Expert Calculates True Cost of Raising Child

Australians are having fewer children than ever. At 1.5 babies per woman, the fertility rate is at a record low . Many attribute this to the cost of having and raising children.

If this is true, it raises questions of intergenerational fairness and future planning for governments. What do we do about the young would-be parents who are opting out because it's simply too expensive?

The problem with this assumption is that while it may feel true that childbearing must have become more expensive over the decades, it's not that simple.

So what do parents have to fork out to raise children, how do we measure it, and are kids really that much more expensive now than they used to be?

Intergenerational inequality is the term on the lips of policymakers in Canberra and beyond. In this four-part series, we've asked leading experts what's making younger generations worse off and how policy could help fix it.

Crunching the numbers

Calculating the cost of raising kids is a complicated beast that raises many questions for academics to consider. Is a second child less expensive than a first child? Are older children more expensive than younger children? Do higher income families spend more on children than lower income families, and what share of that spending is necessary compared to discretionary?

These are debates in the literature for which there aren't necessarily clear answers, in spite of much research.

Researchers also contest whether we should talk about just the direct cost, or if we should also consider the indirect costs, such as the impact on hours in paid work or the loss of leisure time for busy parents. We focus here and in our paper for the Economic Inclusion Advisory Committee on the direct costs.

One way, and probably the more intuitive, is the " budget standards " approach. This puts a value on the cost of a basket of goods and services for a family with and without children. The difference is the cost of children.

This seems simple, until it's not. For example, do you need a fourth bedroom for a third child? Do you need a bigger car? A larger fridge? Private or public school? Childcare or at home care? What about hand-me-down clothes and toys?

Another approach, which is our focus, is a survey-based statistical method (or "iso-welfare" in technical terms) comparing living standards of different households. We ask how much more income (or spending) is required to ensure the same living standard between a family with children and a family without children.

Living standards are measured by what share of total household income or expenditure is spent on basic items, such as food or utilities.

The logic here is that a family that spends a lower share (on average) on basic goods has a higher standard of living than a family that spends a higher share on basic goods.

The latest high quality survey on expenditure in Australia is now ten years old, so in our latest research we've taken a new approach. We use financial stress as a measure of living standards instead.

Using Housing Income and Labour Dynamics in Australia (HILDA) data, we model financial stress against income and a range of other household variables and estimate how much extra disposable income a family with children needs to maintain the same living standard as a couple without children. That extra income is considered the cost of children.

While there are many advantages to using this method, a major drawback is that it doesn't give you an estimate for how much a family needs to spend, rather how much they do spend. Families may well spend more than what they strictly need to.

So, how much do families spend on children?

We estimate families spend about 13% of their disposable income on the first child and a further ten percentage points for each child after that.

For a working-age couple earning the typical after-tax income (around A$130,000 per year), that equates to about $17,000 per year for the first child and around $13,000 per year for each subsequent child.

That means to raise the eldest child to adulthood, the couple would spend about $300,000 over 18 years in today's dollars. Subsequent children would be about $230,000 each.

Lower income families spend a higher share of their income on children, at around 17% for the first child and 13% for subsequent children. But these households spend a lower absolute amount on children.

Does age of the child change the cost? There is uncertainty around this, but our latest research indicates younger children and older children are moderately more expensive than middle aged (six to 12) children.

This finding contrasts with previous research and conventional wisdom that older children are the most expensive.

These estimates are not set in stone. There are different ways to estimate such numbers and they can differ depending on what definitions you adopt and methods you use to analyse the data.

Ok, do kids cost more now?

The HILDA dataset has been gathered over many years, so we can compare the cost of children through time, albeit not perfectly.

Single year samples are relatively small and subject to error, but that analysis suggests not a lot has changed with the cost of children since 2001.

Our research doesn't provide clues as to why fertility rates in Australia have dropped (as they have in most developed nations). Other data such as Australian Bureau of Statistics income survey and financial stress data suggest real incomes for couples with children have increased over the longer term (although not by much, if at all, in recent years).

The lack of evidence here likely points to other factors driving lower fertility rates. Families may be delaying having children to focus on other pursuits, such as employment or education. It's also more acceptable for couples, and women in particular, to choose to not have children.

Another possible reason is people could be being deterred by the perception of higher costs, instead of the actual cost. Or perhaps people simply want to spend their money elsewhere.

Calculating the cost of children is complex and imprecise, but it's fair to say the evidence doesn't show that the direct cost of kids is getting more expensive over time. Younger generations not having kids, or fewer kids, is likely related to many factors, but we can't draw affordability down generational lines.

Ben Phillips through his role at the ANU provides consulting services on a range of areas in economic and social policy and has recently published work on a consulting basis for the Economic Inclusion Advisory Committee on the cost of children.