Chapter Summary

We often think of “financial security” as an emotional state, in which we no longer worry about money.  These kinds of money worries can be quite divorced from people’s objective financial circumstances.  Indeed, surveys show that a sizable percentage of very wealthy people feel distress related to money.  We need some way of measuring financial insecurity in order to study it, but some way of differentiating people who face absolute poverty from those who are mostly concerned with maintaining a privileged station in society for themselves and their children.

This chapter develops a typology of financial insecurity that classifies households based on the likelihood that they will need outside help (from the government, family, charity) to secure a basic livelihood.  We define such a livelihood as involving basic shelter, food, healthcare, education, transportation, closing and personal care items on markets.  The analysis assesses how much of society is economically dependent in the present, how much sits at the precipice of failure and dependency, and how many seem destined for the welfare rolls eventually.  The proportions are surprisingly high.

Key Findings

  • Overall, the U.S. economy makes it possible to sustain a basic livelihood under normal conditions.  We calculate that the typical U.S. household needs about $20 thousand per year to cover the costs of basic housing, utilities, food, transportation, apparel, personal care, and minor healthcare expenditures.  
  • However, these costs escalate quickly when a household encounters a major financial disruption, like having children, getting postsecondary schooling, coping with illness or disability, losing work, getting divorced, experiencing legal problems, or having to take care of a family member.  The problem is that these types of disruptions are common, such that “normal” circumstances are less common than one might assume.
  • About 16% of U.S. households do not earn enough income to cover the costs of a basic livelihood.  If they are not receiving government-provided housing, food, healthcare or some other essential, then they may face absolute poverty.  If we count government-provided income (like Social Security) as government assistance rather than earned income, then the over one-quarter do not earn enough money on markets to sustain a basic livelihood on markets.  
  • Just under half of US households live paycheck to paycheck, in the sense that they would run out of money if they missed four weeks’ of pay.  One-quarter have less than one week of pay in money.    Only one third have the liquid wealth to replace three months of income (which is what financial advisers often recommend).
  • The most economically dependent and vulnerable group are the elderly, but America’s social safety net is very generous to them.
  • It seems mathematically possible for people with modest incomes to retire wealthy, but it requires them to start saving aggressively at a young age and to avoid major financial disruptions.  However, these kinds of problems do emerge regularly, pushing people off track.
  • About 64% of US households appear to be on track to self-finance a poverty-line retirement without the help of government aid (except Medicare, without which a strong majority of elderly would be vulnerable).

Tables and Figures