“Extra Care” Child Support Formula

“Extra Care” Child Support Formula


Australia’s child support scheme has a lot
to answer for. It has created wars between separated and
divorced parents. The fallout is evident in bitter family law
disputes and repeated violations of court orders for parenting time. The child support scheme pits parents against
one another. Incomes are pooled and then divided based
on care time. And the cost of children is almost always
inflated. The result is a race to the bottom. Each parent can get the upper hand on their
ex by getting their income down and the amount of parenting time up. It’s a lose-lose formula for Aussie kids. They often end up spending too much time in
low-income households. But it doesn’t have to be this way. Child Support Australia has been advocating
for a formula and system change for some time. We’ve looked at the maths of the current
scheme in great depth. It doesn’t add up. We can easily do much better. Let’s see exactly how Australia’s child
support system can be reformed. We’ll build a new child support formula
in this video, the “Pay for Extra Care” formula. And we’ll also explain what else can be
done to get separated parents cooperating. Let’s be clear about the current situation. Australia’s child support scheme is a big
stinking pile of manure. We’ve revealed the massive flaws before. There is a series of individual case simulations
that show how the scheme routinely produces distorted, unfair assessments (see the link
below the video). We’ve responded to hundreds of inquiries
from payers and receivers who can’t see the sense in what the system is doing to them,
their children, their partners or other loved ones. We’ve also exposed the many mathematical
flaws with the formula in detail. As explained in the videos, How Child Support
Works in Australia and Australia’s Child Support Formula: 3 Major Flaws, the scheme
is terrible fundamentally from being built on dodgy foundations. The starting assumption is that child support
should reanimate the economic circumstances of an intact family. A noble ambition maybe, but also an awful
foundation for the scheme. People need to understand that the state of
parents being permanently apart is a reality for many people. Why do we have to refer back to the hypothetical
imagining of parents having stayed together? Separated or divorced parents are different
from an intact couple. They live apart. They may have new partners and new offspring
or step-children. They don’t share common financial goals. There’s a good chance that they rarely speak
to one another. And yet the current scheme opts to bind them
together financially through a combined income approach. Under the current scheme, each parent is not
just responsible for providing for the children as they obviously should, but also for the
other parent. Consequently, the scheme creates a race to
the bottom. Bad behaviours, such as not working or alienating
the other parent from their children, routinely produce child support assessments that advantage
offenders at the expense of their ex’s. Despite its massive flaws, there seems little
point in tinkering with the current scheme. How do you tinker with a pile of manure and
turn it into something beautiful? You can’t. But you can successfully plant a rose on top
of a stench-filled pile. So let’s go for a new creation, a new child
support system. It can be nourished by the excremental learnings
from what has happened in the past. Let’s get started with introducing a new
system. By applying the following three principles,
we can create a new child support formula – one that would work far better and be
much fairer. The “50:50 care is fair” principle is
crucial for reforming the child support system. It says that child support is not needed,
and therefore should be dispensed with, when each parent has the children or child half
the time. While the principle has broad significance,
let’s just focus on 50:50 care cases for the moment. In these cases, by definition each parent
is doing their fair share in terms of physically providing care. Each parent is contributing about the same
in terms of making their time available for parenting. And each parent is making a similar contribution
in terms of providing a home, meals, discipline, activities, entertainment, etc.
50:50 care can also be considered naturally fair in financial terms. We know that parents with higher incomes tend
to spend more on their children. So, in a 50:50 care situation, the parent
with the higher income would normally spend more. That happens without the need for forced payments. For example, a higher income parent might
provide a nicer home, buy a good computer, and take the kids on more expensive holidays. So why is the “50:50 care is fair” principle
crucial for child support reform? The answer is that it simplifies everything. You can have an easily understood, effective
child support formula if you apply the principle. It provides a solid anchor point for the formula
and helps give clarity about what child support is for. The approach also has some nice mathematical
properties that we’ll use later. Problems start occurring as soon as you deviate
from the principle. If child support must be paid when care is
50:50, what exactly are the payments for? They’re obviously not compensation for one
parent providing more care since care is evenly split. And they’re not compensation for higher
costs, unless it’s the parent with the lower income who makes the payments. When care is 50:50, any automatic child support
payments are just a kind of income redistribution. It’s taking from higher earners to give
to lower earners for the sake of it. The payments aren’t for the kids because
the paying parent is just as likely to spend the money on the kids as the receiving parent. In effect, the payments are only there to
try to balance living standards between parents – without boosting living standards for
children. While some people seem to favour transferring
wealth at every opportunity, I’m sorry to say to those people that child support is
not the place for it. In practical terms, you can’t have a simple,
effective child support system that involves naked wealth transfer. Trying to manage everyone’s incomes complicates
an already difficult task. Not only do the objectives of the system become
compromised and clouded, but the maths of calculating support is made complex. And there are massive incentive problems as
well that we’ll get to later. The second principle, “Let receivers earn”,
helps demonstrate why child support reform must include the first principle that “50:50
care is fair”. These two important principles depend on one
another. The “let receivers earn” principle says
that child support payments should not depend on how much or how little the receiving parent
earns. The receiving parent should be free to earn
as much as they can without any kind of child support penalty. Who is the “receiving parent”? Using the “50:50 care is fair” principle,
the receiving parent must be the parent who provides the majority of care. It’s only by applying the “50:50 care
is fair” principle that can we define a receiving parent in this simple way. And that then allows us to use just one parent’s
income in the formula. The “let receivers earn” principle is
extremely effective at simplifying child support. By removing one parent’s income from the
equation, you get a cleaner formula. You also dramatically reduce admin costs for
the Government and parents. And, I can tell you based on feedback, the
hassles, complaints and grief for parents would be reduced enormously as well. No more worries about what the receiving parent
might be doing to avoid work and lower their taxable income. Allowing receivers to freely earn is an attractive
idea and, frankly, there are no other good alternatives. The original version of Australia’s child
support system had this property. Part of the reason why Australia brought the
income of receiving parents into the system is that some paying parents made complaints. They whinged that receiving parents weren’t
making a financial contribution. Unfortunately for all concerned, those lobbyists
didn’t think beyond the short-sighted goal of grabbing money off hard-working majority-care
parents. Parents with majority care often already face
significant financial disincentives that discourage them from working. If they work more, they have to pay more tax,
government benefits are withdrawn and they need to look at paying for things such as
after-school care. The last thing that should be imposed on them
is further discouragement in the form of reduced child support. It seems like the people who wanted to penalise
receivers for earning income didn’t know what they were doing. We’ve ended up with a system where children
are too often being looked after by sole parents who stay at home collecting welfare and child
support. Payers as a group probably haven’t saved
a single cent from bringing everybody’s income into the system. And they have ended up seeing their children
less. That’s the result of encouraging stay-at-home
parenting. The bottom line is that every major group
would win, including children and paying parents, by removing financial barriers for receiving
parents who want to work and earn more. For happy co-parenting, see Timtab.com. A robot will write your parenting plan for
you. Um, it’s artificial intelligence – AI, not
a robot! Whatever, Mr Know-It-All. Just go to Timtab. The “let payers choose” principle says
that you should allow payers room to be generous with their children of their own free will. In other words, don’t force-extract every
available dollar out of payers who are already meeting their obligations. The issue is especially relevant for higher
income payers. Under whatever formula you apply, higher income
payers will normally be more than covering their share of the costs of raising children. To explain why we should “let payers choose”,
think about this quote from a Wendy Mass novel. “A fight is going on inside me,” said
an old man to his son. “It is a terrible fight between two wolves. One wolf is evil. He is anger, envy, sorrow, regret, greed,
arrogance, self-pity, guilt, resentment, inferiority, lies, false pride, superiority, and ego. The other wolf is good. He is joy, peace, love, hope, serenity, humility,
kindness, benevolence, empathy, generosity, truth, compassion and faith. The same fight is going on inside you.” The son thought about it for a minute and
then asked, “Which wolf will win?” The old man replied simply, “The one you
feed.” If we want parents to choose a positive approach
towards parenting and being a provider, we should allow room for that to happen. Let paying parents make their own choices. If they are already providing well, let them
choose what they do with their extra income. They are the ones who earned it and we shouldn’t
be taking away their right to decide how their money should be spent. To do the opposite, to go for every last dollar,
gives rise to resentment, despair and counterproductive behaviour. Child Support Australia often hears from payers
and their new partners expressing lack of hope. No matter how hard the payer works, they seem
to never have money to save, or to put towards a home or new family, or to invest in an education
fund for when their child finishes Year 12. And we also hear many stories about payers
who quit work, reduce hours or go to extreme lengths to hide their income. Australia’s child support scheme has been
feeding the bad wolf. And squeezing payers also creates incentive
problems for recipients. Recipients are often able to profit from caring
for their children. This creates a temptation to dominate care
and work less, to the possible benefit of the recipient but at a cost to everyone else. How does it help children to have them brought
up mainly by low-income parents who are exploiting the child support system? It doesn’t. They should be spending more time with higher-income
parents. The three principles discussed so far allow
us to create a fairly simple child support formula, the “Pay for Extra Care” formula. Instead of the horrible complexity that exists
at the moment, child support could potentially be calculated by most people just using a
hand-held calculator. With the “Pay for Extra Care” formula,
child support is only payable for care a parent provides above 50 per cent. That quality comes from the “50:50 care
is fair” principle. The formula has two more features that follow
from the other two principles. Payments depend only on the ability of the
payer to contribute towards the child or children, not on the receiver’s income. And the amount of child support tapers off
at higher income levels, allowing good providers more choice. To calculate child support, let’s start
with the cost of a child. This is the annual cost of raising one young
child. Under the proposed new formula, the cost of
a child is 15 percent of the payer’s income for all income up to $75,000 per year. For any income above $75,000 up to $180,000,
it’s 5 percent of the extra income. Why have we chosen these rates and levels? Actually, we’ve mostly taken them from the
current scheme. $75k is about the annualised rate of MTAWE:
Male Total Average Weekly Earnings. The current scheme uses this benchmark. A 15 percent rate means the cost of a child
is about the same as currently applies for an average payer. The 5 percent rate gives a solid tapering
off in payments for higher income earners who face high marginal tax rates. Let’s see how the formula works using an
example. Suppose John is the payer because he has less
than 50 percent care. If his taxable income was $90,000 last year,
the annual cost of a child is 15 percent of $75,000 plus 5 percent of $15,000. This is 11,250 plus $750, which equals $12,000. Next, we adjust for the number of children
and their ages. Again, we’ll use the settings from the current
scheme. These are implicitly given in a series of
tables and are based on economic studies. The “cost of children” is the “cost
of a child” with any cost loadings added. A second child increases costs by 50 percent. Three or more children increase costs by 70
percent. With respect to ages, a teenager costs 15
percent more than a young child. Two or more teens add 30 percent. If the only child is a teen, there is a 40
percent cost adjustment. Let’s suppose John has two teenagers. The total cost factor is 100 percent plus
50 percent for having a second child plus 30 percent since both are teenagers. So the cost of children for John is $12,000
times 180 percent or 1.8, which works out to $21,600. This is the total cost of children if they
lived with John all the time. We can use it to calculate how much John should
pay in child support. Remember, he pays for the extra care provided
by the mother above 50 percent. Suppose John’s ex, Kate, has the children
11 nights per fortnight. That means she is providing four extra nights
of care per fortnight above the 50:50 level of seven nights. So, the extra care she provides is four divided
by 14, which is 28.6 percent. That means the amount of child support John
pays Kate is 28.6 percent of the cost of children. This is 28.6 percent of $21,600, which works
out to $6,178 per year. We’ve added this new formula to Child Support
Australia’s online calculator. So anyone can see how their assessment would
change if the new formula were introduced. The new formula is fair. You can see how it works. It has similar economic assumptions as the
current formula in terms of salaries and the cost of children. But the payment calculation is different. Essentially, the new formula requires payers
to return the savings they make from providing less than their fair share of physical care. By contrast, the current formula, which is
difficult to explain in words, has all sorts of haphazard income transfers going on. In terms of assessments, the new formula tends
to produce lower child support amounts. This happens because the new formula is unbiased. It avoids biases associated with the current
formula. For example, it doesn’t (a) inflate the
cost of children by adding incomes across households (b) require payers to cover anywhere
up to 100 percent of often inflated costs and (c) have an irregular relationship between
a parent’s care percentage and the amount of financial credit they receive for providing
care. There’s another principle that should be
part of the child support system. This one doesn’t relate to the formula as
such. It feels almost ridiculous to have to say
this, but we need a new principle of not rewarding parents who break the law. Suppose, for example, a parent defies a court
order and keeps their child away from the other parent. They ring Child Support and say, “I know
there’s a court order for shared care but I’ve got the kid all the time now.” What does Child Support currently do? They send a bill to the poor alienated parent
demanding for more money for the offender. Another example. Suppose a payer earned very little eight years
ago and has refused to lodge a tax return since. They’re obviously hiding income since they
regularly go on overseas holidays. What penalty does Child Support apply in this
case? Nothing. They just keep assuming the offender has little
income and reward them with a favourable assessment. We actually have hundreds of examples of these
sorts of things, which have been supplied by forum participants. Breaking the law is wrong and so is rewarding
such behaviour. Simple fixes are possible by following the
“Breaking the law goes unrewarded” principle. If court orders are in place, a parent should
not be paid for extra care above the level ordered unless they can show the other parent
is refusing to provide care. If a parent is doing dodgy things with their
income reporting, Child Support can just set their income to a high benchmark level until
they start complying. These are easy fixes that would help stop
illegal activity. They do, however, require legislative changes. Reforming the child support system would help
the people who are being treated unfairly. These include: children who can’t see one
parent because the other parent is keeping them away for financial gain; children with
low living standards because parents are trying to keep their incomes down for financial gain;
parents who are working extra hours to provide for their children; and parents who are encouraging
relationships between children and the other parent. Reform would improve incentives so that people
are rewarded for doing the right thing rather than for doing the wrong thing. Children would benefit. Society and taxpayers would also benefit as
a result of better employment outcomes. People caught up in the system would benefit
overall and not just financially. The child support system would start feeding
the proverbial good wolf and starving the bad one. We would see fewer disputes, greater positivity
and, it can be confidently said, a better side of humanity.

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