The “child care calculator” from an actuary’s point of view

Last updated on: July 14, 2017 at 8:56 am by Jane the Actuary

The “child care calculator” from an actuary’s point of view 2017-07-14T08:56:59-06:00 Jane the Actuary

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AAAAAAAAAAARGH!

That’s my first reaction to the “child care calculator” put out by the Center for American Progress, as reported by NBC. The calculator, whose fuller background is here, purports to show that astonishingly large sums of money are left on the table by someone making the decision to leave work for a period of time to care for children. The objective of this calculator, as reported by NBC, would appear to be to make it clear how needed extra government subsidies for child care are.

“The most frustrating part for me is seeing how the millennial generation goes through this,” said [CAP economist Michael] Madowitz. “This is going to matter a lot for their lifetime earning potential. The fact that we’re not in a position to get [a better] childcare system set up in time for them is potentially a very large missed opportunity.”

What would a better childcare system look like? Ideally, in Madowitz’s opinion, it would be an extension of the K-12 public schooling program.

“When your kid is five years old, they can go to school for free,” noted Madowitz. “Perhaps we should not wait until they’re five.”

On the CAP site itself, they have (ostensibly) a different, or at least supplemental, objective, that of showing parents who make the stay-at-home decision due to short-term daycare costs, that they’re being pennywise but pound-foolish.

Some families would prefer a stay-at-home parent, informal child care arrangements, or reduced hours even if finances were not part of the decision. But, for many families, short-term child care costs lead to arrangements that may not align with their immediate preferences or long-term interests. A resource such as this calculator is not focused on families who are making these choices independent of financial constraints. This tool focuses on the families for whom finances play a very large role in these decisions. The goal is to simplify the financially complex decision facing families and to help policymakers understand the real world tradeoffs these constrained families are locked into under the nation’s current child care system.

Now, my first reaction is that they are wrong-headed in making the assumption that the default is for every American adult to work continuously from start to end of their “working lifetime” and that something is wrong and needs fixing for those who don’t follow this model. Yes, this is a real issue for someone working paycheck-to-paycheck, but for those who make the voluntary choice to follow another model, whether it’s a “gap year” (which, funny enough, you never hear criticism of from a “lost lifetime income” perspective) or a sabbatical or working part-time or declining available overtime, or, yes, choosing to forgo income in order to rear your children, rather than paying someone else to do so — well, for crying out loud, since when have progressives begun pushing the idea that all that matters is maximizing your total lifetime earnings?

But the math also just doesn’t hold up.

The methodology is only available in a download form, and some of the underlying data I can’t verify, but one key issue is that they flatly ignore the time value of money. So far as I can tell, they treat a dollar earned at age 65, or paid out in Social Security, as having the same value as a dollar earned today. They say they do this “to maintain comparability of our projections with those of retirement calculators” but that’s not a credible reason — retirement calculators are dreadful for this very reason and generally fail to give their users a good picture of their retirement income replacement percentage for many reasons. The primary effect that their failure to discount future income is that it substantially magnifies the lost income, which in turn means that their calculator is not credible.

Now, I could quibble about other portions of their assumptions, and especially their mechanics of how they identify lost merit/promotional increases over time, but, frankly, I need to start my own workday. (And, yes, CAP, there’s a definite “cost” to my blogging; if I shut down the blog today, and stopped reading other blogs, well, yes, I could increase my work hours, and get in that overtime that my boss is after me for. So the American economy is going to have to miss out on that lost GDP.)

Image: https://commons.wikimedia.org/wiki/File%3AMoney_Cash.jpg; By Jericho [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons

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