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The Hidden Financial Cost of Child Care

By on December 6, 2016
Categories: KIDS & MONEY

Sixty-five percent of couples raising children under the age of five are in the workforce. This creates a huge expense for many parents who often must grapple with child care bills.

Parents typically pay roughly $18,000 a year for two children in childcare. The average child care price tag exceeds the median cost of renting an apartment in all 50 states. In most states, the price also exceeds in-state tuition at public universities.

The high cost has led many couples to decide that one parent, usually the mother, should stay home to save on childcare costs.

Dropping out of the workforce temporarily, however, can have lasting long-term financial consequences for families. A new study from the Center of American Progress (CAP) entitled, Calculating the Cost of Interrupting a Career for Child Care, explores the financial consequences of parental decisions.

Each year that a parent stays out of the workforce, according to the report, can cost a family significantly more than three times a parent’s annual salary in lifetime income. Many families, the report said, “are stuck in a financial catch-22, with too little income today to afford child care that can sustain careers, raise incomes considerably and provide a measure of financial security for the rest of their lives.”

Calculating the Cost

The CAP has developed a calculator to show parents the financial impact of interrupting a career. The calculator goes beyond just multiplying the number of years out of the workforce with the parent’s last annual salary and also includes lost opportunity costs. The calculator, for instance, considers the loss in wage growth and the missing retirement savings from a 401(k) account and Social Security.

Factors that the calculator takes into consideration include:

  • Current salary
  • Gender
  • Age
  • Age when worker began full-time employment
  • Age when worker takes time off for child care
  • Length of leave from workplace

Financial Hit Example

To illustrate calculator findings, the CAP used a hypothetical teacher, who earned $44,000 a year. She had a baby when she was 26 and left the workforce for five years. Losing her $44,000 salary for five years would cost $220,000 in lost wages.

In addition, the career interruption would cost an estimated $265,000 in lifetime wage growth plus another $222,000 in retirement benefits. The calculator estimated that the time off from the workforce would cost her nearly $707,000 in today’s dollars over her lifetime or roughly 3.2 times as much as her lost wages alone.

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