The Two-Income Trap (9 page)

Leather interiors may not be responsible for the rise in bankruptcies, but the over-consumption camp might still argue that families could have saved by buying cheaper cars. After all, a family doesn’t
need
a new SUV with a CD player, at least not in the same way that it needs decent day care or a home in a safe neighborhood. But we pause here to offer a bit of sympathy for the much-maligned buyer of the family car. The din from the car industry has changed pitch over the past generation. Glance at an advertisement from any maker of family cars, and there you’ll see it: safety for sale. This testimonial is featured on the official Volvo Web site: “The driver of the truck lost control of his vehicle and hit me, and my wife, who was five months pregnant. . . . There was much talk that ‘the Volvo had saved our lives’ and I’m convinced it did. . . . I wish to thank the people at Volvo for the lives of my wife and my child. . . . ”
¹⁰⁸
Sure, maybe families could do without the twelve-speaker sound systems, but we wouldn’t ask them to do without the automatic braking systems, the crash-resistant steel frames, or the dual airbags that they are spending all that money on.

But do the cars have to be so
big?
SUVs may drink gasoline with abandon, but families are also buying room for safety devices that didn’t even exist in the early 1970s. Every time I (Elizabeth) strap my granddaughter into the car, I am reminded of what I did when Amelia was a baby. I tucked her in a wicker bassinet, which perched on the back seat of our Volkswagen Beetle. I was somewhat unusual—not because I failed to use so much as a seat belt to hold my seven-pound daughter in place—but because I opted not to hold her in my lap, where a simple fender bender would have transformed her into a free-flying projectile.

Safety standards have changed, with a real effect on the family pocketbook. I (Amelia) wouldn’t even think of driving my toddler to the end of the block without strapping her into a plastic seat so enormous that she looks like an astronaut preparing to launch into outer space. We shelled out more than $100 for that seat, but the real expenditure was for our car. A few years ago I was driving a little two-door
Mazda—more or less the modern equivalent of Elizabeth’s Beetle. But when the baby came, the Mazda had to go, replaced by a four-door car big enough for two car seats (with the thought that our first-born may one day have a younger brother or sister to pick on). It gets particularly tough for families with more than two kids. Jane Stewart, a stay-at-home mom in Denver, describes the consequences of having three children under the age of five. According to most experts, the Stewarts should harness those three kids in the back seat—not just with a seat belt, but into a bulky car seat or “booster seat” designed especially for children—until they are at least
eight years old.
¹⁰⁹
Jane explains, “We have a Grand Cherokee and three car seats in the back. When the baby needs [the next-size car seat], we don’t think all three will fit. Then it will be time for a Suburban or a minivan.” A generation ago, the Stewarts could have fit their kids into the back seat of any sedan on the market, with room left over for the family dog. Today, even a Jeep Grand Cherokee—a car that weighs 4,000 pounds—is not big enough. The critics may be right that families don’t need all those gizmos in their cars, but we would certainly take sides with the Stewarts against anyone who argued that they didn’t need all that
room
.

By and large, families have spent prudently on their automobiles, or at least as prudently as they did a generation ago. And the money they are spending is paying off: The rate of child auto fatalities has declined steadily since the mid-1970s, thanks at least in part to safer cars and better car seats.
¹¹⁰
For all the criticism hurled at car manufacturers (and car buyers), it is important to note that families drive stronger, safer cars that last a lot longer than they used to.

It’s time now to add it all up. Families are working harder and, thanks to Mom’s income, they are making more money than ever before. And yet, they are spending more, too. So where does that leave the typical working family?

We offer two examples. We begin with Tom and Susan, representatives of the average middle-class family of a generation ago. (Once again, to make the comparisons easy, all figures are adjusted for inflation, reported in 2000 dollars throughout this discussion.) Tom works full-time, earning $38,700, the median income for a fully employed man in 1973, while Susan stays at home to care for the house and children.
¹¹¹
Tom and Susan have the typical two children, one in grade school and a three-year-old who stays home with Susan. The family buys health insurance through Tom’s job, to which they contribute $1,030 a year—the average amount spent by an insured family that made at least some contribution to the cost of a private insurance policy.
¹¹²
They own an average home in an average family neighborhood—costing them $5,310 a year in mortgage payments.
¹¹³
Shopping is within walking distance, so the family owns just one car, on which it spends $5,140 a year for car payments, maintenance, gas, and repairs.
¹¹⁴
And, like all good citizens, they pay their taxes, which claim about 24 percent of Tom’s income.
¹¹⁵
Once all the taxes, mortgage payments, and other fixed expenses are paid, Tom and Susan are left with $17,834 in discretionary income (inflation adjusted), or about 46 percent of Tom’s pretax paycheck. They aren’t rich, but they have nearly $1,500 a month to cover food, clothing, utilities, and anything else they might need.

So how does our 1973 couple compare with Justin and Kimberly, the modern-day version of the traditional family? Like Tom, Justin is an average earner, bringing home $39,000 in 2000—not even 1 percent more than his counterpart of a generation ago. But there is one big difference: Thanks to Kimberly’s full-time salary, the family’s combined income is $67,800—a whopping 75 percent higher than the household income for Tom and Susan.
¹¹⁶
A quick look at their income statement shows how the modern dual-income couple has sailed past their single-income counterpart of a generation ago.

So where did all that money go? Like Tom and Susan, Justin and Kimberly bought an average home, but today that three-bedroom-two-bath ranch costs a lot more. Their annual mortgage payments are nearly $9,000.
¹¹⁷
The older child still goes to the public elementary
school, but after school and during summer vacations he goes to day care, at an average yearly cost of $4,350. The younger child attends a full-time preschool/day care program, which costs the family $5,320 a year.
¹¹⁸
With Kimberly at work, the second car is a must, so the family spends more than $8,000 a year on its two vehicles. Health insurance is another must, and even with Justin’s employer picking up a big share of the cost, insurance takes $1,650 from the couple’s paychecks.
¹¹⁹
Taxes also take their toll. Thanks in part to Kimberly’s extra income, the family has been bumped into a higher bracket, and the government takes 33 percent of the family’s money.
¹²⁰
So where does that leave Justin and Kimberly after these basic expenses are deducted? With $17,045—about $800
less
than Tom and Susan, who were getting by on just one income.

Source
: Analysis of Consumer Expenditure Survey

FIGURE 2.1 Fixed costs as a share of family income

This bears repeating. Today, after an average two-income family makes its house payments, car payments, insurance payments, and
child care payments, they have
less
money left over,
even though they have a second, full-time earner in the workplace
.
¹²¹

If Justin and Kimberly have less money left over than Tom and Susan did, what happens to a family that tries to get by on a single income in today’s economy? Their expenses would be a little lower than Justin and Kimberly’s. They can save on after-school care for the older child, their taxes will be lower, and, if they are lucky enough to live close to shopping and other services, perhaps they can get by without a second car. But if they tried to live a normal, middle-class life in other ways—buy an average home, send their younger child to preschool, purchase health insurance, and so forth—they would be left with only $6,720 a year to cover all their other expenses. They would have to find a way to buy food, clothing, utilities, life insurance, furniture, appliances, and so on with less than $600 a month. The modern single-earner family that tries to keep up an average lifestyle faces a
60 percent
drop in discretionary income compared with its one-income counterpart of a generation ago.

To all those critics who are calling for selfish mothers to return home, we have to ask—are you kidding? Do the math. And for all the advocates of “downshifting,” we ask just how far down these families are supposed to shift.

We should point out that the expenses we have laid out are averages, and plenty of families manage to pay less (or more). But the alternatives families have pursued in an effort to make ends meet bear some scrutiny. Consider child care. Government statistics show that the average amount a family of four spends on after-school care is lower than the $4,350 we cited above. We calculated this figure from data on families who pay for child care, but the government “average” includes children who have a grandmother or an older sibling who watches them for free. That’s a great way for those lucky families to save some money, but it doesn’t do a bit of good for the typical family that has to rely on paid child care. For them, paying less money means getting less quality, such as an unlicensed neighbor
who parks several children in front of her television or an overcrowded center with barely passable facilities.

There are other ways families could save money. Families could also cut their health insurance expenses. They could drop those costs to zero by following the model of millions of other middle-class families who simply live without health insurance and pray for the best. Or they could give up the house and move into an apartment in a marginal neighborhood. There are always options, but for families with children, these options signal that their middle-class lives are slipping away.

Even if they are able to trim around the edges, families are faced with a sobering truth: Every one of those expensive items we identified—mortgage, car payments, insurance, tuition—is a fixed cost. Families must pay them each and every month, through good times and bad times, no matter what. Unlike clothing or food, there is no way to cut back from one month to the next. Short of moving out of the house, withdrawing their daughter from preschool, or canceling the insurance policy altogether, Justin and Kimberly are stuck. Fully 75 percent of their income is earmarked for recurrent monthly expenses.

If all goes well, Justin and Kimberly may squeak by. They will even get a breather in another five years or so, when the children are old enough to be left alone after school. But the spending hiatus will last for just a few years, until the older child heads off to college. At that point, the family’s budget will be squeezed harder than ever as they search for an extra $9,000 a year to cover room, board, and tuition for the local state university. If they are lucky, they will have set something aside during the intervening years, and they’ll find a way to put their kids through college. And when they hit their mid- to late fifties, Justin and Kimberly might begin to think about putting something away for their retirement (about thirty years later than a financial planner would recommend).
¹²²

This projection assumes, of course, that nothing goes wrong. With 75 percent of income earmarked for fixed expenses, today’s family
has no margin for error. There is no leeway to cut back if Justin’s hours are cut or if Kimberly gets laid off. There is no room in the budget if Kimberly needs to take a few months off work to care for Grandma, or if Justin hurts his back and can’t work. The modern American family is walking on a high wire without a net; they pray there won’t be any wind. If all goes well, they will make it across safely, their children will grow up and finish college, and they will move on to retirement. But if anything—anything at all—goes wrong, then today’s two-income family is in big, big trouble.

In the next chapter, we explore just how much can go wrong.

C
armen’s third pregnancy was difficult. When she was thirty weeks along, she started hemorrhaging, and her obstetrician performed an emergency cesarean section. Little Gabe weighed just under two pounds at birth, and the doctors predicted a lifetime of severely impaired physical and cognitive ability for him. Many would have considered Gabe’s fate a tragedy, but Carmen Ramirez saw it differently. “This was God’s gift. He is my miracle baby. He came when my sister suddenly passed away. I could not believe I was pregnant. I felt so blessed.”