The Privatization of Risk and the Growing Economic Insecurity of Americans
Published on: Jun 07, 2006

Growing Economic Insecurity for American Families

Over the past generation, the economic risks faced by American families have increased dramatically, due to linked changes in the workplace and family (Hacker 2004). Yet public programs have largely failed to adapt to these new and newly intensified risks, and private workplace benefits have substantially eroded. As a result, Americans increasingly find themselves on an economic tightrope, without an adequate safety net if—as is ever more likely—they lose their footing. This tightrope does not simply create anxiety about the future and hardship when families lose their fragile balance. It also threatens economic opportunity by making it harder for families to feel sufficiently secure to make the risky investments—in education, housing, retirement savings, and the like—to prosper in a highly dynamic and uncertain economy.

The signs of increased economic insecurity are everywhere. As Elizabeth Warren and Melissa Jacoby explain in their essays, personal bankruptcy rates have risen fivefold in the last quarter century. The mortgage foreclosure rate has increased threefold since the early 1980s (and ninefold since the early 1950s). Rates of job loss are up (Farber 2005), job tenure for men and older workers is down, and skills seem to obsolesce with a speed that defies recent memory. Levels of personal debt are at record levels. And the main forms of household wealth that families now hold—namely, housing and corporate equities—themselves embody substantial (and, arguably, increasing) risk. Meanwhile, employers have shifted from so-called defined-benefit pensions that promise a fixed payment in retirement toward “defined-contribution” pensions, like 401(k) plans, that greatly increase the degree of risk and responsibility placed on individual workers in retirement planning.

For more than a decade, moreover, the number and share of Americans without health insurance have risen with little interruption. Over a two-year period, roughly one in three nonelderly Americans go without coverage at some point (Families USA 2003). Yet not only the uninsured are at financial risk. In 2004, more than 14 million nonelderly Americans paid more than 25 percent of their earnings on out-of-pocket medical costs and health premiums; 10 million of them were insured (Families USA 2004). Medical costs and crises are a factor in nearly half of all personal bankruptcies in the United States, and 80 percent of families bankrupt for medical reasons have health insurance (Himmelstein et al. 2005).
Perhaps not surprisingly, poll after poll shows that large majorities of Americans today are pessimistic about the economy and concerned that economic security is slipping away (Newport 2005).

Perhaps the most telling evidence of increased economic insecurity is the growing volatility of family incomes. Along with Nigar Nargis of the University of Dhaka, I have examined the variability of family incomes using the Panel Study of Income Dynamics (PSID), a dataset managed by the University of Michigan that has been tracking a nationally representative group of households since the late 1960s. The PSID data is valuable because most government statistics—such as the unemployment rate, the poverty level, and the distribution of annual income—are “snapshots” that tell us what people are experiencing at a given time, rather than “moving pictures” that reveal what happens to people over a period of several years (Pierson 2004). Because the PSID tracks families over time, it allows us to gain a true dynamic portrait of the up and down trajectory of Americans on the economic ladder over the course of their lives.

What this picture shows is that families are not merely pulling apart economically—as the well-documented rise in inequality shows. They are also experiencing greater income instability over time. Since the early 1970s, as Figure 1 shows, family incomes in the United States have become much more volatile. Volatility is higher for women than for men, higher for blacks and Hispanics than for whites, and higher for less educated Americans than for more educated Americans. (In all these estimates, family income is adjusted for family size and then distributed equally to adult family members.) Yet volatility has risen across all these groups and, indeed, has risen virtually as quickly among the educated as among the less educated. It has also risen faster than economic inequality over the past generation.