The Two-Income Trap - Elizabeth Warren [43]
What Went Wrong
If the bankruptcy system isn’t packed with frauds and cheats, then why are so many families in trouble? With a million and a half families declaring bankruptcy each year, one might expect innumerable explanations for all that financial mayhem. During our interviews we heard a wide variety of reasons. Some were victims of crime, some had made bad investments, some had problems with alcohol or gambling, and some had lost their homes in a flood or an earthquake. A few interviewees had actually done just what the “over-consumption” camp had accused them of—they had bought too many goodies on their credit cards. Perhaps the stand-out story was the man who filed for bankruptcy after he was shot while trying to foil a robbery at a nearby hardware store, and the resulting hospital bills and time off from work destroyed him financially.
Source: 2001 Consumer Bankruptcy Project
FIGURE 4.1 Reasons for filing for bankruptcy: families with children
While many of the stories are memorable for their odd details, the statistics reveal a much simpler picture. The overwhelming majority of financial failures are surprising not for their uniqueness, but for their sameness. Nearly nine out of ten families with children cite just three reasons for their bankruptcies: job loss, family breakup, and medical problems.31 All the other reasons combined—acts of God, called up for military service, personal profligacy, and so on—account for just 13 percent of families in bankruptcy.
Two-Income Trap, Part Two
There’s nothing new or exotic about the problems faced by American families today. Jobs have come and gone, couples have broken up, and illnesses and injuries have been facts of life since the first cave-man kissed the first cavewoman good-bye and headed off to the hunt. But the Two-Income Trap compounded the ordinary risks of daily life. With Mom in the workplace and the family’s safety net forfeited, a short-term job loss or a medium-sized illness now poses a far greater menace to a family that has no reserves. It takes less to sink these families; as a result, more of them go under.
But the two-income family didn’t just lose its safety net. By sending both adults into the labor force, these families actually increased the chances that they would need that safety net. In fact, they doubled the risk. With two adults in the workforce, the dual-income family has double the odds that someone could get laid off, downsized, or otherwise left without a paycheck. Mom or Dad could suddenly lose a job.
The basic math may seem obvious, but the consequences are surprising. Consider Tom and Susan, the typical 1970s single-income family introduced in chapter 2. Statistically speaking, Tom faced a 2.5 percent chance of losing his job in any given year.32 Had Justin and Kimberly, our present-day two-earner couple,33 been around back then, they would have had a 4.9 percent chance of a major drop in income—almost double the chances of a single-income family.34 The odds aren’t doubled to exactly 5.0 (2.5 + 2.5) because in some of the families both the husband and the wife will be laid off, so the total number of families who experience a layoff is slightly less than 5.0 percent. (Of course, that also means some families get hit with two layoffs, a double catastrophe.) No matter how the odds are calculated, the principle is straightforward: two workers, two chances to lose a job.
This situation would be tough enough for the two-income family if the working world had stayed the same over the past generation. But, as anyone who watches the nightly news or reads the newspapers knows, the world did not stay the same. In the past twenty-five years, the chances that