Completing the American Welfare State, Part 2

Yesterday I discussed one of Hillary Clinton's three welfare-state reforms, namely a federal paid-family-leave entitlement program. I used the recently-created program in New York as an example. I explained how enormously under-funded that program is. 

New York is not the only state enacting or considering a paid-leave program. With the threat of a federal program it is important to explore the state-level models already enacted or being considered. Emphasis should first and foremost be on the fiscal side of these programs, a side that seems to go completely unnoticed in the national debate.

Perhaps the most important example of a paid-leave entitlement is the pilot program in the District of Columbia. Sponsored by the U.S. Department of Labor, the program has "enthusiastic support from the Obama administration". Back in October 2015 the National Law Review presented the program:

The Council of the District of Columbia is considering legislation that would give all D.C. residents and those employed in the District up to 16 weeks of paid family and medical leave every 24 months for certain qualifying life events, including bonding with a new child, recuperating from a military deployment, and caring for an ill family member.

Since this is a federally sponsored program it is very likely that it will serve as a test run for a national version. For this reason alone, it is critical to analyze the funding model. As with the New York program, money comes from a payroll tax. However, in this case the tax is progressive, topping out at one percent on incomes at $150,000 and up. 

Just like the New York program, this federal pilot model is structurally under-funded, and badly so. To see why, let us start on the benefits side. Eligible persons have the right to 16 weeks of paid leave per 24 months of employment (two thirds of the annual eligibility in the New York program). Translated into monetary value, this is equivalent to 15.4 percent of their annual earnings. 

As mentioned, the proposed funding consists of a payroll tax that tops out at one percent of a person's annual earnings. To make the case even better for this entitlement program, let us assume that the tax is one percent across the board, i.e., not progressive but proportionate. This would mean that the entitlement value of 15.4 percent of a person's annual earnings should be paid for with a tax of one percent of their earnings. 

Or, in calendar time, eight weeks of paid leave is paid for with 0.52 weeks worth of annual work. 

In fairness, this 16-to-1 structural under-funding calculation is based on the assumption that people get 100 percent of their salary covered for the full eight weeks they are away. That is not the rate at which the program would replace income: each entitled person (which includes all private-sector employees living in the District of Columbia) has the right to 100 percent of the first $1,000 of weekly earnings; after the first grand, the replacement rate is 50 percent up to a total benefit of $3,000 per week. 

Given the lower replacement rate after the first grand, this means partial replacement of weekly earnings up to $5,000. Fortunately for the District - and the federal government - this paid-leave program will not dole out $3K per week a person is away from work. The total expected cost of the program is as follows:

• The average weekly personal income for a private employee in the District is $1,690;
• With replacement rates as stated above, this means that every employed person residing in the District is eligible for, on average, $1,345 per week;
• With a cap of eight weeks per year this comes out to $10,761 per year in maximum paid-leave compensation. 

As of 2014 there were 607,000 private-sector employees in the District. Given the average annual individual benefit maximum of $10,761, this means that the paid-leave program can cost taxpayers a maximum of $6.5 billion per year. 

Will the designated payroll tax cover this cost? Not by a long shot: based again on 2014 numbers the payroll tax paying for the program would only pull one percent of private-sector payroll, or $533.6 million. 

With a defined entitlement value of $6.5 billion, the paid-leave program is under-funded by 91.8 percent. 

Either that, or the administration in charge of the program will have to limit each eligible person's use of it to 8.2 percent of his actual eligibility. In other words, instead of eight weeks per year he will only be allowed to actually use about 4.5 days. 

The New York paid-leave program is galactically under-funded. So is, without a doubt, the federal pilot program for the District of Columbia. Either model would be a fiscal disaster if applied to the federal level. 

The third and last installment of this series of articles explains exactly what a disaster it would be.