Tuesday, March 25, 2008

The Cost of Raising Children

How much does it cost to raise kids in today's dollars? Every year I see estimates in the hundreds of thousands of dollars, and it makes me scratch my head. It seems to that the people putting together these statistics pull these numbers out of their ass thin air. Today I went and read some of the actual FDA report upon which these news articles are based (pdf warning).

I still don't get it. If this is true (and that in my mind is a big if), then Americans pay a hell of alot of money to raise (on average) relatively stupid kids compared to the rest of the first world, a significant portion of whom (nearly 30%) don't even graduate from high school.

According to this survey, the cost of raising a kid through age 18 (note that this does not include college expenditures) for a middle income bracket family is $197,700. This is about $11,000/year/child. According to this report, the cost of raising my 2 kids is more than double the cost of my home in today's dollars.

Below are two figures from the 2006 FDA report. My apologies for how small they are. You can pull them up in a separate browser tab or just look in the pdf report to find them if you want to look at them closely.





From my perspective, the only way to come up with a number close to this is to consider lost opportunity costs for working wives who are staying at home. If one does that, the numbers don't come close. A woman missing out on 20 years of work at $30k/year is losing $600,000 in today's money. Give her a college degree and a family is easily passing up a cool million dollars by having a mom stay at home.

But the FDA doesn't consider lost opportunity costs. They are solely interested in how much a family pays for housing, food, transportation, clothing, healthcare, education, child care and miscellaneous items like personal care and entertainment expenses.

So what goes into these bigger numbers? What percent of parents vs. non parents pay more to live in a nice school district? That can be a big expense, but can it explain an average cost/kid of $66k ($132K for two child families). That sure doesn't apply to me. Some people might get a slightly larger house, but how many people would get a 1 or 2 bedroom house vs. a 3 or 4 bedroom house if they didn't have kids? For me a 3 bedroom home is probably the smallest I would go, even without kids. The total education costs are high for public schooling and home schooling, but they are low for private school. The food costs for children in the 0-2 age range are ridiculous in my opinion, but then again my family didn't buy formula or baby food. A average teenage boy can certainly put the food away, so maybe $50/week/kid is justified. The clothing costs seem ridiculous to me, but then again with few exceptions I don't shop for new clothes for my kids (or for myself for that matter). Overall, to me these numbers look greatly inflated.

Looking at the big picture, according to this study a family which grosses $59,600/year will spend $197,700/kid. Multiplying this by the family size factor and taking it out to eight kids, one can see that large families are quite expensive. The biggest question this raises for me is this: are families with 8 or more kids all con artists with drug/forgery businesses on the side?
# Kids: % Income Spent on Kids
1 Kid: 23% of gross income (124%)
2 Kids: 37% of gross income (100%)
3 Kids: 43% of gross income (77%)
4 Kids: 57% of gross income (77%)
5 Kids: 71% of gross income (77%)
6 Kids: 86% of gross income (77%)
7 Kids: 100% of gross income (77%)
8 Kids: 114% of gross income

Clearly, this equation breaks down soon after 3 kids, so why do the report authors even bother saying the numbers should be multiplied by 0.77 for when the family has "three or more" children. Did I miss the disclaimer for families with more than 3 kids? I certainly don't believe 0.77 is the correct factor for 4 kids, because there is no way on earth that a middle income family spends 60% of their gross income on their 4 children.

The only way these numbers make any sense to me is if I imagine that two working parent families have very extravagant lifestyles compared to my own. I didn't see anywhere in the report where two working parent families were broken out from two parent families with only one person in the workforce. Even then, though, the results seem rather dubious.

So, what's wrong with my analysis? Did I miss the fine print by only skimming the report over my lunch break? Am I just a whacked out cheapskate who can't relate to the average Joe? Does anybody think that on average a middle class family spends 37% of pre-tax income to raise 3 kids? Enlighten me, please!

MB

2 comments:

Kevin said...

MB,

I don't readily see a flaw in your reasoning. Granted, their focus is upon 2 children since that is average, but, at the very least, the 0.77 factor seems wrong. It does seem like they failed to do some basic sanity checks, such as the one you provided.

I've perused their methods a bit, though not in great detail.

Apparently, families with more than 6 children were explicitly excluded, as well as extended families. Furthermore, while the Consumer Expenditure Survey seems to occur about yearly, all estimates on the cost of children since 1992 appear to be based upon the same 1990-92 survey (and only the interview portion). It seems like they merely adjust their figures to current dollars every year.

Here are select quotes from crc2007.pdf :

"Data used to estimate expenditures on children are from the 1990-92 Consumer Expenditure Survey - Interview portion (CE)."

"About 5,000 households are interviewed each quarter over a 1-year period. Each quarter is deemed an independent sample by BLS, bringing the total number of households in each year’s survey to about 20,000 households.

From these households, husband-wife and single-parent families were selected for this study if: (1) they had at least one child of their own, age 17 or under, in the household, (2) they had six or fewer children, (3) there were no other related or unrelated people present in the household except their own children, and (4) they were complete income reporters.

As defined by BLS, complete income reporters are households that provide values for major sources of income, such as wages and salaries, self-employment income, and Social Security income. Quarterly expenditures were annualized.

The sample consisted of 12,850 husband- wife households and 3,395 single-parent households and was weighted to reflect the U.S. population of interest, using BLS weighting methods.
"

"Unlike food and health care, no research base exists for allocating estimated household expenditures on housing, transportation, and other miscellaneous goods and services among family members. USDA uses the per capita method in allocating these expenses; the per capit method allocates expenses among household members in equal proportions."

"Results of this study should be of use in developing State child support guidelines and foster care payments as well as in family educational programs."

Kevin

MamasBoy said...

Kevin,

Thanks so much for reading more and adding context and info on how these numbers are derived. I really appreciate it, since I haven't had the time to follow up and do more reading myself.

One of the paragraphs toward the end of your post seems to be key to how the report authors come up with such unrealistic numbers overall. It also explains why I found the food numbers (outside of the 0-2 age range) quite reasonable. I guess a lot of women must still be feeding their kids baby formula to skew the 0-2 year food numbers so high.

"Unlike food and health care, no research base exists for allocating estimated household expenditures on housing, transportation, and other miscellaneous goods and services among family members. USDA uses the per capita method in allocating these expenses; the per capita method allocates expenses among household members in equal proportions."

It seems to me that if studies are going to calculate how expensive kids are on a per capita basis for housing and household expenses, then they should also report how much less it costs to support an adult after kids are born. This would give some perspective and make the calculation methodology more transparent, since people would then see that after you have kids, the cost of living for adults in the household drops precipitously. I suspect that they don't do this because it would raise too many questions in people's minds and cause a lot of folks to dismiss the report who otherwise would believe it. Honestly, when I read reports like this, I wonder what the authors' agenda is? It reminds me too much of the Chinese population graph I blogged about a while back.
http://embracingtherisk.blogspot.com/search/label/world%20population
When I read that these numbers are being used to public policy decisions, I find that idea a bit scary. On the other hand, it also may explain why there is no concerted effort to correct the many shortcomings and overestimation errors int he report. While my own brief foster care experience came it at the break even point cost-wise, that was only because it didn't last too long. Foster parents can bring in quite a bit of income beyond what it takes to support a kid, if they have a measure of stability. However, many (most?) foster care situations are very brief and the kids often come into the home with almost nothing in terms of clothes, etc. In that sense, if these reports were more realistic, many foster parents would be losing their shirts financially in situations where the kid was only in the home for a few months... either that or they wouldn't be able to provide as well for the kids. Keeping the numbers high to justify realistic reimbursement for short term foster care is the best explanation I can come up with for why these reports drastically overestimate the cost of children year after year without anybody raising a stink and getting the methodology corrected (like doing a bit of research into how housing and transportation expenses get divvied up for the average household in the same income and age brackets with/without kids).

MB