Risk and Recovery: Documenting the Changing Risks to Family Incomes

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Abstract

Using the 1996, 2001, and 2004 panels of the Survey of Income and Program Participation, this brief examines the likelihood that nonelderly individuals in families with children experience substantial drops in family income and recoveries from such drops. Over 13 percent of families see their incomes fall by half at some point over the course of a year with the lowest- and highest-income families the most likely to experience a substantial income loss. Further, only two in five individuals recover to at least 100 percent of their pre-drop income in the year after the drop.

Introduction

Policymakers and the public are increasingly sensing that families are on their own, at the mercy of uncontrollable events such as illness or downsizing and at ever-increasing risk of suffering financial losses and declines in their material well-being as a result of these events. A spate of recent research has begun to assess whether this perception is borne out by data on income and earnings. Most of this work has focused on the volatility of earnings and income—for example, how much a family’s income moves up or down from year to year1— while some hones in on substantial declines in income. The data and research generally support the popular perception that income has grown more volatile over time, although the magnitude and timing of changes are sensitive to the data and measure of income used, the period and population studied, and the analytic approach taken.

A focus on volatility captures the uncertainty families face in knowing what their income will be from one year to the next; however, more volatile incomes do not necessarily mean families or individuals are worse off. Increased variance of income over time also indicates that the income distribution is becoming less rigid and that families at the bottom are more likely to move up. Indeed, increased mobility is the flip side of increasing volatility.

In contrast, a focus on substantial income losses captures the downside of volatility. Shortterm losses are also important as even they can disrupt family routines, elevate stress, and impede the ability to plan in addition to reducing total family resources. Each effect may have lasting consequences for adults and children even if the loss of income is short-lived.

This brief examines the likelihood that nonelderly individuals in families with children experience a substantial drop in family income as well as the likelihood that their income returns to pre-decline levels. We also put income drops in context by examining how often these drops are preceded by a short-term spike in income. We use data from the 1996, 2001, and 2004 panels of the Survey of Income and Program Participation (SIPP). Unlike studies that rely on annual data, we assess income changes (drops and recoveries) over a shorter time horizon of four-month periods.

Steep income drops are common, with 13.6 percent of families seeing their incomes fall by half at some point over the course of a year. The likelihood of income drops across the income distribution is U-shaped, with the lowestand highest-income families the most likely to experience a substantial income loss. Further, only two in five individuals recover to at least 100 percent of their pre-drop income in the year after the drop.

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