Jane the Actuary General Interest

The Biden Family Leave Plan: Good Intentions, Bad Policy, Worse Implementation Plan

Originally published at Forbes.com on September 23, 2021.

 

Parental leave has been on the agenda not merely of Democrats but also of moderate Republicans for quite some time. To be sure, Republican proposals have been far more restrained — Marco Rubio’s ill-fated 2018 proposal to allow parents to “borrow” from their Social Security benefits never went anywhere, but at about the same time, the Brookings Institute and AEI, two think tanks generally on opposite sides of the political spectrum collaborated on a paid leave proposal. And, yes, even the Heritage Foundation has a hard time saying, “no,” to the idea itself, suggesting instead that programs should be left to states and employers.

As with any social insurance program, there are bound to be winners and losers, and families who make the intentional decision that one parent will leave the workforce to care for children may grouse that wages are taken out of the wage-earner’s paycheck to support those making the opposite decision, but some level of grousing is pretty much unavoidable and the wider consensus seems to be that the idea is sound but the implementation must be done smartly.

Which means that when the Biden administration announced back in April that it was including Family Leave in its American Family Plan, I criticized the details, however limited they were at the time, for failing as a social insurance program because it did not have a dedicated payroll tax. The typical family leave program in a typical Western European country is funded based on a dedicated payroll tax, as was the case in the original “Family Act” (though even there, the proposed payroll tax was not sufficient to fully fund the benefit). Even in those countries where leave programs are provided through general tax revenues, the funding source is not a special “soak the rich” tax but an income tax system in which everyone pays more.

We now have more details on the Biden plan, which is now intended to be funded through the Reconciliation bill. The legislation itself contains many of the characteristics of the spring proposal — 12 weeks of paid leave to “qualified caregivers.” Specifically, the program would provide benefits for pretty much any sort of caregiving as long as it was “in lieu of work” and without compensation, for the equivalent of 12 weeks (all at once or spread out over time) per year, at a pay-replacement structure with bend-points similar to Social Security. This means that someone earning about $35,000 would get about 80%, someone earning $72,000 would get 67% of pay, and someone earning $100,000 would get about 55% of their pay by the benefit, with a de facto cap at that pay level but a trivial level of benefit up to $250,000. (This vaguely resembles proposals for hiking Social Security benefits, as if it was intended originally to be based on a payroll tax to $250,000.) In addition, benefits would be paid for any of the eligible reasons of the Family and Medical Leave Act, so not just for newborns or newly-adopted children but for medical caregiving as well, which suggests that in the case of long-term needs, individuals could collect benefits year after year.

And, indeed, not only is the program not funded by a payroll tax, but it is not really funded in any real way at all, since it is part of a spending plan with tax increases that are intended to cover only half of the new spending in the first place — $3.5 trillion in new spending with $1.75 trillion in new debt. In fact, the overall level of new debt is even worse when considering that many of the proposed spending programs in the Reconciliation bill, which include child tax credits, free preschool and community college and heavily subsidized child care, are nominally authorized for only a portion of the 10 years, so that the Committee for a Responsible Federal Budget has estimated that a true 10 year cost would be more like $5 – 5.5 trillion. The official “framework for the FY 2022 budget resolution” indicates, for every new spending proposal, that “the duration of each program’s enactment will be determined based on scoring and Committee input.” The very prospect that any of these programs would be implemented using the “10 year sunset” that is part and parcel of how Reconciliation works, is appalling. Once these programs are implemented, families should be able to reliably make future plans in a way that just isn’t possible when Congress plays games with sunsets and extensions. Implementing family leave through a Budget Reconciliation bill is the wrong way to create the program — and by that I do not just mean that it is an imperfect way, but that it would do more harm than good.

In a commentary at the Boston Globe last week, Vicki Shabo and Jacob S. Hacker said of this proposal, “Done right, paid leave could be Democrats’ Social Security for the 21st century” — a “social policy landmark that could cement the loyalties of a new generation of voters.” Yet they cite FDR’s famous quote that “no damn politician can ever scrap my social security program” while omitting the fact that this very quote is about FDR’s perception of the importance of financing the Social Security program through payroll taxes rather than general revenue.

The bottom line: yes on family leave as an extension of social insurance policies, if done right with appropriate plan design and funding. But by no means should it be debt-financed and certainly not with an expiration date to hide its cost.

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary General Interest, Retirement

Forbes post, “Why Biden’s American Family Plan’s Family Leave – Reportedly – Gets Social Insurance Completely Wrong”

Originally published at Forbes.com on April 22,2021.  The legislation has failed in the meantime, but the issue of Family Leave has not gone away.

Earlier this week, the Washington Post reported on some initial details on the American Families Plan, the third of the Biden administration’s massive spending bills, expected to be unveiled next week, and following on the American Rescue Plan already passed and the American Jobs Plan of infrastructure and social spending. The proposal is expected to include

  • $225 billion for child-care funding;
  • $225 billion for paid family and medical leave;
  • $200 billion for universal prekindergarten;
  • Hundreds of billions in education funding, including his “free community college” campaign promise; and
  • An extension of the expanded child tax credit/child allowance through 2025.

The plan is intended to be funded by tax increases on “wealthy Americans and investors, in addition to beefing up enforcement at the Internal Revenue Service.”

The Post did not provide details on the time frame over which these costs would be incurred or funded. (Recall that the “jobs plan” spends over 8 years and funds over 15.) But one might assume that his proposal for family and medical leave would be based on his campaign promise, that is,

“Biden will create a national paid family and medical leave program to give all workers up to 12 weeks of paid leave, based on the FAMILY Act. Workers can use this leave to care for newborns or newly adopted or fostered children, for their own or family member’s serious health conditions, or for chosen family; or to care for injured military service members or deal with “qualifying exigencies arising from the deployment” of a family member. During their time away from the job, workers will receive at least two-thirds of their paycheck up to $4,000 so they can better afford to take leave — with low- and middle-wage workers receiving larger shares of their paycheck.”

Now, the FAMILY Act is an existing legislative proposal which would provide 12 weeks of leave at 66% of pay, paid for by 0.2% of pay (employer/employee) contributions. And as it turns out, this proposal has been around since at least 2013, when on another platform I critiqued the bill not just for its egregious acronym (the bill title is the Family and Medical Insurance Leave Act, which ought to be the FAMIL Act, and even then “insurance leave” rather than “leave insurance” doesn’t even make sense, but it’s rearranged to get the acronym) but for the fact that the contribution level appear to have been chosen as a politically palatable tax rate rather than based on any actuarial analysis of the cost of running such a program. In fact, in January 2020, the Social Security Chief Actuary provided an analysis of the bill’s cost, and found that rather than the proposed payroll tax rate of 0.4% would be insufficient and instead 0.62% would be required to fund benefits — and that under a surprisingly low set of assumptions around use of the benefits, that only 35% of new parents would take advantage of the program, that 4% of workers would have medical conditions of their own and 0.4% of workers would need to care for a family member, and that, on average, they would receive benefits for only two rather than three months. Yet nowhere in the legislation is there any means of adjusting the payroll tax to meet actual financing needs, nor adjusting benefits to meet the revenue available.

Financing issues aside, however, this approach is a reasonable form of social insurance provision. Quite simply, this is how social insurance works. We, collectively, want a means of collectively providing funds to people as circumstances require — retirement, disability, unemployment, family leave needs — and the mechanisms of social insurance deliver: universal payroll taxes with rates set as needed to fund these payments.

Consider a few international examples, based on the data available at the International Social Security Association website (and highly simplified):

France provides sickness benefits and maternity/paternity/adoption leave, for up to 10 weeks after birth, funded with a 13.3% payroll tax, plus family allowances funded with a 3.45% payroll tax, which include both cash benefits, childcare subsidies, and benefits for reduced work hours, paid for 2 years, more or less.

Netherlands provides a maternity leave benefit for up to 16 weeks, funded through its unemployment insurance program (2.85% payroll tax).

Sweden’s benefits have a parental benefit-specific payroll tax of 2.6% of pay as well as a 4.35% payroll tax for sick leave.

Germany provides maternity and sick leave with a payroll tax that’s combined with the costs for medical benefits, at 7.3% for each of employees and employers, for up to 8 weeks. Additional benefits, including a child benefit and a one-year 67% parental leave benefit, are funded out of general revenues.

And — as a reminder — when other “western” countries do fund their benefits from general revenues, this means they fund them from income taxes in which there is no special effort to “soak the rich” but instead their top tax bracket applies, generally speaking, to everyone middle-class (or upper-middle-class) and above.

This means that Biden’s proposal to fund family leave through a tax hike on the wealthy is not just ill-conceived but far from the international norm. And it won’t get us where its supporters want us to be. If we define social insurance not as something we all pay for and benefit from, but as government benefits “paid for by other people,” it will create a dead-end that will impact the prospects for social insurance, generally speaking — including reform of Social Security itself.

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.