Can you self-insure Family Leave?

Last updated on: June 13, 2017 at 7:54 am by Jane the Actuary

Can you self-insure Family Leave? 2017-06-13T07:54:30-06:00 Jane the Actuary

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The AEI-Brookings Working Group on Paid Family Leave has come up with a family leave proposal, and I’ve been meaning to blog about it for a while — the trouble is that it involve reading a lengthy report, which I just haven’t managed to do yet. So as a shortcut I’ve scrolled down to the key details of their proposal:

70% of pay replacement
8 weeks
$600 per week cap (equivalent to $45,000-ish covered salary)
Both new mothers and fathers covered, for newborns or adoptions
Funded via a combination of payroll tax and unspecified budget cuts or tax expenditure reductions.

And as it happened, I was thinking about this prior to their publishing their proposal — during the offsite team meeting a couple weeks ago, I was doodling about the question of, from an actuary’s point of view, how the problem of parental leave should be solved.

I should remind readers that I am not an actuary in any sort of insurance field, but deal with retirement. That which I know about insurance comes from actuarial exams, work I did with a benefit benchmarking project, and general reading.

But readers who work for larger employers, at least on a salaried basis, will generally have either Short-Term Disability (STD) benefits, or sick day accruals, or both — that is, something like a 5 or 10 day sick day accrual, and then benefits at a reduced level like 70% afterwards — as a part of their employee benefits program. And in this case, maternity leave is generally covered under the classification of “recovery from childbirth” with the standardized timing of 6 weeks “recovery period” for regular childbirth or 8 weeks for c-sections. Presumably any medical complications might result in greater lengths of time, but, of course, the 6 or 8 weeks, for most desk jobs anyway, is something of a legal fiction, since moms are typically physically active around the house, with babycare and the like, a lot sooner than that anyway.

Could an individual purchase a STD policy even if not offered by the employer that would cover “recovery from childbirth”? According to growingfamilybenefits.com, coverage for “childbirth recovery” comes with employer-provided plans (even if they’re fully employee-paid) but not with individually-purchased policies, which only provide benefits in the case of pregnancy complications (e.g., being placed on bed rest). And this restriction makes sense – there would be substantial anti-selection issues otherwise, if women waited until they planned to conceive to purchase a policy, then dropped it immediately after using the 6 – 8 week benefit, then re-applied just before planning the next pregnancy.

What about “self-insuring” — that is, saving up to cover expenses during the leave?

It’s great, in principle. In practice, we know that too many working- and middle-class families simply don’t have this sort of savings cushion. After all, for a two-child family, we’re not just talking about building a 3-months-of-income fund by the time you reach 25 or 30 or whatever age you’d have your first baby at, even in the increasingly-idealized love+marriage+baby carriage order, but replenishing that fund for baby number two. And, much as, in principle, it ought to be perfectly do-able to live on just one spouse’s income, when, after all, if mom decides to stay at home, that’s exactly what they’d be doing, it’s just as true that for many people the transition to a substantially reduced income isn’t something that they’re capable of managing (though, to be sure, after any such leave runs out, the new family needs to figure out how to manage daycare bills, unless they’ve got a willing, free family member, or can cleverly juggle schedules). Call it paternalism if you want, but it’s a pragmatic recognition of how people behave. And if you consider other Big Expenses for which one is expected to save — kids’ college and retirement, primarily — the savings horizon is a lot longer.

What’s more, the notion that you have to have all your ducks lined up in a row, including a substantial financial cushion, before you can begin to contemplate having children, is harming families and harming society. Sure, there are plenty of families who don’t take this approach — either because their pregnancies are unplanned, or because they are in fact either frugal (that was us, with a satisfactory paycheck besides), or are willing to just manage one way or the other, or, at the bottom end of the income scale, are receiving benefits that are bumped up on a per-kid basis anyway. But among many middle- and upper middle-class women, there is definitely now the notion that you need to get your career very well established, have enough promotions that you’ll be missed while on your leave, and only then can you consider having a baby, or two at the outside most.

Which leaves us with the Social Insurance model: some sort of pay replacement for a fixed number of weeks or months to care for a newborn or newly-placed child, funded via a payroll tax. Should it be 100% of pay? Probably not — you are saving money, after all, relative to your post-return-to-work expenses by the fact that you don’t need childcare for that baby. Should it be available to both mothers and fathers? It probably has to be, in the year 2017, if it’s a matter of caring for a newborn rather than the physical recovery from childbirth. Should it be available for other “good reasons” such as caring for an elderly parent or a sick or disabled, but not newborn, child? Probably not – those are lovely benefits to have, but they don’t make sense as a government program, with the complexity of verifying the time off, administering small payments, and the like. How long should it last? Probably somewhere in the neighborhood of 8 – 12 weeks, up until that point that it’s considered acceptable for a child to start daycare.

A bigger question: should it be contingent on the parent ceasing to work and then returning afterwards, or should it be, effectively, a payment to all new parents as a percentage of family income? After all, having the state pay 8 – 12 weeks of pay at a 70% rate is the equivalent of paying between 10 – 15% of annual pay, as a lump sum.

And that is a more intriguing question: does a 10 – 15% of pay “baby bonus” make sense if it’s thought of as covering parental leave?

Image: from flickr. from https://www.flickr.com/photos/92334668@N07/11368402995

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