Wednesday, June 22, 2005

Honey, we can't afford the kids

If you are thinking about having a child, stop. I have a financial warning: you probably can't afford it. Don't take my word for it, look at the result of a massive financial exercise conducted as part of the Government's recent review of the Child Support Act. It is relevant more broadly to anyone considering having a child, even if their relationship stays intact. If there is a mortgage involved, the outlook is chilling.

There are two completely different ways to work out the cost of having a child, and the review used both of them. One is to measure what couples with children spend and to work out how much it exceeds what similar couples without children spend.

The problem with this approach is that it examines "what is" rather than "what should be". Many parents might not spend enough on their children (they might not be able to); others may spend far too much.

The other approach is daunting, if not impossible. It is to identify and cost every single extra item of spending needed to raise a child (including, for example, each extra toothbrush and the extra toilet paper) and to add up those costs. In all, there are more than 700 such costs...

The task is made more difficult by the knowledge that a lot of the costs involve goods that are shared between the child and the parents. For example, a fridge is used by an entire household, but if there is a child in the house extra spending might be needed to make it bigger or to replace it sooner.

Much of the work involved calculating what a couple without children should reasonably be spending. A researcher, Paul Henman, began the task a decade ago at the then Department of Social Security, and finished it off in his present post at the University of Queensland.

He had to make value judgements, among them: no household needed to spend money on cigarettes; everyone needed an annual visit to the dentist; each household needed a car (a 12-year-old Corolla) and membership of the NRMA or such like, but not membership of a union.

His team prepared budgets for two different standards of living: "modest but adequate", based on the prices of the leading brands sold at Woolworths; and "low cost", based on the prices of Home Brand and No Frills products.

When it came to adding in the costs of children, Henman erred on the low side. He says that was deliberate. He told me this week he was under enormous pressure from his employers at the Department of Social Security to keep the estimates low. They might later be used to set benefit levels. These low estimates, adjusted for present prices, were presented to the Child Support Review.

They appear to be comprehensive. A six-year-old girl is assumed to need 49 different items of clothing and footwear, all purchased at Target. Among the toys needed for a 10-year-old boy are a bicycle, skateboard and cricket set. Where there are two children in the house, they are permitted a second, portable television set.

But a lot is left out. Children up to 14 are assumed to get their hair cut at home. All their visits to the doctor are bulk-billed. They go to government, rather than private, schools. And, even when they are teenagers, they continue to be outfitted at Target. Most bizarrely, to my way of thinking, teenagers are assumed not to own, or make calls to, mobile phones. They are limited to two local calls a day.

I put it to Henman that he was out of touch with the needs of the modern teenage girl. He conceded that he didn't have one of his own and said the assumptions underlying his work were in need of revision.

But even so, the costs he came up with are large. The cost of a three-year-old to a couple trying to eke out a "modest but adequate" living is estimated at $17,620 - most of it spent on child care. Without child care, the cost is a more modest $6500 a year, but it climbs as the child gets older, reaching $10,300 in the teenage years ($7850 if buying "low-cost" items).

To put these costs in perspective, they are said to account for between a fifth and a quarter of a typical household's disposable income.

A typical mortgage takes up more than a third of household income. I know many home buyers who can barely make the repayments. Henman's numbers suggest they cannot afford to have children.

And the other set of numbers prepared for the review, using actual spending patterns, are worse. Spending on children is said to climb over time to $19,500 a year for middle-income couples or $13,520 for low-income couples. This amounts to between a quarter and four-fifths of gross family income.

There are also indirect costs not taken into account in either of the studies. They include the income lost by the parent who withdraws from work to look after the children. Even if both parents continue to work, one is likely to seek a job where there are easier hours, less responsibility and less pay.

About the only bright side is that incomes tend to rise over time, making the cost of caring for a child in the teenage years less daunting than it would seem at birth.

It might be a good thing that most of us don't do the financial calculations. We close our eyes and dive in. We manage by cutting our spending or by extending already impossibly large mortgages.

We sense that children bring benefits that can't be described in financial terms. They give us a sense of purpose - they believe in us, idolise us and depend on us.

It is almost financially impossible, but it's worth it.