This post has been republished from Professor Patricia McCoy’s Substack. Her new book, “Sharing Risk: The Path to Economic Well-Being for All,” is available from The University of California Press.
A few years ago, I was doing research as a law professor at Boston College, and I stumbled across this disturbing fact: more than half of American households do not have enough income every month to pay their basic expenses. We’re not talking about small luxuries like dining out, going to the movies, or streaming services either. Instead, these families do not even have enough money to pay for their bare-bones essentials every month, including food, housing, and clothing. They are constantly juggling bills and robbing Peter to pay Paul. They cannot get ahead.
How did we reach this point, where fully half of Americans struggle to pay for their essentials? For one thing, low-wage service-sector jobs replaced well-paid manufacturing jobs over the past 50 years. This loss in good factory jobs played out just as union membership declined, along with the raises, pensions, and workplace health benefits that unions used to negotiate. In the process, wages stagnated, and secure jobs vanished.
Meanwhile, governments and business were offloading their financial risks and dumping them onto individual families. Unemployment insurance covered fewer and fewer workers, states discontinued free college tuition, and employers cancelled valuable pension benefits in exchange for risky 401(k) plans (or no retirement benefits at all). For tens of millions of households, the risk of job loss, soaring medical costs, and cash-strapped retirements got worse over the past half century. While the financial risks on these families grew, their paychecks (after inflation) did not.
How did policymakers respond? Too often, experts told these households to “just save more.” They admonished people to build 3 to 6 months of emergency savings, salt away money for college, save for a down payment, and sock away a million dollars (or more) for retirement. These savings demands are daunting for most families. But they are positively absurd for the bottom half of households who cannot even pay for basics. These families have almost no savings to fall back on.
In my new book, Sharing Risk: The Path to Economic Well-Being for All with the University of California Press, I argue that this has to change. It is unconscionable that half of households struggle just to make ends meet in the richest nation on earth.
So, what will it take to make working families financially secure? In Sharing Risk, I call for expanded use of something called “risk sharing.” We are all familiar with private insurance, which is the leading type of risk sharing, but other examples abound. Risk sharing takes a risk that someone would otherwise absorb alone and spreads the cost of that risk across a bigger pool of people. If the worst happens and the risk materializes, the injured person will no longer bear the loss alone. Instead, the pool will cover the loss.
Sharing risk is a win-win proposition because it protects more people from risks at a lower total cost. Risk sharing improves people’s welfare by protecting everyone in the pool from financial losses and affording them peace of mind. At the same time, it is usually more cost-effective to pool financial risks than to drop those risks on individuals’ shoulders.
Here, let me add, there is nothing revolutionary about this approach. The United States has used risk sharing for years to shield households from certain types of financial hazards. Social Security, unemployment insurance, and health insurance all come to mind.
But the nation’s risk-sharing programs are badly showing their age. Given the heavy financial burdens on so many Americans, we need to update risk sharing to suit today’s conditions. In Sharing Risk, I describe better risk-sharing arrangements and how they would help families achieve economic stability. This discussion looks at five key milestones that can help families flourish, including making ends meet, owning a home, affording health care, paying for college, and enjoying a secure retirement.
At this point, you may be asking, is it even realistic to call for expanded risk sharing in the current political environment? Doubts on that score are understandable, particularly for programs in danger of rollback. In future weekly columns, I will discuss social safety net programs that are currently on the chopping block. Still, some progress may be possible even in today’s political climate.
The most prominent example is the expansion of the Child Tax Credit, which a bipartisan majority of Congress supports. Meanwhile, a vocal number of congressional Republicans in red states support extension of Medicaid expansion because it is in strong popular demand by their constituents. This suggests that members of Congress who ignore the widespread financial distress affecting voters put their seats at risk. That is particularly true now that the same households who lack money to make it through the month have a majority and the power to vote incumbents out of office. Now more than ever, politicians need to take the financial stress on families seriously and enact more risk sharing, not less, if they want to get reelected.
This post has been republished from Professor Patricia McCoy’s Substack. Her new book, “Sharing Risk: The Path to Economic Well-Being for All,” is available from The University of California Press.
BC Law: Impact 