I’ve written before about the FAMILY Act, the leading Democratic initiative in the House and Senate to create a nationwide system of paid family and medical leave like that enjoyed by citizens of virtually every other country in the world.
One of the things advocates say when describing the FAMILY Act is that it’s based on a “social insurance model.” This is a meaningless phrase if you’re not a policy advocate, but in its simplest form, it means that, just like you can only insure a house for the house’s value, or take out a life insurance policy up to some multiple of your earnings, the taxes (or “premiums”) you pay while working are based on your income, as is the benefit you receive while caring for a new child, family member, or yourself. The direct parallel is to Social Security’s old age benefit, where higher-income taxpayers pay more in Social Security taxes, and receive correspondingly higher benefits when they retire.
The social insurance model is therefore based on the idea of “wage replacement:” what percentage of your wages should the program replace during qualifying life events? Social Security, for example, uses an extremely complicated weighted average of your highest-earning 35 years, then applies different replacement rates to income in different brackets up to the maximum. The FAMILY Act relies on its own formula, slightly more similar to unemployment insurance benefits, based on your highest earning year in the previous 3 years, up to an arbitrary cap.
There are serious arguments for a wage replacement model
Since at the end of the day I disagree with the wage replacement model, I want to give the absolutely fairest, most compelling arguments for it — and they are compelling!
- Wage replacement encourages higher-income workers to take leave. This is plainly true. If the goal of a paid family and medical leave program is to reduce the cost to workers of using the leave they’re entitled to, then the benefit should scale up to the income they sacrifice when taking leave. A new parent with a high income is by definition sacrificing more money when they take leave than a new parent with a low income; if their benefit doesn’t reflect that, they’ll be somewhat less likely to take leave, or take as much leave as they’re entitled to.
- Wage replacement reflects regional living expenses. If differences in wages do not reflect different levels of education or experience, but rather different regional costs of living, then giving higher benefits to higher earners simply reflects those regional differences. A flat benefit would punish leave-takers in high-wage, high-cost-of-living areas, and be a windfall to leave-takers in areas where wages and prices are lower.
- Wage replacement promotes gender equity. There’s both a crude and sophisticated version of this argument, so I want to offer both. The crude version is that, at an economy-wide level, male employees earn more money than female employees, and a flat benefit will perpetuate those wage disparities: if either parent can take leave and receive the same benefit, a given family unit will be financially better off if the lower-earner takes the leave and the higher-earner continues to work. In many relationships, that means a female caretaker and a male worker, which is not a pattern the federal government should be explicitly subsidizing. The sophisticated version is that within any individual relationship, whenever there’s a higher-earner and a lower-earner they face the exact same choice. Mitigating, although not eliminating, that power dynamic is an important argument in favor of wage replacement regardless of the gender of either worker.
These are serious arguments, and they have convinced the paid leave advocacy community of the advantages of a wage replacement model.
Wage replacement is a complicated, intrusive policy design
I do not think wage replacement is a good policy design, but I understand I have lost this fight, so I will only briefly summarize the problems I see in all such policies:
- It rewards accurate income reporting, and magnifies the existing pain to the low-income workers most vulnerable to underreporting. A tipped worker whose tips go unreported or underreported now loses out on both Social Security old age benefits and the paid family and medical leave benefit they’re entitled to.
- It rewards high-income workers in low-cost states. This is the inverse of the second point made above: while some amount of wage differentials are accounted for by regional differences in costs of living, others are not. The more convincing you find the “regional wage-and-cost differences” theory, the less willing you should be to offer wage replacement to a high-income worker in a low-cost state. If $60,000 per year represents poverty wages in Manhattan, but a middle class income in Nebraska, then an identical wage replacement rate will impoverish the New Yorker while the Nebraskan barely notices!
- The inscrutable means-testing formulas make it impossible to know what your benefit will actually be. A flat benefit allows people to plan their expenses around their income. A wage replacement model based on a rolling 3-year period simply makes it impossible to know what your benefit will be. Not because it’s impossible to calculate (the Social Security Administration has a nice website showing what your disability and old age benefits will be, based on all the information they have available), but because it’s constantly changing. If you get pregnant in July and plan to give birth in March, will your benefit be based on that really good sales year you had 3 years ago or will that year already have rolled off your benefit schedule by the time you take maternity leave?
These are my basic arguments against a wage replacement model, and all forms of means-testing, but as I say, I’ve lost that fight and have come to peace with it.
Whether or not wage replacement is good policy, it’s a good measurement
No one has to agree with me on the downsides of the wage replacement model. I don’t always agree with myself! But whether or not wage replacement is good policy design, it’s an essential lens when looking at the bevy of alternatives to the FAMILY Act bubbling up in Congress. Precisely because those policy alternatives are so different, you need a set of uniform tools to judge them by.
For example, the “bipartisan” Cassidy-Sinema bill offers new parents the ability to claim a present-year $5,000 additional child tax credit, repaid by reducing the child tax credit available in the next 10 years by $500 per year. While this is idiotic program design, the idiocy is not the point of this post. The wage replacement rate is.
In the ideal case, a two-parent family claiming the Cassidy-Sinema tax credit would receive a total of $5,000 in the year of their child’s birth or adoption to assist them with their expenses during their 12 weeks of federally-guaranteed FMLA leave. The median annual household income in the United States is approximately $63,179, 23% of which (reflecting 12 weeks of leave) works out to $14,579. A $5,000 benefit — even ignoring the fact that it has to be repaid — represents a wage replacement rate of about 34% for the median household.
Whether or not you think a paid family and medical leave benefit should be linked to a given individual’s or household’s income, or be offered as a flat benefit based on qualifying events, you cannot believe that a 34% wage replacement rate is anywhere close to adequate.
The point of this post is not that a social insurance or wage replacement model is the right or wrong way to design a paid family and medical leave policy. Rather, it is to give you an easy, back-of-the-envelope calculation you can perform whenever you hear someone promoting an alternative to the FAMILY Act, which is the only serious attempt to enact such a policy in the United States:
- divide the length of the benefit, in weeks, by 52
- multiple the result by $63,179
- divide the benefit by the result.
That’s the wage replacement rate for the median household in the United States. The more valuable you think paid family and medical leave is, the higher you should want that replacement rate to be, and the less valuable, the lower.
Likewise, the 66% wage replacement rate in the FAMILY Act is the only viable solution to the cancer of unpaid family and medical leave in the United States. The time to fight about how it can and will be improved is after we’ve passed it.