Child Support Cost Avoidance in 1999, Final Report

Cost avoidance estimates are generated using the TRIM3 microsimulation model (Transfer Income Model, Version 3). TRIM3 is a comprehensive microsimulation model, developed and maintained by the Urban Institute under contract with the Office of the Assistant Secretary for Planning and Evaluation of the U.S. Department of Health and Human Services. For more than twenty years, the TRIM family of models has been used to estimate the effects of proposed changes to means-tested transfer programs and the tax system. TRIM3 captures state variation in program rules, including the detailed rules of state TANF programs. The cost avoidance estimates are produced using data from the March 2000 Current Population Survey (CPS), which provides detailed household and person-level income and demographic data for calendar year 1999.

Several steps are involved in estimating cost avoidance. First, TRIM3 must calculate the reduction in transfer program benefits that results when child support reduces the amount of benefits a participating family receives, renders an otherwise eligible family ineligible for assistance, or is sufficient to cause an eligible family to decide not to participate. The reduction in transfer program benefits is then disaggregated into that arising from IV-D collections and that arising from private child support payments. Since child support is underreported on the CPS, the initial TRIM3 estimate is likely to understate the total reduction in transfer program benefits. A revised estimate of cost avoidance attributable to IV-D collections is made by multiplying the TRIM3 "cost avoidance ratio" - the average reduction in transfer program benefits per dollar of child support - by the amount of child support distributed according to OCSE financial data.

The estimates developed in this report show that cost avoidance from IV-D child support collections exceeds the total amount of cost recovery in FY 1999. Of the total combined $4.9 billion in cost avoidance and cost recovery produced by IV-D child support collections, less than half (48 percent) is from cost recovery (figure 1).

Cost avoidance is highest in the Food Stamp Program, accounting for 37 percent ($936 million) of the total $2.6 billion in cost avoidance from IV-D child support collections (figure 2). Cost avoidance to the Food Stamp Program occurs when child support lowers the amount of benefit a participating household receives, renders an otherwise eligible household ineligible, or is sufficient to cause an eligible household to decide not to participate. Cost avoidance to the Food Stamp Program would be even greater if it were not for the fact that households that pay child support are able to deduct the child support payment from income when calculating the benefit amount. Since the Food Stamp Program is a federally funded entitlement program, the $936 million in cost avoidance reflects direct savings to the federal government.

Source: TRIM3 Microsimulation Model and FY 1999 OCSE Financial Data.

Source: TRIM3 Microsimulation Model and FY 1999 OCSE Financial Data.

TANF accounts for 29 percent ($735 million) of total cost avoidance from IV-D child support collections. Cost avoidance to the TANF program occurs when child support income renders a family ineligible for assistance or makes an eligible family decide not to participate. Given the TANF block grant structure, a reduction in TANF assistance does not directly decrease federal or state spending on TANF-related programs but rather frees up resources for training programs, job search, transportation, child care, and other support services.

Medicaid accounts for 23 percent ($588 million) of total cost avoidance from IV-D child support collections. This estimate captures cost avoidance that arises when child support renders a person ineligible for Medicaid. In addition, if child support is sufficient to keep a person from receiving SSI or TANF, and as a result, the person chooses not to enroll in Medicaid, then the resulting Medicaid savings are counted as cost avoidance. The cost avoidance estimate does not capture the savings to the Medicaid program that arise when health insurance coverage is obtained from the noncustodial parent through a medical support order. In addition, no cost avoidance is attributed to children who would be eligible for the State Children's Health Insurance Program (SCHIP) in the absence of Medicaid. Since Medicaid is a federal-state matching entitlement program, the $588 million in cost avoidance reflects shared savings to federal and state governments.

SSI accounts for 6 percent ($154 million) of total cost avoidance from IV-D child support collections. Cost avoidance to the SSI program occurs when child support income lowers the benefit amount for a participating child, renders an otherwise eligible child ineligible, or is sufficient to cause an eligible child to decide not to participate. Due to data limitations, the cost avoidance estimate only captures the first source of cost avoidance - a lower benefit resulting from receipt of child support income. Furthermore, cost avoidance arising from reductions in state supplementary SSI payments is not captured. SSI is a federally funded entitlement program, so the $154 million in cost avoidance reflects direct savings to the federal government.

Federal housing assistance programs account for the remaining 6 percent ($142 million) of total cost avoidance from IV-D child support collections. This includes households receiving either project-based assistance (public housing and Section 8 project-based) or household-based assistance (Section 8 certificates and vouchers). Cost avoidance arises when child support income increases the household's rental payments - which are typically set at the larger of 10 percent of gross income or 30 percent of net income. Although the federal housing programs are discretionary programs, cost avoidance may indirectly reduce federal spending on housing assistanceand help localhousing authorities cover the operating costsassociated withpublic housing.

It is important to note that the IV-D estimates presented here show the costs avoided as a result of IV-D collections, and cannot be entirely attributed to IV-D enforcement activities. Undoubtedly, some percentage of IV-D child support collections would be paid even in the absence of the IV-D system. It is beyond the scope of this report to estimate the amount of child support collected and costs avoided solely as a result of IV-D enforcement efforts. However, the IV-D cost avoidance estimates are consistent with estimates that attribute all cost recovery to the IV-D system (Committee on Ways and Means 2000).

The numbers presented here should be viewed as a lower-bound estimate of cost avoidance. In cases where data limitations resulted in a range of estimates, the methodological approach yielding the lowest cost avoidance figure was selected. Furthermore, the estimate does not capture all sources of cost avoidance. Additional cost avoidance arises from means-tested transfer programs not included in the estimates. Notable examples include the Child Care Development Fund (CCDF) and the State Children's Health Insurance Program (SCHIP). Given the limited research concerning the effect of child support enforcement on work, marriage, and childbearing decisions (Barnow et al. 2000), behavioral effects are not included in the estimates presented here.

To the extent that the number of families receiving TANF continues to decline, cost avoidance can be expected to increase in size relative to cost recovery. The President's budget for FY 2003 proposes legislation that would allow current and former welfare recipients to retain more of the child support paid on their behalf (OMB 2002). If implemented, these provisions can be expected to reduce cost recovery, while increasing cost avoidance.

Unlike cost recovery, cost avoidance can only be estimated. It cannot be directly measured. But when even a lower-bound estimate of cost avoidance exceeds the total amount of cost recovery, it is clear that cost avoidance is an important part of the picture. As the child support enforcement community calls attention to child support's ability to improve families' financial stability and independence, it is worth recognizing that this increased independence also implies financial benefits to government through cost avoidance.

TRIM3 estimates the total reduction in transfer program benefits attributable to child support by subtracting total program benefits under a "baseline" simulation, in which child support is paid, from total program benefits under an "alternative" simulation, in which no child support is paid. Eligibility and benefits are calculated using the state and federal program rules that were in effect for the majority of calendar year 1999.

The child support income used in the baseline simulation is the child support income reported on the CPS, except that here it is treated as the income of the child rather than of the adult who reports it.^[8] This modification is necessary in order to correctly simulate the treatment of child support in the SSI and TANF programs.^[9] Child support income is set to zero for a small number of households where child support is reported, but there are no children.^[10]

For each simulation, TRIM3 performs the same basic steps a caseworker would perform in determining eligibility and establishing the benefit level, using the rules in effect in the household's state of residence. The model first divides the household into relevant "filing units" - the group or groups of people in the household who would file together as a unit when applying for assistance. TRIM3 then determines whether members of the filing unit meet any relevant eligibility requirements, such as those related to age, disability, immigrant and citizenship status, and work status. Income and assets tests are conducted in order to determine whether the unit meets financial eligibility requirements. If so, a benefit amount is calculated.

Not all units eligible for assistance choose to participate, so TRIM3 must select participants from among those found eligible. Eligible units that report receiving assistance from a particular program on the CPS are automatically simulated to participate in the baseline simulation. Additional participants are selected, as needed, in such a way that the size and composition of the simulated baseline caseload matches that of the actual caseload as closely as possible.^[11]

For the alternative simulation, child support is set to zero, and eligibility and benefits are recalculated. Units are allowed to change their participation decision in response to a change in their eligible benefit level. For example, a unit may have been eligible for a very low food stamp benefit in the baseline, and so have chosen not to participate. Without child support income, the unit becomes eligible for a higher food stamp benefit, and decides to participate. If a unit starts participating in one program, then that may increase the likelihood of participating in other programs. For example, most SSI and TANF recipients participate in the Food Stamp Program. So most units that start participating in SSI or TANF in the alternative simulation are simulated to participate in the Food Stamp Program as well.

The CPS does not indicate whether a child support recipient receives IV-D services. Therefore, this information must be imputed onto the file using data from the 1998 CPS April/March Matched File (CPS-CSS).^[12] Total child support payments and benefit reductions can then be calculated separately for IV-D and non-IV-D families.

The CPS-CSS collects detailed child support information from custodial mothers and custodial fathers. There is no specific question about whether a custodial parent receives IV-D services. However, IV-D status can be inferred using an approach developed by Matthew Lyon (1999). A custodial parent is counted as receiving IV-D services if anyone in the family receives TANF or Medicaid. Those without TANF or Medicaid are counted as IV-D if they respond that they have had contact with the government regarding child support, do not know whether they are supposed to receive child support because "a child support agency filled out the paper work", or were supposed to receive child support through a child support, welfare, or other public agency.

TRIM3 assumes that all families receiving TANF or Medicaid in the baseline simulation receive IV-D services. A logit model is used to impute the IV-D status of mothers not in families receiving TANF or Medicaid. The model controls for the mother's demographic, income, and child support characteristics. Fathers who are not in families receiving TANF or Medicaid are flagged as receiving IV-D services based on probabilities that vary by poverty level. Because the CPS-CSS does not contain information on nonparent caretakers, the only nonparent caretakers flagged as receiving IV-D services are those in families receiving TANF or Medicaid. See Appendix A for additional information concerning the imputation of IV-D status.

Because there is no external target for total child support income that captures private payments as well as IV-D collections, it is impossible to know the full extent of underreporting of child support income on the CPS. However, there is little doubt that child support is underreported. With the exception of income from wages and salaries, income amounts are typically underreported in household survey data. The CPS captured an estimated 71 percent of property income, 88 percent of transfer income, and 77 percent of pension income in 1996 (Roemer 2000). Wheaton (1997) estimates that child support on the March 1992 CPS is underreported by as much as 21 to 27 percent relative to child support reported on the 1992 CPS-CSS.

Child support is particularly likely to be underreported for TANF recipients, who are unlikely to report child support payments retained by the government. Therefore, unadjusted TRIM3 estimates will fall far short of the actual level of TANF cost recovery. To the extent that persons who do not receive TANF underreport child support, unadjusted TRIM3 estimates of cost avoidance will be understated as well.

The results presented in this report correct for the problem of underreporting by adjusting the TRIM3 estimates using OCSE financial data obtained from table 1 of the Child Support Enforcement FY 1999 Preliminary Data Report (OCSE 2000).^[13] OCSE data on TANF cost recovery are substituted for the unadjusted TRIM3 estimates. Revised IV-D cost avoidance estimates are calculated by multiplying the TRIM3 cost avoidance ratio (average reduction in transfer program benefits per dollar of child support) by the total amount of payments to families as reported in the OCSE financial data. No revised estimate is possible for persons not receiving IV-D services, since there are no comparable data for the total amount of child support paid privately.

Using data from the CPS, TRIM3 estimates that $19.9 billion dollars in child support were paid to non-TANF families in 1999, of which $10.3 billion were paid through the IV-D system (table 1).^[14] The remaining $9.6 billion were paid through private transactions. The TRIM3 estimate of child support paid to non-TANF IV-D families is lower than the actual amount reported by OCSE ($13.4 billion) due to the underreporting of child support income on the CPS.^[15]

Child support collected by the IV-D system results in an estimated $1,950 million in reduced means-tested benefits for families receiving support, and private child support transactions result in an additional $400 million benefit reduction. These results do not correct for the underreporting of child support on the CPS. The overall cost avoidance ratio - average reduction in transfer program benefits per dollar of child support - is .190 for IV-D non-TANF families. That is, each $1 received by a IV-D non-TANF family results in an average benefit reduction of $0.19 over the five programs evaluated. The cost avoidance ratio is .042 for families receiving child support through private transactions. It is not surprising that the cost avoidance ratio is lower for families receiving child support through private transactions, since they tend to have higher incomes and less interaction with social assistance programs. The overall cost avoidance ratio for all non-TANF families is .118.

As shown above, cost avoidance arising from IV-D child support collections is much greater than that arising from private child support payments. This is to be expected, since families receiving IV-D services tend to have lower incomes than those who do not (Lyon 1999) and cost avoidance ratios tend to be higher for lower-income families (Wheaton and Sorensen 1998).

Table 2 shows the total cost avoidance ratio (summed over all programs), by poverty level, for non-TANF families.^[20] Cost avoidance ratios fall dramatically as family income relative to the poverty threshold rises. The ratio drops from a high of .68 for poor families, to a low of .011 for families with incomes greater than 300 percent of the poverty threshold. This is to be expected, since eligibility and benefits for means-tested transfer programs are targeted to lower-income families.

The cost avoidance ratio for privately paid child support is lower than the IV-D cost avoidance ratio for families of the same income level. A lower cost avoidance ratio is expected for families who receive support privately, since the fact that a family does not receive IV-D services suggests that it has not received AFDC or TANF in the past and may be less likely than a similar IV-D family to seek government assistance.

Because cost avoidance ratios are higher at lower income levels, the overall cost avoidance ratio will be higher to the extent that a greater proportion of the child support is collected on behalf of low-income families. As can be seen from table 3, a major explanation for the higher overall cost avoidance ratio experienced by the IV-D system is that 41 percent of total child support dollars collected by the IV-D system for non-TANF families is paid to families with incomes under 200 percent of the poverty threshold. In contrast, only 10 percent of privately paid child support goes to families with incomes that low.

The vast majority of child support income collected on behalf of families currently receiving TANF is retained by the government to help offset TANF expenditures. However, a small amount is paid to families, and this in turn produces cost avoidance to other programs.

Under AFDC rules in effect until 1997, states were required to "pass through" to the family the first 50 dollars in child support collected in each month. This was discontinued under TANF, although states were permitted to continue the pass-through practice so long as they financed it themselves. Federal law allowed two states that had pass-through related waivers under the AFDC program to continue the practice under TANF. Under these waivers, Connecticut passes through up to $100 per month of child support, and Wisconsin passes through the full amount of the child support collection.^[21]

The OCSE financial data count child support pass-through amounts in the two waiver states as "payments to families," but not the optional pass-through amounts financed by the states. Other types of child support payments counted as "payments to families" include collection overages, "fill the gap" payments in states that use child support to fill the gap between the state's maximum benefit and the income eligibility standard, and collections made for TANF families on behalf of children outside the TANF assistance unit (such as an SSI child).

In order to maintain consistency with the OCSE financial data, only those child support collections that meet the OCSE definition of "payments to families" are assumed to generate cost avoidance. The optional pass-through amounts financed by the states are counted as "cost recovery" because this is consistent with how the dollars are classified in the OCSE financial data.

Unfortunately, the CPS sample size is too small to generate reliable cost avoidance ratios for the waiver and fill-the-gap states, and there is no way to directly simulate the cost avoidance that arises from payments to families for collection overages. In order to provide enough data for a rough cost avoidance estimate for all TANF families, a special simulation is performed in which all states are simulated to have at least a fifty-dollar pass-through. Cost avoidance ratios are calculated by comparing the results from this simulation to the alternative simulation in which no child support is paid. The cost avoidance ratio is set equal to the change in transfer program benefits (for TANF families) divided by the amount of child support paid to TANF families (net of what is retained by the government). While this is not a real-world policy scenario, it provides enough data to generate a rough estimate of the cost avoidance that arises when child support is paid directly to TANF families.

The simulation produces a total cost avoidance ratio of .402 for child support payments to TANF families. The ratio for SSI is .177 (reflecting the child support collected on behalf of children outside the TANF assistance unit), and the ratios for housing assistance and food stamps are .074 and .151, respectively. The simulation does not yield any cost avoidance for Medicaid, since it is assumed that a person receiving TANF will receive Medicaid regardless of the amount of child support paid to the family.

The total cost avoidance dollar estimates presented in table 1 understate the true extent of cost avoidance because they are derived from CPS data in which child support income is underreported. To the extent that child support income is underreported on the CPS, benefit reductions resulting from child support will also be understated. To correct for this problem, revised IV-D cost avoidance estimates are calculated by multiplying the TRIM3 cost avoidance ratio (average reduction in transfer program benefits per dollar of child support) by the total amount of payments to families as reported in the OCSE financial data. No revised estimate is possible for persons not receiving IV-D services, since there are no comparable data for the total amount of child support paid privately.

Table 4 shows the total estimated cost avoidance produced when TRIM3 cost avoidance ratios are multiplied by the actual level of distributed child support as reported in the OCSE financial data (OCSE 2000). Cost avoidance from IV-D child support distributions amounts to an estimated $2,555 million for FY 1999, almost entirely from families not currently receiving TANF.

The child support payments in table 4 are obtained from table 1 of the Child Support Enforcement FY 1999 Preliminary Data Report (OCSE 2000). The $113 million reported for TANF families is the total amount distributed to TANF families (IV-A) and children receiving foster care maintenance services under title IV-E of the Social Security Act. TRIM3 does not simulate the IV-E program and so makes the assumption that the cost avoidance ratio for payments to IV-E children is the same as for payments to TANF families.

The $13,362 million reported for non-TANF families represents the sum of "medical support" and "payments to families" for "former assistance" and "never assistance" families. TRIM3 does not distinguish between families that formerly received AFDC or TANF, and those that never received assistance. Therefore, separate cost avoidance estimates for former assistance and never assistance families are not possible.

"Medical support" payments represent cash payments made by the noncustodial parent for the purpose of helping defray the child's medical expenses. The $21 million in medical support paid to TANF and IV-E families is assumed to go primarily to the Medicaid program to help offset Medicaid expenditures, and so is not included in the cost avoidance estimate shown in table 4. However, the $13,362 million in payments to non-TANF families includes about $75 million in medical support payments, which are assumed to be treated the same as child support income in calculating eligibility and benefits under the various transfer programs.^[22]

The greatest source of IV-D cost avoidance is to the Food Stamp Program, with an estimated $936 million dollars of benefit reductions in FY 1999. Cost avoidance would be even higher ($979 million) if it were not for the child support deduction available to noncustodial parents who pay child support. TRIM3 does not simulate the food stamp child support deduction, so a rough approximation is made for the purpose of table 4. All persons claiming the child support deduction are assumed to pay child support through the IV-D system.^[23] The aggregate amount of the deduction is estimated using data from the FY 1999 Food Stamp Program Quality Control Sample (Rosso and Fowler 2000), and the deduction is assumed to increase the noncustodial parent's food stamp benefit by 30 percent of the deducted amount.^[24] Since the Food Stamp Program is a federally funded entitlement program, the $936 million in cost avoidance reflects direct savings to the federal government.

IV-D child support collections reduce TANF benefits by an estimated $735 million by reducing the number of families eligible for or participating in TANF. Given the TANF block grant structure, a reduction in TANF assistance does not directly decrease federal or state spending on TANF-related programs but rather frees up resources for training programs, job search, transportation, child care, and other support services.

Medicaid cost avoidance arising from changes in eligibility and enrollment amounts to an estimated $588 million. As mentioned previously, no cost avoidance is attributed to children who are eligible for SCHIP but would receive Medicaid in the absence of child support. The Medicaid estimate does not include savings from enforcement of medical support orders. Since Medicaid is a federal-state matching entitlement program, the $588 million in cost avoidance reflects shared savings to federal and state governments.

IV-D child support collections reduce the SSI benefits of disabled children by an estimated $154 million. As mentioned previously, this estimate only captures the benefit reduction for participating children. It does not capture the savings that occur when child support renders a child ineligible for SSI or is sufficient to cause an eligible family to decide not to participate. Furthermore, cost avoidance arising from reductions in state supplementary SSI payments is not captured. SSI is a federally funded entitlement program, so the $154 million in cost avoidance reflects direct savings to the federal government.

Federal housing assistance programs account for the remaining $142 million of cost avoidance from IV-D child support collections. Although the federal housing programs are discretionary programs, cost avoidance may indirectly reduce federal spending on housing assistanceand help localhousing authorities cover the operating costsassociated withpublic housing.

The financial benefits to government of the CSE Program have traditionally been measured by the extent of cost recovery - the total amount of child support retained by the government to offset current and past TANF and AFDC expenditures. In FY 1999, cost recovery equaled $2,347 million dollars (OCSE 2000). Of this amount, $1,346 million were from collections made on behalf of current TANF and IV-E recipients and the remaining $1,002 million were from collections made on behalf of former recipients. In addition, most of the $21 million in medical support payments made on behalf of current TANF and IV-E recipients can be assumed to be transmitted to the Medicaid program for the purpose of offsetting the medical expenses of Medicaid enrollees. Therefore, this $21 million is included in the "Cost Recovery" row shown in table 5, bringing the total amount up to $2,368 million.

Table 5 shows the percentage break down of cost recovery and cost avoidance resulting from IV-D child support collections in FY 1999. Of the total estimated $4,923 million in cost recovery and cost avoidance, less than half (48 percent) results from TANF cost recovery and direct reimbursement of the Medicaid program. The remaining $2,555 million results from cost avoidance, of which 37 percent is for the Food Stamp Program, 29 percent is for TANF, 23 percent is for Medicaid, and the remaining 12 percent is split between SSI and the federal housing assistance programs.