The war on the family - MoneySense

The war on the family

Today’s young parents can’t afford to have kids — and that hurts us all.

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Michelle Warren and Brad Smart are sitting at the dining room table in their modest Victorian row house in Toronto, explaining why they probably won’t be having any more children. Behind them, their three-year-old daughter Finleigh, dressed in a pink tutu over jeans, dances to a Disco Mickey Mouse record. The couple’s other daughter, 10-month-old Ruarie, is napping upstairs.

Both Brad, 36, and Michelle, 34, say they love being parents. When I look over at Finleigh, who is holding her index finger up to her lips and shushing us for making too much noise, it’s easy to see why. She’s busy setting up a make-believe tea party.

So why not have another Finleigh, another Ruarie? Michelle says the problem is money. It’s not so much the cost of the diapers and formula as the loss of income. Michelle quit her job to work from home so she could look after her two young daughters, and that decision has meant a big pay cut. Add in the mortgage, saving up for the kids’ education and paying down their own debts, and Brad and Michelle’s finances are being stretched to the snapping point. They would like to have a third child, but they’ll probably be forced to stop at two.

Brad and Michelle aren’t the only young parents who are finding that they can’t afford to have as many children as they would like. Across the country millions of other young parents are reaching similar conclusions. Without much in the way of comment or debate, Canada has become a country where small families are the norm — and those small families are shaping a demographic crisis that is going to hurt all of us over the decades ahead, whether we have children or not.

To understand why, consider the amazing shrinkage of the Canadian family. As recently as the 1960s, families used to span an average of four kids; today, the typical family includes a mere 1.5 children. Since today’s parents aren’t having enough kids to replace themselves, Canada’s population growth has slowed to only 1% a year. Two-thirds of that meagre increase comes from immigration rather than new babies. Soon we will rely completely on immigration to keep Canada’s population from shrinking.

Slow growth is a problem because many of our social programs — notably Old Age Security and Medicare — were designed back in the days of tail-finned cars and four kids to a family. Both plans raise money by taxing those who are working. But since Canada’s population is aging, fewer and fewer people are working for each retired senior. Right now there are five working people for every senior; within 25 years, there will be only half that many. Given the dismal math, the federal government will face two ugly options in the decades ahead. It can reduce benefits or service to the elderly or it can tax the young even more heavily to support the millions of grey-haired boomers now beginning to slide into retirement. “If you expect to get all of those nice government payouts when you retire, you better hope that people have lots of kids,” says Malcolm Hamilton, an actuary with Mercer Human Resource Consulting in Toronto. “Because if the next generation is too small, you’re going to be outta luck.”

The tug of war between the generations has already begun. Over the past three decades, governments have consistently funded and enriched programs for seniors. Meanwhile, young families are finding it increasingly difficult to make ends meet. As a result, they’re reducing their number of kids — which has the effect of ensuring the problem will grow even worse in years to come.

You can’t blame young couples for their decision to have fewer children than their own parents. Over the past three decades, total family incomes in real terms — that is, adjusted for inflation — have actually gone down. Statistics Canada says the median family income in 1980 was $58,000. Twenty-seven years later, it’s $57,700. (Both figures are expressed in 2005 dollars to remove the effects of inflation.) But stagnant incomes are not the worst problem. A generation ago, it took just one working parent to generate that median household income. These days it takes two.

As a result, child-rearing has become a monumental financial challenge. In the early 1970s, when 70% of families had only a single income earner, raising kids was demanding, but the only financial penalty you paid was the actual cost of raising each child. Today, both parents work in 70% of families. When they decide to have a child, they pay a double penalty. They pay the extra expenses of raising each child. They also pay with a huge drop in income since one parent has to take time off work.

Young families are facing a much bigger challenge in making ends meet than earlier generations, says Hamilton, one of Canada’s top experts on pensions and aging. He calculates that after expenses, many working families don’t have much more to spend on themselves than senior couples on welfare. That’s an appalling finding. But instead of helping young families, Ottawa taxes them to death. Why? “Because they look rich, even though they don’t have any discretionary income,” Hamilton says.

The financial illusion persists because the income tax system looks only at what you make, not the demands that you face. According to 2003 Statistics Canada data, the average total income for couples with children is about $87,000; the total income for a senior couple is about $50,000. Since young couples have higher incomes, they pay two-and-a-half times as much tax as senior couples.

The problem with this system is that young couples also have many more fingers reaching into their wallets than seniors do. While seniors have paid off their homes and raised their kids, the young still have to contend with mortgage payments, car payments, diapers, and university tuition for their kids. As a result, the average middle class family with kids has only 4% of the household’s gross income left over each year, compared to 13% for senior couples.

If you agree that people should be taxed according to their ability to pay, the current system is brutally unfair because it focuses on income, not wealth. In 2005 the median net worth of couples with children was a meagre $189,000. The median net worth of senior couples was more than twice as high, at $443,600. Look at those figures and you have to think that if anyone needs tax breaks, it’s not people in their 70s, it’s people with seven-year-olds. But the system works in just the opposite fashion.

The tragedy is that young parents still want good-sized families. Demographers at Statistics Canada noticed a few years ago that when they asked Canadians how many kids they would like to have, the average number was 2.5 — in other words, one full child more than they actually go on to have. Why the discrepancy? It seems that young couples adjust their plans when they run into the economic realities of having a child.

Hamilton believes our national priorities have gone askew. “It’s not a matter of charity, of giving people money to raise kids,” he says. “It’s a matter of letting young couples keep more of the money they’ve earned, because their children are a future asset. The question is: should we view children as just another family expenditure, like a car, or as something that benefits all of society?”

Brad and Michelle can tell you all about the trade-offs involved in having a child. Before Finleigh was born they both worked full time. They enjoyed foreign holidays and went out with friends three times a week. But when Finleigh arrived, Michelle’s pay plummeted to less than half of her previous wage. The standard one-year maternity benefit in Canada is 55% of your pay, but it’s capped at just under $22,000, so most middle-class parents don’t even get the full 55% income replacement.

When her maternity leave was up, Michelle could have put Finleigh in daycare and gone back to her corporate job, but daycare would have cost $15,000 a year. Brad and Michelle crunched the numbers and decided that if Michelle worked for herself from home while looking after Finleigh, they would be better off. So she set up a home office in their musty basement and took on freelance communications projects, working whenever Finleigh napped. The arrangement worked fine — until Ruarie arrived on the scene.

Since Michelle was self-employed, she wasn’t eligible for maternity benefits. She couldn’t work with a newborn on her lap, so for a while, her income largely vanished. Brad and Michelle now had to support two young children on a combined income that was close to half of its pre-child total.

They tried to cut costs, but found that some costs can’t be cut. Like many young families, they had bought their starter home just before their first child was born. While both were bringing home paycheques, the mortgage consumed a reasonable 25% of their income. When Michelle stopped earning money, though, the mortgage devoured almost half of Brad’s take-home pay. Of the remainder, about $10,000 a year went toward running their cars, $4,200 to utilities and cable and $2,400 a year to property taxes. Then there was clothing, diapers and insurance. Plus “you feel pressure to start saving for your kids’ university tuition,” says Michelle, “so we’re doing that, even though I’m still trying to pay off my own student loan.”

When they totaled up all their expenses, they discovered that they hadn’t budgeted for groceries. “So I started working again when Ruarie was just five weeks old,” says Michelle. “But it’s difficult to do with a newborn and a three-year-old. Sometimes I get up at five in the morning so I can do some work before Brad leaves for the day. The other night, I worked until midnight. During the day, I’ll put the kids in their rooms for half an hour so I can make a couple of phone calls. It’s a juggling act.”

Brad says they’re now in “a holding pattern” which he thinks they can maintain until Finleigh and Ruarie are older, as long as they continue to stick to a very tight budget. They’re getting by, but another child could push them over the edge. “We’re realizing that for us to have a third would mean moving,” says Michelle. “Plus, we’d have to get a new car. There’s just not enough room in our car for three child seats.” A third child would also consume Michelle’s few remaining hours for freelance work and make their finances impossible.

Ottawa’s attitude toward the Finleighs and Ruaries of the world has long been one of disinterest. It doesn’t see any reason to discourage kids, but it sees no rationale to encourage them either. Government views children strictly as an individual decision — a personal expenditure that is your choice and not one that other taxpayers should be tapped to support.

This attitude makes sense up to a point. No one wants to be called upon to bankroll the eighth or ninth child in a neighbor’s brood. But as fertility rates have declined well below replacement levels, our lack of pro-family policies seems increasingly senseless. If we don’t encourage kids, who is going to support any of us in the future? Just as childless couples in Victorian times had to worry about who would look after them in their old age, so we as a society now have to worry about who will pay for the social programs we’ve promised ourselves.

There is also the question of justice. The government typically looks at the entire income of your family when judging your eligibility for welfare or social programs. But when it comes to taxing you, government switches course and views each of us as an individual, whether we’re supporting just ourselves or a family of six.

This isn’t the way the rest of the world works. Jack Mintz, director of the international tax program at the University of Toronto’s Rotman School of Management, says that almost every other developed country encourages larger families by offering tax deductions for kids, and those deductions are worth thousands of dollars. “You should recognize that it costs more for a grouping of many people to live on a given income than a single individual,” Mintz says. “Most other countries offer more in the way of deductions or credits for children than Canada does.”

France, for instance, has a very different view from Canada on how taxes should be levied. Rather than taxing its citizens as individuals, France taxes family units. Each family files a return, showing its total income and total number of people living on that income. The family can allocate that money for tax purposes among family members to better reflect how it is actually spent.

This system amounts to income splitting and it can dramatically reduce the tax a family pays. A husband who earns the equivalent of $90,000 can split it with his stay-at-home wife so that each pays tax on only $45,000. In fact, France goes even further and allows parents to split incomes with their kids too (each of the first two children is worth half an adult, and subsequent kids are worth a full adult). The more children you’re supporting, the lower your tax rate.

Danièle Bélanger says lower taxes made a huge difference to her family’s standard of living during a year in France. But taxes were just the beginning. “In France, the general premise is that the majority of families have two working parents, so the infrastructure is designed from the ground up to meet the needs of people in that situation,” says the married mother of three. “In Canada, the majority of families have two parents working too, but the system hasn’t changed since the ’60s, when the mother usually stayed home.”

In France, access to licensed, affordable daycare is viewed as a right, says Bélanger, a sociology professor in London, Ont. Daycare is available for children six months old and up and the cost is subsidized and geared to income, so it’s affordable for everyone. Those with three or more children are rewarded with an extra monthly allowance of about $400, plus the famous carte famille nombreuse (“the large family card”). This token of appreciation to large families provides the kinds of benefits usually reserved for seniors, such as 50% off train tickets if you book in advance, 25% off the Paris subway, and discounts at museums and art galleries. “The general feeling is that society should share the costs of large families because we all benefit,” says Bélanger. “Whereas here in Canada, the attitude is it was your crazy decision to have kids, so the more you have, the poorer you’ll be.”

France proves that fertility follows finances. In most European countries, fertility rates have been declining for 40 years. They’ve recently reached crisis levels in countries such as Spain, Greece, Italy and Germany. But not in France. There, the fertility rate has been steadily rising. Couples now average two children. This is the balancing point at which parents are replacing themselves, ensuring that the country doesn’t shrink, and it seems to have been reached largely as a result of France’s deliberate policy of encouraging kids.

The correlation between government support for children and high birth rates is the opposite of what most people would predict. Conservative pundits argue that the best way to reverse the decline in birth rates would be a return to a traditional society, in which the father works and the mother stays home to look after the kids. But the evidence indicates that the reverse is true. Countries such as Spain, Greece, Italy and Germany, where fertility rates have dipped to dangerously low levels, have more traditional cultures that favor stay-at-home mothers. Countries where fertility rates are higher, such as France, Norway and Sweden, have more progressive governments, which provide generous maternity benefits, subsidized daycare and child tax deductions that make it easier for women to have both kids and jobs.

Which type of country do we want Canada to be? Right now, our fertility rate is at 1.5 and dropping. Europe’s experience indicates that if we continue to implement policies that pretend most women stay at home with the kids, we will see our fertility rate slide to around 1.3, the same as in Greece, Spain and Italy. On the other hand, like France, we could bring in policies that encourage young couples to have larger families.

A 2002 study by Kevin Milligan, now assistant professor of economics at the University of British Columbia, suggests that if the will is there, we could easily follow France’s example. Milligan looked at the link between public policy and fertility levels by analyzing data from the Allowance for Newborn Children, a baby bonus program that ran in Quebec from 1988 through 1996. He found that the program, which gave families sizable cash bonuses for having children, succeeded in encouraging an extra 93,000 births that would not have occurred without the program. But the program was eventually cancelled because of its cost: Milligan estimates that each additional child cost about $15,000 in public funds.

When you consider that every child will pay hundreds of thousands of dollars in taxes during their working lives, perhaps the expense is worth it. For that matter, you can ask mothers such as Irma Grande-Bergeret, who put off having her daughter Brianna until she was almost 41 for financial reasons, how much difference a little money makes.

Irma lives with her husband Jules and three-year-old daughter Brianna just north of Bolton, Ont. She says that when she married Jules 18 years ago, they “weren’t mentally prepared” for children, but then when they decided to have kids a few years later, it was finances that got in the way. Jules, who works as a window-installer, had periods where he was only working seasonally, and sometimes it was Irma’s salary that kept them afloat. There was no way they could afford to live on just 55% of Irma’s pay, even during a shortened maternity leave. That’s why she waited until Jules had a more regular job, she says. But they had to wait so long, Irma was almost too old to conceive by the time she felt they could afford a child.

Having a child has turned out to be even more expensive than the couple thought. There was the cost of moving out of their tiny place in the city to a house in the country, so Brianna could have a backyard to play in. Then there was daycare. “I’ve paid over $13,000 a year for Brianna’s daycare, yet they only let you declare $7,000 on your taxes,” Irma says. “Why don’t they recognize the actual cost?” Moving and daycare expenses grew so high that the couple had to cash in some of their RRSPs to tide them over. Their emergency fund of $5,000 has dwindled to $2,000.

Irma gets up early every weekday, drives Brianna to daycare, then makes the hour-long drive to Toronto where she provides vocational rehabilitation services for injured workers in the food industry. Every day at 4:30 p.m. she rushes out the door and drives back to Bolton to pick up Brianna from the daycare before it closes. If she has grocery shopping to do, she tries to squeeze it in at lunch. “I don’t have the choice not to work any more,” Irma says. “And financially, things are much harder. In the end it was finances that kept us from having two kids — we just weren’t sure if we could afford it.”

Couples such as Irma and Jules show the reality of having kids in Canada. Few people say, “I’m not going to have any kids because they’re too expensive.” Instead, families simply stop after one or two kids because life becomes too difficult. Roderic Beaujot, a professor of sociology at the University of Western Ontario, says the trend to small families is making him nervous. Statistics Canada predicts that seniors aged 65 and over will outnumber children within eight years. This will be the first time in Canadian history that the grey-haired set will be larger than the 15-and-under group. The population shift suggests that kids could be sidelined as we cater more and more to the needs of aging boomers. “[The trend] indicates a society that’s not open to children and the renewal, youth and creativity that children represent,” Beaujot says. “An aging society is a different society. It’s one that will focus on the elderly. As society gets older, there will be less and less concern about youth and young people.”

The solution to our demographic dilemma involves a few simple remedies. Mintz, the tax expert, says the first step would be to reward people who have children with substantial tax deductions — not the paltry amounts they get now, but real deductions that acknowledge the true magnitude of the costs involved when families decide to add another mouth to feed.

Better pay for new mothers would help, too. Beaujot says that when he asks what changes would have the biggest positive impact on young families, his students always say that longer leave and more maternity pay top the list. Most countries with higher fertility rates than Canada offer more than we do.

The third prong to the solution would be better daycare. The debate over whether it’s better to give parents more money to spend on private daycare or offer subsidized universal daycare rages on. In the meantime, parents make do with a woefully inadequate government stipend of $100 a month per child under six.

If the government continues to do nothing, our demographic destiny is inescapable. Right now, we’re putting the needs of older Canadians ahead of the needs of young families and their children. We’re focusing on our past instead of the future. It’s easy to understand why young couples such as Brad and Michelle are having fewer children, given the economic realities.

Unless Canada changes, we’re shaping a future in which a greying population will look to the young for financial support of its favorite medicare and pension programs — and the young won’t be there. Encouraging couples to have children helps everybody. We can make simple changes that allow families to have the kids they want, or we can sit back, do nothing and wait for our looming population crisis to hit us in the face. It is our future, and it is ours to decide.

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