Is US Policy Getting the Cost of Children Wrong?
New research using life satisfaction suggests welfare thresholds may overestimate the cost of a first child, while tax relief drastically & dramatically underestimates it.
Adding a first child to a two-adult household requires an 18% increase in income for the family to feel just as satisfied with their life as before, finds new research using subjective well-being data ("The cost of raising a child: Equivalence scales in the United States" by Peibin Hou, Falin Sun, Wendiam Sawadgo, Samir Huseynov, & Wenying Li).
Why it matters: With U.S. birth rates falling 20% since 2007 and hitting record lows, understanding the perceived financial burden of children, a key factor in these trends, is crucial. This "equivalence scale" helps gauge the actual cost needed to maintain living standards and has big implications for poverty measures, tax policy, and social assistance programs.
While the government uses different equivalence scales implicitly or explicitly, there's no single standard, calculations often lack transparency, and they frequently don't isolate the cost of a child versus another adult.
Example 1 (HHS Poverty Guidelines 2024-25): A household of 3 needs $25,820, while a household of 2 needs $20,440. This implies a 26% income increase (scale of 1.26) for the third person, regardless of whether it's a child or an adult.
Example 2 (Census Poverty Measure 2023): A 2-adult household threshold is $20,404; a 2-adult, 1-child household threshold is $24,526. This implies a 20% increase specifically for the child (scale of 1.20). This is based on the older Orshansky method.
Example 3 (Tax Deductions): The standard deduction increases from $29,200 for two adults to $30,500 with one child (+$ 1,300). This implies only a 4% cost increase (scale of ~1.04).
The Setup: Researchers used a subjective approach, asking people directly about life satisfaction. This helps overcome major challenges in traditional "objective" methods that rely on consumption data, as it's hard to separate child-specific spending or make assumptions about utility without observing children living alone.
The Data: A survey of a nationally representative sample of 1,991 U.S. residents (balanced for demographics) conducted via Qualtrics, excluding 30 responses for quality issues.
The Method: Participants reported household income, number of adults/children, and life satisfaction on an 11-point Likert scale (0-10). The researchers used this data to estimate the parameters (α for the cost of a second adult relative to the first, β for the cost of each child) in the widely used OECD equivalence scale formula: Equivalent Income = Household Income / (1 + α*(N_adults-1) + β*N_children). They assumed life satisfaction proxies for utility and used two measures:
Direct: "How satisfied are you with your household income?" (0-10 scale).
Indirect (Incentivized): Participants guessed the average satisfaction reported by other respondents at different income levels (0-10 scale). A $10 bonus was offered if their guess was within +/- 1 point of the true average. This aimed to reduce potential self-reporting biases (like misevaluation or social comparison effects) by leveraging potentially more objective second-order beliefs.
Data & Insights (By the Numbers):
Direct Measure Results:
Cost of second adult (α): 0.85 (An 85% income increase needed compared to a single adult to maintain satisfaction). This implies lower household resource sharing efficiency than the standard OECD assumption (α=0.7).
Cost of first child (β): 0.40 (A 40% income increase needed compared to a childless couple). This is lower than the standard OECD assumption (β=0.5).
Implied Equivalence Scale (2 adults, 1 child vs. 2 adults): 1.22 (Calculated as (1+α+β)/(1+α) = (1+0.85+0.40)/(1+0.85)). This means a 22% income increase is needed.
Indirect (Incentivized) Measure Results:
Cost of second adult (α): 0.93 (Higher than direct measure, suggesting even lower economies of scale for adults).
Cost of first child (β): 0.34 (Lower than direct measure, suggesting a lower perceived cost for the child).
Implied Equivalence Scale (2 adults, 1 child vs. 2 adults): 1.18 (Calculated as (1+0.93+0.34)/(1+0.93)). An 18% income increase is needed.
Comparison: The 1.18 scale from the potentially less biased incentivized measure is lower than official U.S. scales (HHS 1.26, Census 1.20) and many European countries (e.g., Cyprus 1.78, Finland 1.48, Greece 1.43, Spain 1.38), though similar to Germany (1.12), France (1.17), and Netherlands (1.11). The U.S. estimate suggests relatively efficient resource sharing for children or lower perceived costs than many peers. It remains significantly higher than the scale implied by tax deductions (~1.04).
Between the lines
The incentivized "guess others' satisfaction" method yielded a lower cost estimate for raising a child (18%) compared to the direct self-report (22%). The researchers lean towards the 1.18 scale (18% cost) from the incentivized measure as potentially more accurate due to reduced hypothetical bias. Both estimates (18% and 22%), however, are significantly lower than the cost implied by adding a generic third person (adult or child) in the HHS poverty guidelines (26%), highlighting the importance of distinguishing between adding an adult vs. a child.
Bottomline
This study provides new subjective estimates suggesting raising a first child costs about 18-22% of a two-adult household's income to maintain life satisfaction. This implies:
Welfare programs (WIC, NSLP): Eligibility thresholds based on HHS poverty guidelines (used for programs like WIC at 185% and NSLP at 130% of the poverty line) likely use an equivalence scale (1.26) that is too high for two-adult, one-child households. This is because HHS doesn't distinguish the cost of an additional child (estimated here at 34-40% of the first adult's cost) from an additional adult (estimated at 85-93%). This could lead to overly generous benefits for this specific household type relative to others. (Dave’s note: It’s important to remember that these programs are first to buy excess food supply from farmers, else direct cash is quicker and more effective!)
Tax Policy (Deductions, EITC): Current policies implying only a ~4% cost increase (scale of 1.04) via deductions significantly underestimate the financial burden of raising a child (estimated at 18-22%). This inadequacy fails to sufficiently offset child-rearing expenses for working families.
Addressing these inconsistencies by developing and using more accurate, transparent, child-specific equivalence scales could lead to fairer, more efficient social safety nets and tax policies.
Iirc, average taxes (tax revenue/GDP) are around 27%. Maybe this suggests a policy direction.