Social Democratic America (4 page)

As of 2007, the average income of the roughly 25 million households in the bottom 20 percent (quintile) was just $18,000.
¹¹

Very few of these low-income Americans are destitute. Most have clothing, food, and shelter. Many have a car, a television, heat and air conditioning, and access to medical care.
¹²
But making ends meet on an income of $18,000 is a challenge. That comes out to $1,500 a month. If you spend $500 on rent and utilities, $300 on food, and $200 on transportation, you're left with just $500 each month for all other expenses. It's doable. Millions of Americans offer proof of that. But this is a life best described as “scraping by.”
¹³

Now, there are important caveats. First, income data are never perfect. However, these data, compiled by the Congressional Budget Office (CBO), are quite good. They are created by merging the Census Bureau's annual survey of households with tax records from the Internal Revenue Service (IRS). The income measure includes earnings, capital gains, government transfers, and other sources of cash income. It adds in-kind income (employer-paid health insurance premiums, Medicare and Medicaid benefits, food stamps), employee contributions to 401(k) retirement plans, and employer-paid payroll taxes. Tax payments are subtracted. These data give us a pretty reliable picture of the incomes of American households.

Second, $18,000 is the average among these 25 million households, so some had an income above this amount. According to the CBO's calculations, the highest income among bottom-quintile households with one person was $20,000. For households with four persons, it was $40,000. Making ends meet is a little easier at this income level, but it still isn't easy. And half or more of these 25 million have incomes below the $18,000 average. Some solo adults have to make do with an income of $10,000 or $5,000. Some families with one or more kids have to get by on $20,000 or $15,000 or even less.

Third, some of these households have assets that reduce their expenses or provide a cushion in case expenses exceed income in a particular month or year. Some, for example, are retirees who own a home and therefore have no rent or mortgage payments. But many aren't saved by assets. Asena Caner and Edward Wolff calculate that in the late 1990s, about one-quarter of Americans were “asset poor,” meaning they did not have enough assets to replace their income for at least three months.
¹⁴

Fourth, these data very likely underestimate the true incomes of some households at the bottom. The data come from a survey in which people are asked what their income was in the prior year. People in low-income households tend to underreport their income, perhaps out of fear that accurate disclosure will result in loss of a government benefit they receive.
¹⁵

Fifth, some of these 25 million households have a low income for only a short time. Their income may be low one year because the wage earner leaves her job temporarily to have a child, is sick, or gets laid off. By the following year, the earner may be back in paid employment. Some low earners are just beginning their work career. Five or ten years later, their earnings will be higher, or perhaps they will have a partner whose earnings add to household income. Using a panel data set known as the Panel Study of Income Dynamics (PSID), which tracks the same set of households over time, Mark Rank and Thomas Hirschl calculate that by the time Americans reach age 65, fewer than 10 percent will have spent five or more consecutive years with an income below the official poverty line (about $12,000 for a single adult and $23,000 for a household of four as of 2012).
¹⁶
On the other hand, some who move up the economic ladder will later move back down. Shuffling in and out of poverty is common. Rank and Hirschl find that if we ask what share of Americans will have spent five or more
total
years below the poverty line upon reaching age 65, the share rises to 25 percent.
¹⁷

Finally, some of these households are made up of immigrants from much poorer nations. Many are better off than they would
have been if they had stayed in their native country. But that doesn't change the fact that they are scraping by.

How much should these qualifiers alter our impression of economic insecurity due to low income in the United States? It's difficult to say. Suppose the truly insecure constitute only half of the bottom quintile. That's still 10 percent of American households, much more than we should accept in a nation as rich as ours.

Perhaps we should measure low income in another way. We could, for example, identify the minimum income needed for a decent standard of living and then see how many households fall below this amount. A team of researchers at the Economic Policy Institute did just that, estimating “basic family budgets” for metropolitan and rural areas around the country and calculating the share of families with incomes below these amounts in 1997–99.
¹⁸
They concluded that approximately 29 percent of US families could not make ends meet. More recently, researchers with Wider Opportunities for Women and the Center for Social Development at Washington University calculated basic-needs budgets for various household types.
¹⁹
They estimate that to meet basic expenses in 2010, a single adult needed, on average, about $30,000, and a household with two adults and two children needed about $68,000. According to their calculations, 43 percent of American households fell below the threshold.

Let's return to low income and consider the trend over time. Is it getting better or worse?
Figure 2.1
shows what happened between 1979 and 2007. There was improvement, but only a little. Average income in the bottom fifth rose by just $2,000 over this nearly three-decade period. That's not much, particularly given that the American economy was growing at a healthy clip (a point I expand on later in this chapter). On the other hand, these data don't indicate a rise in insecurity.

One group some believe
has
suffered a rise in insecurity due to low income is the elderly. Now, in one respect elderly Americans have fared well: they are the only age group whose poverty rate has declined since the 1970s.
²⁰
A key reason is Social Security. In 1979, the average recipient of Social Security old-age benefits got about $10,000 (in today's dollars). That average increased steadily over the ensuing three decades, reaching nearly $15,000 as of 2010. During this time, the share of elderly Americans receiving Social Security held steady at around 90 percent.

FIGURE
2.1 Average income of households on the bottom fifth of the income ladder

Posttransfer-posttax income. The income measure includes earnings, capital gains, government transfers, and other sources of cash income. It adds in-kind income (employer-paid health insurance premiums, Medicare and Medicaid benefits, food stamps), employee contributions to 401(k) retirement plans, and employer-paid payroll taxes. Tax payments are subtracted. The incomes are in 2007 dollars; inflation adjustment is via the CPI-U-RS.
Data source
: Congressional Budget Office, “Average Federal Tax Rates and Income, by Income Category, 1979–2007.”

But Social Security is just the first of three tiers of retirement income security. After all, $15,000 isn't much to live on, even if you don't have a mortgage to pay. The second tier is private—usually employer-based—pensions. The share of people under age 65 who participate in an employer pension plan has remained steady at around 60 percent,
²¹
but the
type
of plan has changed dramatically. According to the Center for Retirement Research, in the early 1980s nearly 90 percent of Americans with an employer pension plan had a defined-benefit plan. By 2007 that share had shrunk to 36 percent. Defined-benefit pension plans have been replaced by defined-contribution plans such as 401(k)s.
Among those with a pension, defined-contribution plans jumped from 38 percent to 81 percent.
²²

Defined-contribution plans have some advantages: they're portable across employers, the employee has some say in how the money is invested, and a person in financial difficulty prior to retirement age can withdraw some or all of the money, though there is a tax penalty for doing so.
²³
The problem is that employees and employers may not contribute enough to defined-contribution plans or keep the money in them long enough to reap the benefits in retirement.
²⁴
If an employee doesn't know about or understand her firm's program, or feels she needs every dollar of her earnings to pay for current expenses, she may go a long time, perhaps even her entire working career, without putting any money into a defined-contribution plan. Employer contributions usually take the form of matching funds, with the amount put in by the employer pegged to the amount put in by the employee. Thus, no employee contribution often means no employer contribution. Moreover, when a person switches employers, she or he can choose to keep the defined-contribution-plan money as is, roll it over into an individual retirement account (IRA), or withdraw it, after a tax penalty is subtracted. Too many people choose to withdraw some or all of the money, leaving them with a lot less, and sometimes nothing at all, for their retirement years.

The third tier of retirement income security is personal savings. It too has weakened. Average household saving as a share of disposable household income fell from 10 percent in the 1970s to 8 percent in the 1980s to 5 percent in the 1990s to 3 percent in the 2000s.
²⁵
And the decline was probably even steeper for households on the lower rungs of the income ladder.

It isn't just a low level of income that threatens economic security. Instability of income does too.

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. The first has to do with subjective well-being. A loss tends to reduce our happiness more than a gain increases it.
²⁶
The second involves assets. 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 offset, the household may be worse off at the end of the period due to the asset sell-off.

It turns out, however, 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.
²⁷
According to their calculations, among households that experience a drop in income of 25 percent 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 made as entrepreneurs. 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 undesirable employees.

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. In the study mentioned in the previous paragraph, Rose and Winship find that in any given year, 15 to 20 percent of Americans experience an income decline of 25 percent or more from the previous year.
²⁸
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 percent of households suffered this fate each year.
²⁹
A study by the CBO matches data from the Survey of Income and Program Participation (SIPP) with Social Security Administration records and gets a similar estimate of approximately 10 percent during the 1990s and 2000s.
³⁰
Finally, a team of researchers led by Jacob Hacker uses a third data source, the Current Population Survey (CPS), covering the mid-1980s through 2009, and comes up with 15 to 18 percent.
³¹

These estimates vary, but not wildly. In any given year, approximately 10 to 20 percent of working-age Americans will experience a severe income drop.

Using PSID data, Elizabeth Jacobs has calculated that the share of American households experiencing a severe year-to-year income drop at some point in a ten-year period is roughly twice the share in any given two-year period. If so, the share of working-age Americans who at some point suffer a large income decline is in the neighborhood of 20 to 40 percent.
³²