Sunday, February 5, 2012

Demographics and Child Dependency: What It Costs to Raise a Child

In developed countries such as the US and other OECD countries the subject of demographics generally centers on birth rates (fertility) and the fraction of the population that is aged and no longer working. Most of the concern is focused on the growing fraction of the aged, and the economic burden anticipated in continuing to provide benefits to these people at the level they currently enjoy. To quantify this issue analysts often refer to an "aged dependency" which is just the ratio of the aged (greater than 65 years) to the working age population (20-64 years) multiplied by one hundred. In an earlier analysis, Population Management: Aging Societies, Total Dependencies, and Fertilities, we argued that a society that comes into equilibrium and maintains a constant population would have an aged dependency of 39. Right now the US has a value of only 22. It would seem that our society should begin some serious planning, not on how to save expenses, but on how to allocate resources in order to support a much higher fraction of senior citizens.

Considerations of senior benefits cannot be considered in isolation. There is a child dependency that must also be considered. Children are another segment of the population that requires a high level of support while contributing nothing to the tax base. As we shall see, children are becoming increasingly expensive to maintain, yet little thought seems to go into how many the society needs and how many it can support. At present, the child dependency ratio is consistent with the equilibrium value and fertility is at the level where the population will just replace itself.

The Department of Agriculture has the responsibility for tracking the costs of raising children. It has provided a detailed report: Expenditures on Children by Families, 2010. Note that the numbers they provide only track children up to age 17. College age expenses are not included.

The first thing to recognize is that the amount of resources devoted to children varies widely with income.

For a middle income family the total costs break out as follows.

In 1960 dollars the cost would have been $25,229 versus $185,856 in 2010 dollars, a constant dollar rise of 22%.

The report also provides estimates of the average expenditures in multiple child families.

Estimates of college costs are also included.

"The College Board (2011) estimated that in 2010-2011, annual average (enrollment-weighted) tuition and fees were $7,605 at 4-year public colleges (in-State tuition) and $27,293 at 4-year private (non-profit) colleges; annual room and board was $8,535 at 4-year public colleges and $9,700 at 4-year private colleges. For 2-year colleges in 2010-2011, annual average tuition and fees were $2,713 at public colleges."

Using these numbers, an average four year college education would cost $64,560 at a public school, and $147,972 at a private (non-profit), college. One can spend much more, or much less depending on circumstances.

There are also expenses that the government incurs in supporting childrearing.

"The estimates do not include all government expenditures on children. Examples of excluded expenses would be public education, Medicaid, and subsidized school meals. The actual expenditures on children (by parents and the government), therefore, would be higher than reported in this study, especially for children in the lowest income group."

One could also include the nation’s expenditures on Food Stamps and the Earned Income Tax Credit (EITC) as a cost.

A report here provides a number for the US’s annual education spending per school-aged child as $7,743, the highest in the world by far. This covers ages 6-23 so it includes college expenses. The integrated educational cost per child, ignoring inflation, is then $139,374.

These costs to society will be compared with what must be spent to support senior citizens in a subsequent article.

Children have traditionally been viewed as an economic asset. They grow up to be wage earners and tax payers. If society has an increasing fraction of senior citizens, then one might argue that an increasing number of tax payers are required to support them as they age. If society runs at near full employment, then an ever increasing population is required to chase after the ever increasing number of seniors—clearly not a sustainable situation.

A more pertinent assessment of the employment situation can be derived from this view from the Economic Policy Institute.

"The labor force participation rate was 63.7 percent in January, its lowest point since the downturn began. Remarkably, the labor force has grown by less than half a million workers since the recession started in December 2007, though the working-age population has grown by nearly 10 million in that time. There are currently 2.8 million "marginally attached" workers—workers who want a job, are available to work, but have given up actively seeking work. If these workers were in the labor force and counted as unemployed, the unemployment rate would be 9.9 percent right now instead of 8.3 percent."

"At a time like this, with the labor force not growing at a steady pace, arguably the cleanest measure for assessing labor market trends is the employment-to-population ratio, which is simply the share of working-age people who have a job. The ratio was 58.5 percent in January, also not far from its low of 58.2 percent last summer. The labor market still has substantial ground to make up: The employment-to-population ratio was 63.3 percent five years ago, in January 2007, before the recession started."

Some do not participate in the work force by choice, but the bottom line is that the economy has not been creating enough jobs for all those who want and need one. This is not a phenomenon caused by the Great Recession. It has been going on for at least the last decade. High unemployment rates seem to be associated with developed economies, and result in ever increasing employment difficulties for the young. We may be reaching a point where society must bear the cost of supporting 10% or more of the children we raise not just through age 17, or age 23, but for their entire lives.

One can argue that better education would solve the employment problem, but the data does not support that claim. A better education certainly helps, but wages and opportunities for a four-year college graduate have stagnated. The positions with the potential for high earnings seem to go now to those with postgraduate education or a professional degree. This entails spending ever more money on our children as they chase ever fewer desirable positions. This is not a sustainable situation either.

Demographic trends are leading to a situation in which society will have to expend more resources in supporting an aging population. Economic trends may be moving us in the direction where a lower birthrate will be necessary. Fewer, better-prepared children may provide the best path forward. It is at least time to consider that notion. There are economic solutions that allow for more seniors and fewer working age adults; society just has to select them.

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