The Precarious State of Family Balance Sheets

Tuesday, February 10, 2015

American households experience tremendous income volatility, certainly much more than I would have thought. More than 40% of households saw a change of greater than 25% of their income within two years. When incomes fall that much, it's hard to imagine how one would withstand that kind of economic shock without an asset cushion. And, of course, few have one; 55% of households are 'savings limited', unable to replace their income from their liquid assets. Even those in the top quintile can't quite go two months on their liquid assets, which speaks to the anemic savings rate even among those whose incomes would suggest ability to put money aside. Those who are low income would struggle to get by for even two weeks on their savings. And even if households stripped assets out of other, longer-term accounts, including retirement savings and other investments, they could only do without their incomes for about four months.

Given the state of the employment market, still today, that's really thin ice to stand on.

And, juxtaposed with that figure on income volatility, it makes me wonder what we could be doing to facilitate saving when households have unexpected and significant increases in income, which seems to happen with some regularity, too, whether because of some household members' return to the labor market or the nature of unpredictable employment. How could we encourage people to accumulate assets during those relatively flush times, and how might that position them for the downward dips in income, too?

Another aspect of the report, noteworthy for AEDI's work, relates to household spending, which is back to close to 1990 levels. Since housing and health care, in particular, have increased significantly and consume ever-larger shares of household budgets, these consumption figures make me wonder what families aren't spending on their children's education and academic enrichment, and what the effects of these constraints might be, over children's lifetimes. Again, since we know that economic insecurity can affect academic achievement, and since some level of insecurity seems fairly pervasive, how can public policy smooth out these periods, surrounding children with positive educational supports, even when their families' fortunes wane?

Household wealth is greater in 2013 than in 1983, but not by much, particularly without housing value. And, of course, the gains are highly unequal. If most households' state is precarious, so much more those who live on the financial margins, for whom even the good days are overshadowed by the strains carried from the past and the doubts held for the future.

What are families not investing in, because budgets are tight when you live at the intersection of financial strain, as Pew's report characterizes this troubling Ven diagram? What will be the long-term effects of those decisions, on their prospects for getting ahead and getting out of these jams? And what are the implications for us all?

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