Economic Security Index: Financial hardship on the rise
Shoppers load packages into their car after shopping at a Target. A monthly consumer survey shows that Americans' confidence in the economy eroded further in July amid job worries.
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The financial deterioration in American households from 2008 to 2009 -- and the economic insecurity it brought about -- was the worst in a generation, according to a new index created to measure financial hardship.
The Economic Security Index, created by a Yale University economist and sponsored by the Rockefeller Foundation, measures the share of Americans who experienced at least a 25 percent drop in available family income, whether due to a decline in income or a spike in medical spending, and who lacked an adequate financial safety net.
"It allows people to see they are not alone if they are facing economic problems," said Jacob Hacker, the Yale economist who led a group of scholars in creating the index. "If they're not facing problems, it provides a clear message that there is a real risk of these kinds of losses."
Using data from the U.S. Census Bureau, the University of Michigan Panel Study of Income Dynamics and the U.S. Bureau of Labor Statistics, a group of economists from across the political spectrum concluded that one in five Americans experienced a 25 percent or more decline in income in 2009 vs. one in eight in 1985.
In 1985, the study showed 12 percent of Americans had a greater than 25 percent loss of income from the previous year. In 2009, 20 percent of Americans lost more than 25 percent of their income the previous year.
A higher number in the survey indicates greater insecurity just as a rising unemployment rate signals a faltering economy.
"We show it takes six to eight years to get back to the previous income for the typical person," Dr. Hacker said. "These are not short-term drops. It takes a while for them to climb back to where they were."
Meanwhile, the Conference Board, a private research group, announced Tuesday that its Consumer Confidence Index slipped from 62.7 in May to 50.4 in July, reflecting that Americans' confidence in the overall economy had dropped even lower due to worries about the near 10 percent unemployment rate and an indecisive stock market.
All economic groups and virtually all demographic groups have experienced an increase in economic insecurity, according to the Rockefeller Foundation study.
But the less affluent and those with limited education -- African-Americans and Hispanics -- have faced the most insecurity. The Hispanic population overall has had relatively high levels of economic insecurity, hovering around 17 percent, a statistic that hasn't changed much in the 24-year period studied.
Meanwhile, the economic insecurity of African-Americans started out high and got worse over time. The share of African-Americans experiencing large income losses jumped from 15.5 percent in the 1985-to-1995 period to 18.9 percent from 1997 to 2007, the years examined in the study.
Dr. Hacker, author of "The Great Risk Shift," a book that explores the ways economic risk for retirement has shifted from government and employers to families, said he worked three years developing the Economic Security Index.
Other leading economists served as technical advisers to the project, including Henry Aaron, senior fellow at the Brookings Institution, and Nobel Prize laureate economist Robert Solow.
"Our basic finding is that economic insecurity is a broad reality that affects Americans from all walks of life," Dr. Hacker said.
Since losses in 401(k) and IRA retirement accounts were not treated as income drops unless the person was 60 or older, the index did not fully take into account wealth losses that resulted from recent stock market instability. The index could actually understate the current level of insecurity.
"Things are bad now and they've been getting worse gradually but steadily for 25 years," Dr. Hacker said. "The current economic forecast suggests they won't get better quickly so we really have to act.
"The real message to our leaders is our long-term trend. It's high time they started to tackle the underlying causes of rising economic insecurity."
First Published July 28, 2010 12:00 am