The Future of Children, Princeton - Brookings: Providing research and analysis to promote effective policies and programs for children.

The child allowance program is designed to assist low-income families, but the limited availability and poor quality of infant care affects all families and calls for a broader policy. Under current law, the 1993 Family and Medical Leave Act gives employees in companies with 50 or more employees the right to take 12 weeks of unpaid leave.¹⁴ Therefore, most of the private (unpaid) parental leave benefits probably accrue to individuals in large companies. The proposed plan extends the right to an unpaid leave to all individuals and expands the length of the leave to 12 months following the birth or adoption of a child. The plan will be implemented through a parental leave account (described below) comprising a payroll tax and government loans.

The parental leave account (PLA) is a savings account combined with a line of credit from the federal government. Essentially, families would be able to use the funds in these accounts to cover the cost of a one-year leave from work after the birth or adoption of a child. In addition, individuals could borrow against their leave accounts to cover other financial emergencies during the first two years of the lives of their children. If families did not have enough dollars in their accounts to cover the cost of the leave, the federal government would extend a low-interest loan to them, which they would have to pay back.

A parental leave account would be created when an individual of either sex obtained a Social Security number. An additional payroll tax of 3.5%, approximately one-quarter of the current Social Security payroll tax,¹⁵ would be deducted from the individual's earnings and credited to the individual's PLA with each paycheck. At the birth or adoption of a child, parents could borrow against their accounts for one parent to remain home for up to 12 months to care for the child. Individuals would be able to borrow up to 80% of the present value of their expected Social Security benefits. For example, an individual earning $25,000 today could borrow up to $70,000, across several leaves.¹⁶

Parental leave accounts (PLAs) would earn tax-deferred interest at a rate equal to the rate of inflation plus 2.5%. Individuals with funds in their PLAs would earn interest on their accounts, while debtors (those who have drawn down their accounts and borrowed from the government for their leaves) would be charged interest.

The PLA is the mirror image of a college savings plan. In a college savings plan, parents typically have at least 18 years to save for their child's education. With PLAs, the parental leave (and the expenditure) occurs first, and the funds are paid back as the child ages. It is anticipated that the PLAs of many parents would carry negative balances during parents' childbearing years; that is, parents would borrow against their accounts to finance their leaves. Upon retirement, the balance of the PLA would be transferred to a modified Social Security system (described below). Thus, individuals who, upon retirement, had positive cash balances in their PLAs would receive enhanced Social Security benefits, while individuals with negative balances in their accounts would receive reduced Social Security benefits, although all recipients would be guaranteed a minimum level of benefits.

A few examples will clarify how the program is intended to work. Table 4 illustrates the PLAs of families with different numbers of children, born at different times during the couple's relationships. The examples assume that real earnings are constant and that partners face the same earnings profile over their careers. The value of the PLA at retirement (age 65) is reported two ways—in terms of the annual household income and as a percentage of annual Social Security benefits.¹⁷ The first measure helps clarify the resources of the household needed to balance the PLA before retirement, while the second measure describes the potential effect of this account on retirement income.

Case A represents a continuously married couple with two children (born when parents were ages 24 and 27). The couple shares equally the cost of the two one-year leaves, each of which is equivalent to one partner's salary for one year. Except for the duration of the leaves, both parents are assumed to work full time from age 18. The couple has a positive balance in its PLAs before the birth of its first child, when one parent takes the first of two leaves. The couple slowly pays back the cost of the leaves over the next 27 years. After age 54, when the cost of the leaves is repaid, the couple once again has a positive balance in their PLAs. At retirement, the balance in the PLAs is slightly less than one year's annual employment income (approximately 87%) and will augment the couple's annual Social Security income by nearly 25% (for the first 10 years of retirement, assuming that the balances in these accounts are paid out as 10-year annuities).

To show the importance of the timing of the births, Case B is similar to Case A, except that it assumes that the two children are born later in the lives of the parents, when the parents are 27 and 30 years of age. In Case B, the balance at retirement is 1.3 times annual income, or 36% of Social Security income. By postponing the first birth by three years, couple B accumulates a larger balance in their parental leave accounts, necessitating a smaller loan to finance the two one-year leaves. Instead of taking 27 years to cover the parental leaves as in Case A, Couple B requires only 20 years.

In Case C, a single woman has a child at age 35 and finances a one-year leave with no contributions from her partner. Again, through the wonders of compound interest, the woman's early contributions grow to almost cover a year's leave. It takes only nine years, until the mother is age 44, to cover the cost of the leave and to produce a substantial balance at retirement—an amount equivalent to about one year's annual employment income, or 28.8% of the Social Security income.

The previous example shows that even a single parent can finance a one-year leave, assuming that the parent works full time and delays childbearing. Early leaves are costly to finance because parents must pay 2.5% interest (in real terms) on the parental leave loans. Case D illustrates what happens if childbearing is not deferred. Case D is similar to Case A, but adds a birth at parental age 21 to those at ages 24 and 27. With three births during their 20s, couple D generates a large deficit in their PLAs. The couple's annual tax contribution barely pays the interest on that debt, and the deficit declines slowly during their subsequent working years. At retirement, the PLA is still in deficit, equal to 2.2 years of employment income or 62.9% of annual Social Security income. Without other forms of saving, high early fertility will destine the couple to a negative PLA and a significant reduction in retirement income.

The Social Security system is the natural home for administering the parental leave program, although some changes in the current structure of the Social Security system will be necessary. The Social Security system should be restructured into two distinct social programs. The first, which is a continuation of the current Social Security program, will be a pure income transfer program that provides a safety net to the poor and the disabled. All individuals, even those who have a negative parental leave account balance upon retirement, will be entitled to a minimum benefit level paid through this component of the system. These payments will be funded out of current tax revenues, just as today's Social Security payments are. The second component will be a pure insurance system that offers earnings-related benefits on an actuarial basis. In this component, individuals' benefit levels will be directly tied to the amount they have paid into the system. Private insurance companies offer such programs, and it might be possible for the eventual system to be a mixture of public and private programs, which would permit individuals to opt out of the public system with proof of coverage by a qualified private program.¹⁸

Except for individuals with many children (and many leaves) early in their lives or those with short or limited work histories, most individuals will accrue positive balances in their parental leave accounts by the time they retire. The program is intended to be gender-neutral; both men and women will be taxed, with partners, not the state, deciding which partner's account should be debited for the leave. There is no presumption that the woman will necessarily take the leave and be the caregiver. In states with community property laws, it seems reasonable that the financial responsibility for the leave would probably be split equally between the two PLAs of the partners. In case of divorce or separation in such states, the positive or negative balances would be the joint responsibility of the couple.

The PLA approach is new, and it will take some time for parents to grow accustomed to it. Some education may be necessary to help parents understand their rights and responsibilities regarding the leave.

The parental leave account will permit all families, even single parents, to provide infant care. This system will also give families the opportunity to provide parental care for short periods when emergencies arise and other forms of care are not available.