March 29, 2024

Bucks Blog: The Cost, in Dollars, of Raising a Child

In an article in the Your Money special section we just published about bulletproofing your finances, I wrote about one big money move that would be awfully beneficial to my bottom line: not having children. For all that we know about how expensive it is to raise a child, however, we don’t know exactly how much it costs.

So I decided to come up with an estimate, rough as it is, for what it would cost my spouse and me to have one child. I figure it would run close to $2 million by the time it was all over. How did I come up with that estimate?

The United States Department of Agriculture Department publishes an annual report on what families spend on their children, so I used that as a basis for some of my calculations and then tailored them to our own finances and geography. In 2007, The Wall Street Journal tried to improve upon the government figures, but some of the expenses they included seem based on the budgets of the truly rich, like furniture from Pottery Barn and bottled water delivery.

Without excessive expenditures, surely people like us could raise a child for more than the $435,030 the government estimates but less than the $776,000, $1 million or $1.6 million guessed at on the pages of the Wall Street Journal. Right?

I had hoped so, but my estimation of what my spouse and I might spend – and, crucially, what we might lose – having a child ended up being more than those estimates.

In order to be as conservative as possible, I stuck with the Agriculture Department’s figures for the cost of food, transit, clothing and miscellaneous expenses (personal care items, entertainment, reading materials) for children in a two-parent household in the urban Northeast with a combined income of over $103,350.

Those costs are higher in New York City, but our earnings are below the average for the category we fall in, and I wanted to be conservative in my calculations. But for housing, health care and child care I changed the numbers to be more specific to where we live. I used the average cost of full-time child care in New York City for the first few years, $12,750 to $16,000, according to the Administration of Child Services, and then reverted to the Agriculture Department numbers for child care and education until age 18.

My health insurance plan would charge us nearly $4,000 more each year for an additional dependent. Co-pays, prescriptions and other therapies could easily cost another $750 each year. At some point, our hypothetical child would probably have braces as we both did, which costs $4,000 out of pocket.

To estimate the cost of housing a child, I subtracted our rent from the rent we would pay to live in our neighborhood in a more suitable space — one with higher security, a more responsive landlord, reliable heat and better stroller-accessibility. Staying in our neighborhood and continuing to rent would keep our other costs in check, especially because of the quality of the public schools here.

Just as our parents paid most of our undergraduate tuition, my husband and I would want to help our child pay for college. To pay for half of the projected tuition at an average-price four-year public university would require we save $5,328 each year from birth to age 18, according to BlackRock’s college savings calculator.

And since we would probably not cut off our child financially once he or she reached the age of majority, I added the cost of the basics (housing, clothing, food, transportation and health care) between age 18 and 25, when the child would no longer be covered under our health insurance. Later in life, when this young adult has children, we will still spend money by supporting our grandchildren at a rate of $8,289 every five years, the average according to a MetLife study of grandparents’ relationships with their grandchildren.

Then there are the losses I would suffer as a working mother: half a year of forgone wages while on maternity leave and earning 73 percent of what men earn instead of 90 percent like nonmothers (or in my case, the equivalent fraction of my current salary) for the remainder of my career, according to a Columbia University study on the motherhood wage gap. This doesn’t include reduced benefits like 401(k) contributions, but it still adds up to over $700,000. The flip side of this equation is what economists call the “fatherhood premium,” which increases a man’s earnings about 4 percent.

Of course these expenditures and losses are not the strict minimum required to raise a child – not by a long shot. But if we were to have a child and do what most other parents do by trying to give this new little life the very best start possible, it would probably cost us $1.8 million including everything I mentioned above.

Then there are other sacrifices to mental health and perhaps fiscal health, too, albeit in ways that are hard to predict. Some of those disadvantages seem readily apparent, like lower marital satisfaction, higher depression rates, plus that “mommy track.”

So did you think about the cost, in dollars, of having a child before you decided to become a parent? Or do you find the whole idea of factoring in it at all to be odd?

Article source: http://bucks.blogs.nytimes.com/2012/11/13/the-cost-in-dollars-of-raising-a-child/?partner=rss&emc=rss

Report Criticizes High Pay at Fannie and Freddie

The companies, whose fates are to be decided by Congress this year, paid a combined $17 million to their chief executives in 2009 and 2010, the two full years when Fannie Mae and Freddie Mac were wards of the state, the report found. The top six executives at the companies received $35.4 million over the two years. Since Fannie Mae and Freddie Mac were taken over in September 2008, the companies’ mounting mortgage losses have required a $153 billion infusion from taxpayers. Total losses may reach $363 billion through 2013, according to government estimates.

Charles E. Haldeman Jr., a former head of Putnam Investments, the giant fund management concern, joined Freddie Mac as its chief executive in 2009. He made $7.8 million for 2009 and 2010. Fannie Mae’s chief is Michael J. Williams, who has worked at the company since 1991. He received $9.3 million for the two years. Company officials declined to comment.

With hundreds of billions in government support necessary to keep the companies running, questions are arising about the nature of the pay packages and how performance goals are determined. The pay was approved by the housing finance agency, which is charged with conserving the assets of Fannie and Freddie on behalf of taxpayers.

“F.H.F.A. has a responsibility to Congress and taxpayers to efficiently, consistently, and reliably ensure that the compensation paid to Fannie Mae’s and Freddie Mac’s senior executives is reasonable,” ’said Steve A. Linick, the newly appointed inspector general of the agency, in a statement.  “This is especially true when you realize that the U.S. Treasury has invested close to $154 billion to stabilize Fannie Mae and Freddie Mac,” and they “are spending tens of millions of dollars for executive compensation.”

The report cited a “lack of standardized evaluation criteria, documentation of management procedures and internal controls” at the oversight agency, missing steps that may have led to overpayments.

For example, the inspector general said that taxpayer support of the companies may have made performance benchmarks easier to meet for executives. In 2009, Fannie Mae issued 47 percent of new mortgage-backed securities, far exceeding its goal of 37.5 percent. But, as the report noted, this hurdle was almost certainly cleared because the Federal Reserve purchased almost all the mortgage securities issued by Fannie and Freddie in 2009.

In response to the report, the housing agency said that it would “institute a more formal and systematic approach” to its review of the performance benchmarks and the assessment of whether they were reached by the companies’ executives. A spokeswoman for the agency said its officials declined to comment.

Lavish executive pay that does not track a company’s performance has led to anger among shareholders in recent years. When the government stepped in to support some of the nation’s biggest financial institutions in 2008, compensation became an issue of concern to taxpayers. Executive pay at institutions receiving support under the Troubled Asset Relief Program, for example, was subject to approval by an overseer, the special master for TARP. Fannie and Freddie were not required to submit to this process because their assistance did not come from TARP.

As the primary regulator and conservator of both companies, the housing agency has broad powers to direct the companies’ activities; it has replaced board members and senior officers, for example. And it can bar the companies from making golden parachute payments to executives. It consulted with the TARP special master on executive pay at Fannie and Freddie after they were rescued by the government.

Nevertheless, the agency delegates pay decisions to the companies’ boards, accepting their recommendations “unless there is an observed reason to do otherwise,” according to the inspector general’s report. The F.H.F.A. receives advice from its own compensation consultant as well as the work of those hired by Fannie and Freddie.

The inspector general’s report noted that the executives at Fannie and Freddie received far more than their counterparts at other federal housing agencies. The top executive at Ginnie Mae, for example, received an annual salary of less than $200,000. The inspector general suggested that the agency review the discrepancy and account for it to taxpayers.

Agency officials say the salaries and deferred compensation awarded to executives at Fannie and Freddie are necessary if they are to attract and keep talent required to run those operations effectively. They say that current pay at Fannie and Freddie is roughly 40 percent less than it was before the bailout and maintain that the compensation plans are based on the companies’ ability to meet financial and performance targets, like providing liquidity and affordability to the mortgage market.

Edward J. DeMarco, acting director of the Federal Housing Finance Agency, testified before Congress on Thursday about proposals to overhaul Fannie and Freddie. “I am concerned that legislation to overhaul the compensation levels and programs in place today with the application of a federal pay system to nonfederal employees carries great risk for the conservatorships and hence the taxpayer,” he said.

Last year, Mr. DeMarco testified that the executive compensation plans at Fannie and Freddie were designed to achieve the goals of the conservatorship and “align executive decision-making with the long-term financial prospects of the enterprises, and minimize costs to the taxpayer.”

Because shares of both Fannie and Freddie have little value, the companies’ executive compensation consists solely of cash paid out in base salary, deferred salary and long-term incentive pay.

But Brian Foley, a compensation consultant in White Plains questioned the characterization of the companies’ incentive pay as long term, given that it is paid entirely within two years. “One hundred percent of the compensation is paid for two-year performance and a fair portion of that is without regard to performance,” he said. “I understand the stock is worthless, but that doesn’t mean you can’t have cash on the table for a long period. If anybody needs to have good long-term performance, isn’t it Fannie Mae and Freddie Mac?”

Article source: http://feeds.nytimes.com/click.phdo?i=0db6fa1ff989725c0e830be48171c9e3