Where We Are

As has been said ad nauseum, the United States is the only major country on Earth with no federal level paid family leave program.

The only federal level leave program if you can even call it that is the Family and Medical Leave Act of 1993. It permits up to 12 weeks of unpaid leave from work for the birth of a child, caring for a severely ill family member, or recovery from serious illness if the worker has been employed for at least 1,250 hours over the last 12 months in a company with no less than 50 employees.

From this cursory overview of the law, a few problems become evident. Most pertinent is that the law provides zero compensation. This is especially damaging for lower income workers who often don’t have any access to employer provided leave. People who work for small businesses are excluded from the law, leaving that entire group of people potentially without reprise in the event of a birth or unexpected medical event.

Luckily, there has been broad consensus over the need for some paid leave program in the United States. That agreement quickly erodes when policy makers specify details such as funding mechanisms, benefit duration, and benefit amount.

Current Major Proposals

FAMILY Act

This is the major Democratic proposal for paid family leave created by Senator Kirsten Gillibrand that establishes a new office of paid family and medical leave in the Social Security Administration. It provides a 66% wage replacement for qualifying persons with a payment floor of $580 per month and a ceiling of $4000 per month for a maximum duration of 12 weeks. Payments shall be paid through a dedicated trust fund financed by a 0.4% payroll tax split evenly between employers and employees up to $137,700 of wages.

Sounds great, right? Not exactly, as there are several concerning issues with this particular legislation. Most problematic is the funding mechanism; it’s regressive and doesn’t raise the requisite revenue to fully fund the new entitlement. The cost will vary considerably depending on what the participation rate of the program is, but the CBO estimates that the new payroll tax will raise $319 billion USD from 2020 to 2030. Taking the CBO’s participation assumptions, the total cost in the same period would be $547 billion USD. This leaves a gaping deficit of $228 billion USD in the budget.

Making participation estimates based on FMLA use and from survey’s like the Cato Institute’s 2018 family leave questionnaire will result in much higher program expenses. For the former, it is a dubious metric because it assumes that take up would be identical to our present system where FMLA provides no payout. For the latter, concerns regarding sampling are reasonable and an aggregation of many different quality polls would be ideal in gauging what participation numbers would look like. If we assume the high end of program participation from Cato, the payroll tax would have to be 2.9% to fully fund the program.

Cassidy-Sinema

This proposal is the only proposed bipartisan paid family leave bill. It allows parents to receive up to $5000 from their child tax credit in advance. There is one really bad catch though: parents who accept this will receive reduced child tax credit payments for the next 10 years. If you’re too poor to receive any benefit from the child tax credit (it’s non-refundable), they receive 100% of their wages up to $5000 over 12 weeks which they have to repay with said CTC cuts for 15 years.

I’ll be blunt, this is not a paid leave policy because it doesn’t result in a net increase in aid to young families; it’s nothing more than a loan. The qualified beneficiaries under this plan are only new parents; people needing to care give to a family member or take time off for a substantial medical illness don’t qualify under this plan.

New Parents Act

This is also a loan proposal, but is arguably more dangerous as it takes money out of social security to pay for benefits. This reduces the solvency of the Social Security trust fund and also forces parents to make a choice between taking leave and delaying retirement. This loan is also interest bearing, unlike the Cassidy-Sinema proposal. Parental leave is the only qualifying event under this bill as well.

Design Considerations

These three bills have serious problems that reflect the difficulty of balancing different policy goals. One commonality is an inability from all fronts to accept the fact that paid leave isn’t necessarily cheap. There are numerous benefits that we’ll get into, but we have to be mindful that the costs to pay for a program don’t exceed the benefits it provides parents and their children.

Costs

There are three primary concerns with respect to costs that a family leave program will incur

• The tax burden
• Other burdens on employers like workplace disruptions
• The budgetary impact

The tax burden is going to vary depending on duration and benefits paid. A modest proposal like AEI-Brookings (provides 8 weeks of paid leave with 70% wage replacement up to $600/week) could be fully funded with a 0.15% payroll tax. More expansive proposals are going to incur a great tax burden on businesses and employees. Another contributor to expense is how many people are qualified to receive benefits. In paid FMLA, the majority of recipients would be people on medical leaves. The CBO estimates this share of people to be 63% of participants under the FAMILY Act. Crafting a plan that just covers parental leave would make such a proposal considerably more affordable.

Benefit

The benefits of paid paternal leave aren’t anything to scoff at. Women taking leave are less likely to be re- admitted to the hospital as are their newborn children. It also is associated with a general reduction of infant health ailments in the long run. The first few months of life are critical for healthy brain development and having parents present and interacting with their child is imperative for their success down the road. Furthermore, family leave boosts female labor force participation rate after birth.

Benefit structure is an important consideration in design. There are a couple parameters to consider:

• Duration
• Benefit formula

Too short of leave duration presents unique issues. 12 weeks or less of leave is associated with increased depression and 8 weeks or less are associated with a reduction in health. A hodgepodge of different studies have suggested somewhere around 6 months is the magic number when looking at maximizing long run child health and parental health. A benefit duration that extends beyond that has diminishing returns and causes slower return to the workforce for parents whilst also costing workers and firms more.

The payment formula is a large determinant of how progressive a leave policy is. The FAMILY Act is very regressive as the benefit floor is a paltry $580 for a month, but will pay out as much as $4000 for one month. This disproportionately sends more dollars to higher wage workers who have far greater access to paid family leave on average. These higher wage workers are also far more likely to have access to paid family leave by their employer

Here, ATUS is any paid leave that could be used for family reasons and NCS was clearly defined paid family leave of some sort.

These reasons provide a strong case for a flat compensation amount. This is highly progressive because those with lower wages have a much higher effective replacement rate (exceeding 100% in some cases) and those making more who may have access to a private plan would receive less relative to their income. A middle ground between this approach and a flat replacement rate would be a formula mimicking the Social Security benefit formula. This would result in lower income people having a greater replacement rate than wealthier recipients, but would make administration more complicated and give less of a benefit to those close to the poverty line relative to a flat benefit.

A Serious Proposal We Can Afford

I propose a fully funded, social insurance model paid parental leave program ran within the Social Security Administration. All workers who have earned at least $10000 (indexed to inflation) in the last 4 years qualify for taking parental leave for the birth of their child or an adoption of a child. Leave duration would be 24 weeks and would be split amongst parents whichever way they see fit.

For each kid, a flat benefit of $600/week (indexed to inflation) for a maximum of $14,400 would be paid out regardless of income for an entire household. This is extremely generous relative to most other countries that have opted for a flat replacement rate. Assuming the program took affect at the beginning of this year and there were 4,000,000 qualified adopted and born children that parents took time off for that took the full 24 weeks, the program would cost $57.6 billion USD in its first year.

To ensure a comfortable buffer for increased child rearing that will likely occur with this policy, I recommend a 0.75% surcharge on the Social Security FICA to pay for it. If current birthrates remain largely the same with only mild increases, the trust fund will run slight to moderate surpluses. There are other ways to pay for this as well without increasing the deficit, such as ending the charitable giving deduction and other base broadening measures. The payroll tax could also be lower if it were applied on all wages (~0.6%). If we stick with a payroll tax covering all wages, the average worker would pay an additional $6.17 per week in tax for the benefit ($7.71/week if the tax is a surcharge on the existing SS FICA).

Lets Make It Happen

As has been elucidated, America can afford a quality paid family leave plan if we’re smart on the details and mind cost. It’s time that Congress pays consideration to the variables of these policies and craft a plan like the one I’ve proposed or another plan that focuses on providing the majority of the benefit to lower income workers and ensures costs don’t exceed benefits.