Monday, October 7, 2013

The Financial Fragility of American Families

I would like to continue writing about the research we have been doing, and I discuss in this post the financial fragility of American families. This is a topic I have written about before—I started this research project some years ago, during the financial crisis—but the work is continuing and it is important to examine how families are doing in the wake of the financial crisis.

Financial fragility is measured by a new and simple survey question, which was originally used in the 2009 Global Economic Crisis Study and was later added to the 2012 National Financial Capability Study.  The question is worded as follows:

“How confident are you that you could come up with $2,000 if an unexpected need arose within the next month?”  

Respondents could reply:
  • I am certain I could come up with the full $2,000
  • I could probably come up with $2,000
  • I could probably not come up with $2,000
  • I am certain I could not come up with $2,000
The amount was meant to reflect an unexpected expense, such as a car or home repair, a large medical expense (e.g. an emergency room visit), or another urgent need that had to be addressed in a month’s time. When asked in 2009, we found that about half of American families were certain they could not or probably could not come up with $2,000 in 30 days. This is a high proportion, perhaps telling us what a profound effect the financial crisis was having on the finances of so many families. But when the question was asked again in 2012, 40% of families said they were certain they could not or probably could not come up with $2,000 in 30 days. The proportion of those who were certainly not able to come up with $2,000 was about the same as it had been in 2009, about 25%; in other words, one in four families was certain they could not deal with an unexpected expense both during and in the years following the financial crisis.

In an earlier post, I discussed the 2009 data, and I want to focus now on the 2012 data. While financial fragility is more pervasive among the young, among African Americans and Hispanics, and among those with low income and low educational attainment, it is still high among many families.  Let’s look at a group that should be better able to weather a shock: older respondents on the verge of retirement (age 56–61). This group should be close to the peak of wealth accumulation and is expected to have accumulated resources to both keep consumption stable upon retirement as well as when facing a short-run shock. But according to the data, about 36% of older respondents stated they could not come up with $2,000 in 30 days.

There are other indicators in the data corroborating the finding of financial fragility among older adults. For example, about 40% of respondents in this group state they have too much debt. And debt they do have: they have mortgage debt and credit card debt. They have borrowed on their retirement accounts, and they have used payday loans and pawn shops. And medical expenses seem to be contributors as well, as a whopping 24% of older respondents report having unpaid medical bills. So, even those at a point in the life cycle when they should be well-equipped to deal with shocks are, in fact, financially fragile.

The worst of the financial crisis may be over, but many American families—even those who are expected to have accumulated wealth—are far from being insulated from shocks.  A protracted government shutdown may take a toll on the families of public employees.  And if it affects the confidence of the American public, it may make other families feel more insecure too.  After a Great Recession, we need to find ways to strengthen the capacity of families to deal with short-term shocks. It seems we are instead adding more of those shocks.