Lane Kenworthy, The Good Society
October 2019

To be economically secure is to have sufficient resources to cover your expenses. One key is to have a decent income.¹ But that may not suffice if you experience a sizable income decline or a large unanticipated expense.

Americans care a good bit about the stability of their income and expenses. The Pew Research Center and the US Financial Diaries Project have each asked a sample of low- and middle-income Americans “Which is more important to you: financial stability or moving up the income ladder?” In both surveys, two-thirds or more chose financial stability.²

From the mid-1940s through the mid-1970s, the incidence of large income drops and large unanticipated expenses very likely decreased for most Americans, though we don’t have hard data to confirm this. Incomes grew steadily for most households, reducing the share with low income and facilitating the purchase of private insurance. More Americans became homeowners, thereby accumulating some assets. And a raft of new government laws and programs — limited liability law, bankruptcy protection, Social Security old-age benefits, unemployment insurance, statutory minimum wage, AFDC (Aid to Families with Dependent Children, which later became TANF), Social Security disability benefits and Supplemental Security Income (SSI), Medicare and Medicaid, food stamps, EITC, and disaster relief, among others — provided a safeguard against various financial risks, from business failure to job loss to poor health to old age.³

Since the 1970s, according to a number of knowledgeable observers, the trend has reversed. Paul Osterman sounded the alarm in his 1999 book Securing Prosperity, in which he noted the rising frequency of job loss.⁴ In 2006, Louis Uchitelle echoed this argument in his book The Disposable American.⁵ In The Great Risk Shift, published the same year, Jacob Hacker pushed the assessment beyond job loss to suggest that severe income decline has become more common and that private and public insurance against risks such as poor health and old age have weakened.⁶ Peter Gosselin reached a similar verdict a few years later in High Wire.⁷ A survey in 2007 found more than 25% of Americans saying they were “fairly worried” or “very worried” about their economic security, and a similar survey in 2016 found 23% of Americans saying they feel “not financially secure.” According to the latter poll, 17% are frequently anxious about their financial situation and 30% lose sleep over it.⁸

A decline in households’ financial stability wouldn’t be surprising given how America’s economy and society have changed over the past several decades. Competition among firms has intensified as manufacturing and some services have become internationalized. Competitive pressures have increased even in sectors not exposed to competition from abroad, such as retail trade and hotels, partly due to the emergence of large and highly efficient firms such as Walmart. At the same time, companies’ shareholders now demand constant profit improvement rather than steady long-term performance.

These shifts force management to be hypersensitive to costs and constraints. One result has been the end of job security, as firms restructure, downsize, move offshore, or simply go under. Another is enhanced management desire for flexibility, leading to greater use of part-time and temporary employees and irregular and unstable work hours. This increases earnings instability for some people and may reduce their likelihood of qualifying for unemployment compensation, paid sickness leave, and other supports. Employers also have cut back on the provision of benefits, including health insurance and pensions.⁹

Insurance companies are subject to the same pressures. And they now have access to detailed information about the likelihood that particular persons or households will get in a car accident, need expensive medical care, or experience home damage from a fire or a hurricane. As a result, insurers are more selective about the type and extent of insurance coverage they provide and about the clientele to whom they provide it.¹⁰

Family protections against income instability also have weakened. Having a second adult in the household who has a paying job (or can get one) is a valuable asset in the event of income loss, but the share of American households with two adults has decreased, particularly among those with less education and income.¹¹

The period since the 1970s also has witnessed commitments by prominent American policy makers to ensure that, in Bill Clinton’s expression, “the era of big government is over.” Apart from social assistance (AFDC/TANF), most of America’s social programs haven’t shrunk or disappeared. But they haven’t increased enough to keep up with the rise in economic insecurity.¹²

So what do the data tell us about the incidence of large income declines and unanticipated expenses in the United States?

Skip to:

• Large income decline
• Month-to-month income variability
• Large unanticipated expense
• Inflation
• Wealth as a backstop?
• Summary

LARGE INCOME DECLINE

A large income decline can be problematic even if it’s temporary. Consider two households with the same average income over ten years. In one, the income is consistent over these years. The other experiences a big drop in income in one of the years, but offsets that drop with higher-than-average income in one or more later years. The latter household may be worse off in two respects. First, a loss tends to reduce our happiness more than a gain increases it.¹³ Second, a large decline in income may force a household to sell off some or all of its assets, such as a home, to meet expenses. Even if the income loss is ultimately recouped, the household may be worse off at the end of the period due to the asset sell-off.

To make matters worse, it turns out that income declines often aren’t temporary. Stephen Rose and Scott Winship have analyzed data from the Panel Study of Income Dynamics (PSID) to find out what subsequently happens to households experiencing a significant income decline.¹⁴ According to their calculations, among households that experience a drop in income of 25% or more from one year to the next, about one-third do not recover to their prior income level even a full decade later.

There are various reasons for this. Some people own a small business that fails and don’t manage to get a job that pays as much as they had made as an entrepreneur. Others become disabled or suffer a serious health problem and are unable to return to their previous earnings level. Still others are laid off, don’t find a new job right away, and then suffer because potential employers view their jobless spell as a signal that they are an undesirable employee. And some sustained income declines are a result of a partner or spouse’s early death; about 10% of American 25-year-olds won’t live to age 65, and 30% of Americans don’t have life insurance.¹⁵

So income decline is a problem for those who experience it. How many Americans are we talking about? Several researchers have attempted to estimate the frequency of sharp income drops. Rose and Winship find that in any given year, 15% to 20% of Americans experience an income decline of 25% or more from the previous year.¹⁶ Using a different data source, the Survey of Income and Program Participation (SIPP), Winship estimates that during the 1990s and 2000s approximately 8% to 13% of households suffered this fate each year.¹⁷ A study by the Congressional Budget Office matches data from the Survey of Income and Program Participation (SIPP) with Social Security Administration records and gets a similar estimate of approximately 10% during the 1990s and 2000s.¹⁸ A team of researchers led by Jacob Hacker uses a third data source, the Current Population Survey (CPS), covering the mid-1980s through 2012, and comes up with an estimate of 15% to 20%.¹⁹

These estimates vary, but not wildly. In any given two-year period, approximately 10% to 20% of working-age Americans will experience a severe income drop from one year to the next.

If we extend the time horizon a bit, we see that large income decline affects a wide swath of Americans. Using PSID data, Jacob Hacker has calculated that approximately 74% of American households experience a severe year-to-year income drop at some point in a ten-year period.²⁰

Have large year-to-year income declines become more common? Yes, according to calculations by Jacob Hacker’s team and by Scott Winship. These estimates, shown in figure 1, suggest a rise in sharp year-to-year income decline of perhaps three to five percentage points since the 1970s or the early 1980s.²¹ This isn’t a massive increase, but it might cumulate into a more substantial one.

So sharp declines of income among working-age American households are relatively common and their incidence has increased over the past generation. We need to keep in mind that some of these declines are voluntary. A person may leave a job or cut back on work hours to spend more time with children or an ailing relative. A couple may divorce. Someone may quit a job to move to a more desirable location without having another job lined up. Still, we don’t know what portion of income drops are voluntary, and I don’t think we should presume that most are.

Other nations have done better. Figure 2 shows the share of households that experience a large (25% or more) income decline from one year to the next. More households suffer large income drops in the United States than in most other rich democracies.

Among these countries, the only ones in which the incidence of large income decline has increased in recent decades, apart from the United States, are Canada, Finland, and Germany.²²

Public insurance programs play a key role in compensating for earnings losses. Figure 3 shows the strong correlation across countries between the generosity of government social programs and the share of households that suffer a large income decline.

MONTH-TO-MONTH INCOME VARIABILITY

Income instability isn’t solely a problem if it occurs across years. Instability within a year — that is, from month to month — also can put a strain on households, particularly if their income is low or moderate. For some households, employment and/or work hours vary from month to month as one or more adults in the household moves between jobs or takes time off due to sickness or family constraints. And some jobs — seasonal ones, temp work, “platform economy” positions — are inherently irregular.²³ Even when employment is stable, pay can vary. This has always been true for taxi drivers and waitresses, but uncertain pay is no longer exceptional. Recent studies estimate that 2.6% of employed Americans are on call workers, 1.5% are temp agency workers, 3.1% are workers provided by contract firms, and 0.5% are workers who provide services through online intermediaries such as Uber and Task Rabbit. Around 10% have irregular or on-call shifts.²⁴ As many as 33% engage in freelance work of various kinds.²⁵

The US Financial Diaries Project collected detailed cash flow and financial data from 237 low- and middle-income families over the course of a year. On average, about one-third of the income of these families came from a job without a regular wage or salary. In 40% of these families, one or both adults worked more than one job. Among those with low income, about half reported that it was difficult to predict what the household’s income would be during the month.²⁶

Large month-to-month income fluctuations are much more common among Americans in the lowest fifth of incomes than among those with middle incomes.²⁷

Income variability makes life more difficult. As Jonathan Morduch and Rachel Schneider put it, “Without a steady income, planning is much more complicated, and accumulating savings for unexpected expenses — not to mention major purchases such as a car or down payment on a home, or college or retirement — is quite difficult. At a more basic level, uncertainty about how often and how much income will arrive each month adds to the challenge of creating a basic spending plan for how to buy groceries and pay household bills.”²⁸ Households deploy myriad strategies to deal with unsteady income: working an additional job, borrowing from a credit card or money lender, borrowing from family or friends, paying some bills but not others, pawning possessions, selling blood, selling drugs.

How much has month-to-month income variability increased in the United States? Is it more common here than in other affluent democratic countries? We don’t know.

LARGE UNANTICIPATED EXPENSE

A sharp drop in income causes economic insecurity because we may have trouble meeting our expenses. A large unanticipated expense can produce the same result.²⁹

In the United States, the most common large unexpected expense is medical. About one in ten Americans doesn’t have health insurance. Others are underinsured, in the sense that they face a nontrivial likelihood of having to pay out of pocket for health care if they fall victim to a fairly common accident, condition, or disease.

Of course, many of the uninsured and underinsured won’t end up with a large healthcare bill. And some who do will be able to pay it (due to high income or to assets that can be sold), or will be allowed to escape paying it because of low income or assets, or will go into personal bankruptcy and have the debt expunged.

Yet in a modern society, we should consider most of the uninsured and some of the underinsured as economically insecure, in the same way we do those with low income or unstable income.³⁰ They are living on the edge to a degree that should not happen in a rich nation in the twenty-first century. After all, every other affluent country manages to provide health insurance for all (or virtually all) its citizens without breaking the bank.

This form of economic insecurity decreased sharply with the spread of employer-provided private health insurance after World War II and then with the creation of Medicare and Medicaid in the mid-1960s. As figure 4 shows, the share of Americans without health insurance fell from around 90% in 1940 to 24% in 1963 to 11% in 1979. But in the 1980s, 1990s, and 2000s that trend reversed course. By 2010, the share lacking health insurance had risen to 16%.

The 2010 Affordable Care Act (ACA) has made a significant dent in the problem. Beginning in 2014, when the reform’s full set of provisions took effect, we see a sharp fall in the uninsured share. The ACA is expected to eventually reduce that share to perhaps 6-8%. That would be a substantial improvement in economic security, but it will still leave us well short of where we could be, and where every other affluent nation has been for some time.³¹

Figure 4 understates vulnerability to a large medical expense in two respects. First, these data capture the average share of Americans who are uninsured at a given point during a year. (This share is very similar to the share who are uninsured throughout the entire year.³²) If we instead ask how many are uninsured at any point during a year or two, the figure is larger. The Lewin Group estimates that during the two-year period of 2007 and 2008, 29% of Americans lacked health insurance at some point.³³

Second, it isn’t only the uninsured who are insecure. Some Americans have a health insurance policy that is inadequate.³⁴ As figure 5 shows, 60% of Americans say they worry a great deal about the availability and affordability of health care. Out-of-pocket expenses allowed by insurance plans sold on the national health insurance exchanges can be as high as $13,700 a year for a family.³⁵ In a survey by the Commonwealth Fund, 29% of American adults aged 19 to 64 who had health insurance throughout the year reported that they had outstanding medical debt, had trouble paying medical bills, were contacted by a collection agency for unpaid medical bills, or had to alter their way of life in order to pay medical bills.³⁶ And a survey by the Kaiser Foundation and the New York Times found that “while insurance may protect people from having medical bills problems in the first place, once those problems occur the consequences are similar regardless of insurance status. Among those with medical bill problems, almost identical shares of the insured (44%) and uninsured (45%) say the bills have had a major impact on their families.”³⁷

About one-quarter of Americans who file for bankruptcy do so mainly because of a large medical bill.³⁸ As figure 6 shows, personal bankruptcy filings increased steadily and sharply from the mid-1980s through the mid-to-late 2000s. Since 2010 they have decreased, perhaps in part because of the expansion in access to health insurance via the Affordable Care Act.

INFLATION

The price of many goods and services tends to increase from year to year. This is inflation. When the rate of inflation is low and predictable, it causes few if any problems for ordinary households. Wages and government transfers can be adjusted to keep up with modest price rises. When the inflation rate is high or inconsistent, however, it can wreak havoc on people’s finances.

In rich democratic nations like the United States, inflation was a significant problem in the 1970s and early 1980s, as we see in figure 7. But since 1990 the average inflation rate in these countries has been just 2.2%. Since 2000 it’s been 1.8%, and since 2010 only 1.4%.

WEALTH AS A BACKSTOP?

A large income decline or a large unanticipated expense will be less problematic for a household that has assets it can use to replace the lost income or to pay the expense. But several pieces of evidence suggest that this helps only a small share of those who experience these types of economic insecurity.

First, the bottom 40% of Americans have virtually no wealth. From 1983 (the first year of reliable data) through 2007, average net worth among this group was just $2,000. In 2010, 2013, and 2016, the three most recent years in which data were collected, it was negative $10,000.³⁹ Second, studies regularly find that about one in four Americans don’t have enough wealth to replace 25% of their income.⁴⁰ Third, the Economic Security Index team headed by Jacob Hacker has calculated the share of Americans who experience an income drop from one year to the next of 25% or more and who don’t have enough liquid assets to cover that loss. According to their estimates, taking wealth into account does reduce the incidence of this type of insecurity, but only by one percentage point.⁴¹

SUMMARY

Economic security is about more than having a decent income. Experiencing a large income decline or a large unanticipated expense can be just as damaging as persistent low income.

The best available data suggest that in any given year approximately 10% to 20% of Americans suffer a significant income decline, and the share experiencing a year-to-year loss of that magnitude at some point in a decade is 20% to 40%. Only a small fraction of these households have sufficient assets to cover that loss.

The chief large unanticipated expense experienced by Americans is a medical one. The most vulnerable are those who lack health insurance, and that share increased from the late 1970s to 2010. The 2010 Affordable Care Act is expected to reduce that share, but likely only to around 8%. The United States is alone among the world’s affluent longstanding democracies in failing to provide health insurance to all of its citizens.