payer with no care and at least 3 children, including at least 2 teenagers).
If a payer's income is unknown because of improperly failing to submit a tax return, their income can be deemed to be threshold income ($75k) until such time as they submit a return. The maximum amount payable would be $11,550.
No allowances are made for the costs of other dependents. In other words, parents are not subsidised when they make a decision to have another child or otherwise become responsible for another child. This applies to both recipients and payers.
- Separated parents and their partners are treated as having the same planning and budget management responsibilities as parents who are together.
- Allowances for dependents are not required in a time-sharing model because (i) for recipients, support just depends on the payer's capacity to pay and (ii) for payers, support is calculated fairly in the first place (without inflated costs and spousal maintenance).
The only parameter in this model that requires manual updating from one year to the next is threshold income, which can be set annually based on the latest ABS data.
In a time-sharing system of child support, each parent is financially responsible for half the care of a child. Where a parent provides more than half the care in terms of time, the other parent funds that extra time based on his or her income.
The following panels show how the proposed new child support formula would work.
To calculate child support, you need to know the care arrangements and last year's taxable income of the parent with <50% care. Child support is calculated in 3 steps:
- determine the base cost of care for the payer
- add loadings for the number and ages of children
- multiply the cost of care by how many nights the recipient provides care above a 50:50 level.
Base Cost of Care
Annual cost of care for a child
Base annual cost of care is:
15.4 cents per dollar for payer taxable income up to $75k; plus
7.2 cents per dollar for payer income between $75k and $180k
Adjusted Cost of Care
Adjust for number and ages of children
Adjusted cost = Base cost x (1 + sum of loadings)
Number of children: 0.5 for 2nd child, 0.2 for 3rd child
Ages: 0.4 if only child is 13+, 0.15 for teens otherwise (max 2)
Child support based on time sharing
Child support = Extra care x Nightly cost, where:
Extra care = Recipient nights of care per fortnight - 7
Nightly cost = Adjusted cost / 365
- John is the payer (has <50% care) and had $90,000 in taxable income last year. The base cost of care is 15.4% of $75,000 plus 7.2% of $15,000. This is $11,550 + $1,080 = $12,630.
- If the base cost is $12,630, for 2 teens the adjusted cost = $12,630 x 1.8 = $22,734.
- If Kate has her children 11 nights per fortnight and the adjusted cost is $22,734, child support is 4 x $22,734 / 365 per fortnight. This is 4 x $62.28 = $249.12 per fortnight ($6,495 annually).
The hybrid system of child support adds limited income sharing to the time-sharing formula. Where there is a large income disparity, additional support is made available for routine care (and not just extra care). It goes to whichever parent has a low income.
"Routine care" refers to days/nights where, under time sharing, the low-income parent is caring for children without support. It amounts to 7 nights each fortnight for a low-income main carer. For a low-income payer, it's the number of nights of care he or she provides.
How much additional support is paid depends on both need and capacity to pay. Need is measured by how far the low-income parent is below threshold income. Capacity to pay is determined by how far the high-income parent is above the threshold.
Support supplement or offset due to income difference
Only applies if parent incomes are either side of threshold ($75k).
Base income support (BIS) is the smaller of these two:
Available support = 7.2% of (high income - $75k)
Funding deficit = 15.4% of ($75k - low income)
Income support = BIS x routine care % x cost loading, where
Routine care % = smaller of 50% and care % of low-income parent
Cost loading = (1 + sum of loadings for number, ages of children)
- John had $90,000 in taxable income last year. His available support is 7.2% of $15,000 = $1,080. Kate's income was $50,000. Her funding deficit is 15.4% of $25,000 = $3,850. Base income support is therefore $1,080.
- Kate has the children more than half the time, so her routine care % is 50%.
- For 2 teenagers, there's a cost loading of 1 + 0.5 + 0.15 + 0.15 = 1.8.
- Kate receives a support supplement of $1,080 x 50% x 1.8 = $972, bringing the total amount of support received to $7,467.
So far our main focus has been on whether child support is fair or unfair to parents. We’ve looked at many problems and inequities associated with the current scheme. We’ve also developed flexible models that perform better in terms of program efficiency and fairness to parents.
But have we missed something? While Australia's current scheme is often unfair to parents, is there a greater good in terms of child welfare? Is income sharing justified on the basis that it ultimately benefits children? Perhaps it’s possible to be generous with a child at the same time as you treat one of his or her parents unfairly.
We contend that the best way for the bureaucracy to help the children of separated parents is to treat their parents with reasonable fairness. All sorts of costs are created from unbalanced child support assessments, especially when done in an unscientific way as currently happens. Children are seldom insulated from the damage since parents are vital to their wellbeing.
Here are two important reasons why, to achieve the best possible outcomes for children, it’s essential to be fair to parents.
Shared parenting is good for children because it gives them maximum access to the resources (including financial), experiences, skills, teachings and emotional nourishment of both parents. However, Australia’s current child support scheme works against it.
For a child support system to enable shared parenting, it essentially has to leave money out of the parenting equation. In other words, it should leave each parent with little to gain or lose financially from caring for their children.
A system that rewards a parent for dominating caregiving creates resistance to shared care. Especially if they have a low income compared to the other parent, a “primary carer” may:
- seek maximum care possible in any negotiations and court proceedings
- use nefarious tactics (such as psychological conditioning of children and moving far away from the other parent) to gain full parental control over children
- view the promise of extra child support as justification for engaging in costly legal action to secure a greater care allocation.
Excessive child support can also affect attitudes of people involved in the family law system, including counsellors, mediators, lawyers and judges. They may disount the gains in living standards from a child spending good amounts of time with the higher-earning parent.
The time-sharing and hybrid models facilitate shared parenting because they are essentially fair. The payer contributes in support what he or she is estimated to save in care costs. Moreover, base support is for extra care and not the routine care that should be expected of any parent.
Australia's income-sharing scheme is different. It creates significant financial rewards for being the main carer. Low-income parents with majority care can make large amounts of money.
- In several of our case examples, the current system generates pay rates of $100+ for each extra night a parent is with their children.
- Over weeks, months and years, such overcompensation produces a small fortune, especially if the parent consistently avoids work.
When a parent succeeds in dominating care against the wishes of the other parent, children can generally be expected to suffer. They may be forced into a perpetually lower standard of living. They also miss out on beneficial contact time with the other parent. Isolation from a second parent has been repeatedly shown to have negative consequences (see McLanahan et al).
Children with the highest living standards are those with most financially successful parents. Ideally, child support shouldn’t get in the way of parents succeeding. But, with Australia’s unfair system, parents are discouraged from achieving their potential.
As touched upon already, income sharing is an anti-work policy. It accentuates the penalties from earning an income. It also enlarges the rewards from not. Both the payer and recipient have little personal incentive to work harder. For each extra dollar earned, less than 50 cents may be left after accounting for taxes, benefit withdrawal and child support.
The productivity costs may be worst where there's obvious unfairness to a marginalised parent. A tipping point can occur when child support stops improving financial fairness towards the recipient and starts being a source of unfairness to the payer. Payers are often already unhappy at having limited contact with their children. Adding an adverse child support arrangement can create a feeling of being oppressed.
If you’ve ever read internet forums on child support, you probably know that payers often perceive a deep injustice and profound disempowerment. Those with limited contact can feel the heavy weight from bearing two crosses at once.
- They are marginalised as a parent by an unaccommodating co-parent and unsympathetic family court system.
- And they are forced to relinquish control over much of their after-tax earnings by support demands that are out of proportion with the real-world costs of children.
It's only natural to seek escape from oppression. Feeling oppressed can also cause psychological damage. Aggrieved and hurt payers are, over an extended period of time, liable to earn far below their true potential. They may also be less inclined to be personally generous with their children.
When a child's main provider does less well than they should, children suffer across both households. There is also less financial backing available beyond the age of 18. On top of material costs, the ability of the parent to be a strong, positive influence on their child can be compromised.
Similar costs exist with respect to the main carer. Child support can help fund a recipient's non-working lifestyle. Years of disengagement from the workforce or part-time participation causes skills to atrophy. An over-supported parent can be made weaker, less able to financially provide for children and less of a role model for them.
Being fair to Australian parents is not just a matter of being fair to them personally. It’s also a way to produce higher living standards for Australia's children. When we treat parents with respect and impartiality and allow them to be aspirational – irrespective of their gender or role – children ultimately benefit.
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