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The Implications of Means-Testing Paid Family Leave Benefits

Democratic leaders are currently working to include a paid family leave program into their Build Back Better legislation, the total size of which is being vigorously debated. Two ways to decrease the costs of paid leave include means-testing benefits (as requested by Senator Manchin) and limiting a national program to parental leave (as Speaker Pelosi has suggested). Combining these two elements – a means-tested paid parental leave benefit that is targeted to low-income workers – would provide benefits to the workers most in need of paid leave, while significantly limiting the cost of the program.

Low- and middle-income workers are the least likely to receive any form of paid leave today. According to the Bureau of Labor Statistics (BLS), only 12% of workers in the bottom quartile of wages have paid family leave, compared to 35% of those in the top quartile and 40% of those in the top 10%. In the absence of a defined paid family leave benefit, workers commonly use other employer-provided benefits, such as short-term disability, vacation, and sick days. However, low-income workers often do not have access to these benefits either. For instance, only 20% of wage earners in the bottom quartile have short-term disability, compared to 56% of the top quartile of wage earners. As a result, only 33% of workers in low-income families are paid by their employer when they need to take family or medical leave, compared to 66% and 84% of those in middle- and high-income families, respectively.

In a 2017 American Action Forum – American Enterprise Institute report, Angela Rachidi and I outlined an option for a means-tested paid parental leave program that would provide low-income workers the ability to take 12 weeks of paid time off to bond with a newborn or adopted child. Modeled after the Earned Income Tax Credit (EITC), our proposed program would base parental leave benefits and eligibility on household income relative to the federal poverty level (FPL). Benefits would replace up to 80% of weekly income and phase out at 325% of FPL ($76,700 in household income for a family of three). We also illustrated a more expansive option that would use a slower phase-out rate and be available for those below 450% of FPL ($98,600 for a family of three).

The first option (under 325% of FPL) would reach roughly 40% of workers at a cost of about $4 billion per year while the second option (under 450% of FPL) would reach over half the workforce and cost about $6 billion annually.

The substantial advantage of targeting low-income workers is that it would be highly cost-effective. This 12-week parental leave program would be considerably less costly than a comparable 12-week parental leave program with universal coverage, which would cost $13 to $17 billion each year.1 In addition, targeting low-income workers means that most benefits would go to those who currently lack paid leave from their employers. A universal program, on the other hand, would cover many workers who already have access to paid leave benefits.

Estimated One-Year Cost of Parental Leave Benefits: Means-Tested vs Universal Programs

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As a result, a means-tested program would efficiently expand access to paid parental leave and provide numerous economic, health, and development benefits that would be particularly impactful as the United States continues to recover from the COVID-19 pandemic. A September BPC-Morning Consult survey found that 37% of unemployed workers would be more likely to go back to work if their employer provided paid family leave. A robust body of evidence demonstrates that paid parental leave, in particular, helps workers stay in their jobs and provides significant benefits for infant and child health.

This approach, however, has some disadvantages that are worth highlighting. To start, although middle- and high-income workers are more likely to receive paid leave from their employers, there are still many without adequate paid parental leave who would be excluded from this program. A means-tested benefit would also have shortcomings that are typically associated with programs like the EITC. For instance, while the program, on net, would support workforce participation, workers with earnings in the benefit phase-out range would receive a smaller benefit or become ineligible for the program if they increase their earnings. This could discourage work and carry the potential to partially offset the workforce benefits of paid parental leave. Using a slower phase-out – as illustrated in the option that provides benefits to workers under 450% of FPL – would limit this negative impact on work.

A well-constructed, means-tested paid parental leave program could reach a substantial portion of the workforce, directly expand paid leave benefits to those who currently lack them, and do so at a fraction of the cost of a universal program.

End Notes:

1 The $13 to $16 billion annual cost estimate is based on the AEI Paid Family and Medical Leave Cost Model, with the parameters that the program provides 12 weeks of parental leave with an 80% wage replacement rate, $800 maximum weekly benefit, 1-week waiting period, and FMLA work requirement.

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