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Middle Class and Maxed Out


THE TWO-INCOME TRAP

Why Middle-Class Mothers & Fathers Are Going Broke

By Elizabeth Warren & Amelia Warren Tyagi

Basic Books -- 283pp -- $26

During the boom years of the late 1990s, the banking industry and its GOP allies pushed a federal bill that would have required overextended borrowers to pay more of their debts. Instead of being able to file for Chapter 7 bankruptcy, where you can wipe out much of what you owe, more people would have had to accept the tougher Chapter 13. The bankers suggested that Americans had become a nation of mall-trolling luxury lusters drunk on credit-card spending. The legislation got pushed aside as Congress dealt with the Iraq war and sputtering economy. But the image of a vox shopuli endured.

Now comes a grenade of a book exquisitely lobbed at the overconsumption theory by co-authors Elizabeth Warren, a Harvard Law School professor who heads the university's Consumer Bankruptcy Project, and her daughter, Amelia Warren Tyagi, a former McKinsey consultant and Wharton MBA. The Two-Income Trap: Why Middle-Class Mothers & Fathers Are Going Broke draws upon 30 years of bankruptcy, U.S. Census, and Bureau of Labor Statistics data to provide a provocative reason why so many of the supposed-to-be-rich -- people with college degrees, good jobs, and their own homes -- have become the newly poor.

The authors say that, even though the modern two-earner family brings in 75% more inflation-adjusted income than the one-earner family of a generation ago, it actually has less discretionary income -- and far more financial instability. The primary reason: The decline of public education has dramatically raised the price of housing in good school districts, prompting parents to overstretch on mortgages and bid up the price of a middle-class life.

Encouraging this trend is a deregulated lending industry, which has adopted the step-right-up antics of carnival barkers. Thirty years ago, the typical family had no choice but to scrape together a 20% downpayment. Today, it's often 3% down, and Americans are urged by Internet lenders to take out 120% mortgages. "In their desperate rush to save their children from failing schools," the authors write, "families are literally spending themselves into bankruptcy."

At the same time, these middle-class couples are working in an era of unprecedented job insecurity, when even top-tier MBAs can easily get whacked. Salaries as well as health insurance have become a now-you-have-it, now-you-don't proposition. Since the 1970s, the risk of involuntary job loss has soared 150%, while the chance of losing health coverage has increased 49%.

These are the chief reasons, the authors say, why nearly a third of bankruptcy filers owe an entire year's worth of their salary on credit cards -- something that would have been impossible a generation ago. This year alone, the lending industry filled mailboxes with 5 billion pre-approved credit-card offers totaling more than $300,000 per family. In addition to housing and education, the authors demonstrate, families used credit cards not to service brand fever but to pay for catastrophic health problems, costly divorces, and post-layoff living expenses.

The result has been a record number of bankruptees -- 1.5 million people this year. This is more than will suffer heart attacks, more than will graduate from college, and more than will be diagnosed with cancer. In fact, more children will endure their parents' bankruptcy this year than their parents' divorce. And just as the ranks of the uninsured are filling with members of the middle class, so, too, are bankruptcy courts: Nearly 90% of those who file now qualify as middle class by virtue of income and education.

For mothers and children, the situation is even more perilous. If current trends persist, more than one of every six single mothers will go bankrupt by the end of the decade. Indeed, having a child is now the single biggest predictor that a woman will end up in financial ruin. Not having a baby, on the other hand, cuts a woman's chances of getting there by 65%.

Not even a college degree offers insurance anymore. Indeed, college-educated women are 60% more likely to end up bankrupt than less-educated females. That's because educated women often find themselves in financially ruinous divorces from which they can never recover economically. In the 1970s, the average newly divorced woman found 19% of her income to be discretionary. Today, that figure has fallen to 4%.

The book offers a long list of prescriptions, the boldest of which are tax-exemption for all savings and a school-choice voucher system that would pay the entire cost of educating a child, allowing kids to apply to any public school regardless of their Zip Code. The authors also argue for expanded financial assistance for pre-K and college education, as well as more policies that would discourage debt.

The role of personal responsibility isn't shortchanged, either. More and more, you're on your own -- and yet 32% of employees still don't contribute a dime to their 401(k)s. Here, the authors' solutions are the old standbys: Stash away enough cash to support yourself for six months. Max out on retirement savings. Scrape together that old-fashioned 20% downpayment.

But even for families that do everything right, the line between solvency and bankruptcy has never been thinner. One catastrophic medical incident, one job loss, one divorce -- and they may never recover. Despite being courted hard by politicians, there's no such thing as a safety net for the middle class. By Michelle Conlin


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