Of all the items included in the Biden budget, paid family leave is the most nefarious, in terms of both cost and ideological fervor. It is an issue that the left has been pushing for a long time: paid leave and tax-paid, universal child care have been on their agenda for about 15 years by now.
The paid-leave idea is particularly ominous: it removes incentives for parents to save up for their own financial security; it weakens marriage incentives; it gives government the authority to dictate a parent’s choice between work and leisure; and it opens for Congress to drastically raise taxes. On top of that, this program has the potential to become one of the two or three costliest entitlements in the federal budget.
Once fully developed, this program could run an annual cost of $500 billion, but the maximum entitlement value is far higher at almost $1.5 trillion.
That does not mean that the paid-leave program will actually cost north of a trillion dollars. On the contrary, as it is designed now, it is more realistic to assume that the annual cost will stay far below that number. However, the maximum entitlement value gives us a very good idea of what enormous risks Congress is actually taking in creating a program like this: once people are made eligible for some government benefit, the cost of that benefit is entirely dependent on whether or not people want to use the benefits. Government no longer has any cost containment options – other than denying people what they are eligible for.
In short: break a promise.
The maximum entitlement value is the only firm cost cap that government itself puts on an entitlement program. It is the highest possible amount that Congress would have to spend, should every person eligible for paid leave choose to use the entitlement program to the full extent of what Congress allows him or her to do. That, however, does not mean that it is entirely unrealistic in the assessment of the sanity of a paid-leave program. On the contrary, the actual cost can actually turn out to be closer to the maximum entitlement value than most people realize. To see why, take a look at this nice little commentary over at the Heritage Foundation by Rachel Greszler and Carrie Lukas.
It is fortunate for us taxpayers that people in general use entitlements to a lesser extent than the maximum entitlement value allows for. If every person actually eligible for Medicaid would enroll and use all the medical services that Medicaid allows for, the program would likely suffer a fiscal blow-up within a couple of years. We can expect the utilization of paid family leave to be far below what the maximum entitlement value allows – at least initially. As I reported in my paid-leave white paper from 2017, experience from California shows that parents are slow to catch on to this type of program.
However, I also report in the same paper that utilization is quite a bit higher in European countries. Given the nature of the program – you get paid for being away from work – it is likely that utilization will rise quickly and reach higher rates than other entitlement programs. One reason is the lack of poverty stigma that comes with, e.g., food stamps and Medicaid. The paid-leave program will – rightly – be perceived as a universally available entitlement program, one that “everyone” has the right to get access to. It will have the same appeal as a single-payer health care system and therefore likely a much higher utilization rate than existing entitlement programs.
It is very important to understand the potential – even likely – cost of this program, even though the initial offering from the Biden administration appears to be minuscule. As I explained in my rundown of the American Families Plan as included in the Biden budget, the expected cost of the administration’s current paid-leave proposal is just above $12.4 billion in 2024. As we will see below, this number is nowhere close to what the cost is likely going to be, but the figure is understandable from a purely tactical viewpoint: the Democrats know that Republicans – or at least the fiscal conservatives among them – will look for stand-out costly items in the budget. By making the paid-leave program hunker down behind bigger items, the administration apparently hopes to sneak through without much opposition.
To estimate the cost of the paid-leave program, we need to do two things: understand exactly what the administration is officially proposing, and assessing the actual cost of the program based on its maximum entitlement value and likely utilization rate. To begin with the official proposal, we need two pieces of information: the terms for income replacement and the eligibility criteria.
Income replacement is defined by the ratio at which a person’s income is compensated while on paid leave, and the duration of leave permitted under the program. When the White House first proposed paid leave under the American Families Plan, it did not offer much detail on income replacement. Its first mention of the paid-leave plan, from April 28, only states that it is a component of the administration’s Central Planning of American Families. However, that same day CNBC offered more details, explaining that the plan would grant up to $4000/month, replacing two thirds of a person’s income for up to 12 weeks per year.
In an estimate that I explain in more detail below, I put this annual income replacement cost at $5,566 per person who chooses to use paid leave. This is a low estimate compared to the maximum entitlement value of $12,000, which we derive from the $4,000 monthly benefit cap and the eventual duration of leave at 12 weeks.
The next piece of information is the list of eligible criteria, in other words reasons under which people can claim paid leave. This list does not directly inform our cost estimate, but it gives us a fairly good idea of just how high the utilization rate will be. Simply put: the more reasons for being home that the paid-leave program recognizes, the higher the utilization rate will be.
So far, the Biden administration has not been very clear in exactly what reasons for leave would be eligible. According to at least one source, that will be specified by Congress once they draft the relevant bill. However, it is reasonable to expect two types of leave:
- To care for a newborn or newly adopted child; and
- To take care of one’s own health care or the health care of a family member.
It also appears to be the case that the Biden plan would include “safety from sexual assault, stalking, or domestic violence” as reasons for leave. These are typically not included in programs elsewhere and demonstrate a willingness from the administration to broaden reasons for leave beyond the realm that is traditionally offered by paid-leave programs. Therefore, we can expect the bill-drafting process in Congress to be broad in its approach: more reasons for leave rather than fewer.
In other words, when we estimate the potential cost of this program we should assume a reasonably high utilization rate, and that it will rise relatively quickly. The administration appears to want the program to evolve gradually over the next ten years, offering full eligibility by 2031. However, it is a fair assumption that once this program is in place, it will expand much more quickly than that: it will simply be irresistible to candidates for both Congress and the presidency to offer more paid-leave benefits, and to offer them faster.
With all this in mind, let us calculate the potential cost of the program.
To make this estimate as conservative as possible – in other words to avoid accusations of politically motivated hype – suppose the paid-leave program is only used in households with children under the age of 18. Based on Census data, there are roughly 32.5 million such households in America. They distribute as follows:
- Married couples: 22 million
- Parents living together but not married: 2.6 million
- Single moms: 6.25 million
- Single dads: 1.5 million
Next, we need to know how many of these parents would be eligible for paid leave. The first step is, quite obviously, that they work; based on a combination of data from the Census Bureau and the Bureau of Labor Statistics we estimate that:
- In the married-couple group there are 34 million employed parents;
- The cohabit-couple group has 4.1 million employed parents;
- Among single moms, 4.5 million work; and
- Just over 1.25 million single dads work.
We end up with 43.9 million working parents who would be eligible for paid family leave.
Right here, let us take a break and look back at what the Biden administration believes this program will cost. If we assume that the appropriations included in the Biden administration’s budget would be the actual cost of this program, by 2024 each one of these eligible parents would be eligible for a total of $282.60 in benefits. In one year.
This number is of course ridiculously low. If we assume that the program would be fully developed by 2024 – which again the Biden administration does not predict it to be – only five percent of the eligible parents would be able to take full benefits, with nobody else getting anything.
Again, in fairness to the White House, their plan is to develop the program to full eligibility over ten years. However, things do not look much better by 2031. By that year the Biden budget predicts that paid leave will cost $48.9 billion. Suppose that the number of eligible parents – as defined here – grows by one percent per year through 2031 and that annual inflation is three percent (far higher than anyone in official position is willing to sign on to). This lands us in a current-price benefit value of $1,355 per parent.
Bluntly, by 2031 the expected utilization rate would be 18 cents to every dollar parents are eligible for.
It is drastically unrealistic to expect that American parents, when faced with the opportunity to be home for a host of reasons that only partially have to do with having kids, would choose to only use 18 percent of the benefits they are eligible for.
But what is a realistic utilization rate? Let us start with parents of newborns or newly adopted children. The long-term number of births in America is about four million, though in the past two years it has been below 3.8 million. It appears to be the case that Millennials don’t feel they are men and women enough to be parents, and seeing some examples of the young generation I am inclined to agree. Nevertheless, if we assume that this reproductive panic among the young is transitory and that the long-term trajectory is four million births, we have a total of four million parents who would be eligible for paid leave based on the newborn criterion (with only one full leave period for each kid).
How much would it cost if half of those parents chose to use this program? Based on median-income data from the Bureau of Labor Statistics and the Census Bureau, we estimate an average income of $36,000 per year. (The average income per employed worker is higher, but we have to keep in mind that parents with young kids typically are younger than the average worker and therefore are earlier in their careers. Hence they make less.) Under the assumption that they can take 12 weeks of leave and get an income replacement of 67 percent, the maximum benefit each one of them can expect in one year is $5,566.
Already here, the federal government will have to pay out $11.1 billion – in 2021 prices. In other words, this estimate is under the assumption that the program would be up and running in full today.
But what about the rest of the paid-leave program? Again, we have 43.9 million parents who would be eligible for other reasons than to care for a newborn. They can be home for medical reasons – their own or someone in their family – or for the safety reasons mentioned earlier, or any other reason either included from the start or added on as the program expands.
Assuming that each and every one of these parents would use the benefits to their fullest extent, in other words stay home for 12 weeks each – meaning that both parents in a married or cohabitational relationship take 12 weeks of paid leave – and given the aforementioned earnings, the total cost of this program would be $456.6 billion per year.
This does not include the costs of benefits to parents of newborns. If we make the same adjustment to the general parent population in terms of utilization as we did for parents of newborns, the total cost falls by half. Including the newborn-parent cost, we now end up with a realistic $239.3 billion in annual benefits.
Let us keep in mind that we have not yet expanded this program to include working adults that do not have kids at home. With half of the 150 million employed Americans taking full paid leave, and with the assumption that the average employee makes $36,000 per year in qualifying income, the annual cost is almost $417.5 billion.
It is important to remember that the program we discuss here is confined to a two-thirds income replacement rate and to 12 weeks of paid leave. Both these variables are low compared to other programs: the Canadian paid-leave program runs for 52 weeks, while some European countries offer considerably more than that. There are European countries that replace 80 percent or more of a person’s income. It is therefore entirely realistic to expect an American federal paid-leave program to become far more generous with the benefits it offers.
As a glimpse of what this means, suppose we expand eligibility to 26 weeks and raise income replacement to 80 percent up to $4,000 per month. Under the assumption, again, that half of the working population cashes in full benefits (or that everyone takes half of what they are eligible for), the total cost now shoots up to a hair more than $1 trillion per year.
We can skin this cat many different ways. Suppose only a third of the eligible population took full paid leave under the more generous criteria. The program still runs up a tab of $720 billion. To get the cost below the half-a-trillion mark, we need to rely on the working population to only use one third of what they are eligible for.
Either that, or keep the program limited to 12 weeks and a 67-percent income replacement rate.
How realistic is that? Is anyone willing to take the fiscal risk that comes with trusting Congress with a program that can so easily be used to provide financial “encouragement” for voters to cast their ballots a certain way?