Marginal increases in liability as net income increases
This is a discussion about the question "if the NRP earns an extra £ per week, how much should the child support payment increase?" In fact it is only about part of that question - "what should happen at lowish incomes when the NRP is not actually contributing the full amount to the child?"
(This discussion ignores a threshold feature in both schemes - unless a change is greater than a defined amount, the liability won't be adjusted, for administrative ease).
The formulae
Both the current scheme and the reformed scheme have protection mechanisms which ensure that as an NRP's net income reduces (for example, s/he loses a job or has to take on lower paid work) the liability, both in absolute terms and as a percentage of earnings, falls. Sounds OK.
The downside of this, of course, is that as the net income increases, the liability rises, both in absolute terms and as a percentage of earnings! You can't have one without the other. All means-tested schemes have some sort of trap of this sort. The safety net which catches you as you fall can be hard to leap out of.
The current scheme has protection mechanisms called exempt income and protected income which attempt to ensure that the NRP has enough to live on. The reformed scheme simply has a kink in the formula. The effects are vastly different from one another. Here is an illustration.
Comparisons at low to medium net incomes
 Circumstances: housing cost 50 per week, all children young, no other complications. The current formula often appears to ignore the number of children being supported until well above the average NRP net income (£207 per week), as it does here. The reformed formula noticeably takes the number of children into account above £100 net income per week. Note how the liability in the reformed formula often starts rising (above the minimum of about £5 per week) at lower net incomes than the current formula does. Some low earning NRPs will pay more under the reformed scheme. But note especially how steep the rise in liability is with the current formula as net income increases. (In these simple circumstances, this happens as net income increases from about £170 to about £260). In fact, the liability rises by over £72 with this increase in income of £90 - about 80p in every extra £ of net income earned gets paid as extra child support. (Over the middle part of this range it rises at about 85p in the £). Even at its steepest part (between £100 and £200), the liability under the reformed scheme never rises this fast. The corresponding highest marginal increase in liability per extra £ of net income under the reformed scheme is:
However, both schemes become worse than this when income tax & National Insurance are taken into account. |
What should the philosophy be?
How should the liability rise as net income rises? (Consider just the cases where the NRP hasn't been earning enough to pay the "correct" amount of child support).
Purist approach
Some would say "your liability for your children is there even if you are not earning, and we will either find enough jobs for you to do to pay this amount, or your arrears will accumulate until you do earn". However, these approaches, observed in some parts of the USA and Germany, are not the extremes discussed here.
Instead, the approach could be "you will retain enough to live on, but over this amount all your extra earnings will be taken in child support until the "correct" amount has been taken, and only then will you see any extra retained earnings". After all, why should the NRP have any extra money until the child's needs have been taken care of in full?
The current scheme appears to have elements of this in it, although not quite as severe as this. Until the NRP is paying what is considered to be the "correct" amount, in some cases very little extra net income is retained. (And when the effects of income tax and NI are added, even less of the extra gross income is retained).
Practical approach
The practical view recognises that with such a purist approach an NRP is likely to say "stuff it, why bother to try to earn more?"
Some NRPs would still earn more in this case. Research has shown that some people caught in the employment trap of Income Support still work even though they may actually end up with less - out of pride, the social benefits of working, gaining experience for further increases later that will lead to retaining more money, etc. But this takes a resolute person, and many would take the obvious attitude.
In the case of NRPs, there are two additional competing factors beyond those for people in the employment trap of Income Support:
One positive factor is that some NRPs want their children to benefit.
A related negative factor is that some NRPs certainly don't want their ex to benefit! Many NRPs resent earning more, only to see lots of the extra money handed over to someone they may hate, with no guarantee that the children benefit from it. For some NRPs, paying an extra £10 in child support is much worse than burning a £10 note each week - the fact that the ex is benefiting is at least as bad as the loss of the money. Purely rational financial considerations don't apply in the emotional world of child support.
Countries with high amounts of child support (USA, UK) tend to have lowish compliance rates. Countries with lowish amounts of child support (Denmark) tend to have high compliance rates. (Surprise, surprise!) While compliance can be improved in other ways, such as draconian penalties, the incentive to cheat the system somehow will always be there (eventually leading to emigration).
The reformed scheme appears to be trying to steer a compromise path - start paying extra at lower incomes, increase the liability slower with extra income, then peak at lower levels. Some PWCs will be indignant at this. Others will actually see money when before they should have been getting more but were actually failing to get any. Some extra NRPs will see the benefits of earning more. ("Politics is the art of the possible" - there is no doubt that much of the reformed scheme is shaped by politics rather than purely child-oriented analysis).
But once income tax and National Insurance deductions are combined with child support deductions, even the reformed scheme starts to show a significant disincentive.
Does the government understand the impact of marginal withdrawal rates?
The suspicion is that the impact of these marginal rates of withdrawal is not appreciated, or at least acknowledged, by government. For example, the CSA Reform White Paper says:
"Where overtime is regular and pay including overtime is representative of the amount of money normally available, the new rates mean that only 15 to 25 per cent of overtime pay will count for maintenance. At least 75 per cent will be retained by the non-resident parent. This gives nonresident parents a clear advantage from working the longer hours that overtime pay covers while at the same time giving a share of the increased prosperity to the children." (White Paper Annex Two - New rules for income, Paragraph 5 - Overtime payments)
In some cases, each extra net £ earned, for example as overtime, will result in extra deductions of 45p (child support for 3 children when the NRP pays at the reduced rate). It is false to claim "At least 75 per cent will be retained by the nonresident parent". It may be only 55% of extra net income retained. And once income tax and National Insurance deductions are combined with child support deductions, it may fall to only 35% of extra gross income retained.