Working without a net

Economists -- and what few friends the Bush administration still has -- seem flabbergasted at how bleak Americans have grown about their economic prospects.

True, gasoline has shot past $4 a gallon. And house prices keep dropping. And unemployment is creeping higher and higher.

But is this really enough to send consumer confidence plunging to near-record lows? To convince more than 8 in 10 Americans that the country is headed in the wrong direction? Surely something else must be at work.

Republicans and some economic analysts think they know what that something is: Democratic doomsayers. Republican Rep. Virginia Foxx of North Carolina recently distilled this view with Nixonian flourish, declaring: "This is not a failed economy. We are not in recession. What a shame that Democrats want to talk down the economy."

But I think there's a better explanation for the public's dark mood, one that's closer at hand and deeper running than the talk-it-down theory.

Working Americans and their families arrived on the doorstep of the current economic crisis uniquely ill-equipped to cope with its consequences. Rather than having gained a financial protective coating during the period of growth that preceded it, working families up and down the income spectrum were actually nudged further out on an economic limb and therefore were primed for being picked off once problems emerged.

It's not that the growth of the last generation wasn't real; it was. The U.S. economy doubled in size between 1980 and last year. It's not that all of the benefits of the just-past era went to those at the top (although a very substantial chunk did); millions upon millions of Americans prospered right along with the super-rich.

But the prosperity we enjoyed was purchased at a price of diminished security for our families and ourselves. Even as our incomes went up, economic risks -- the costs of being laid off, of suffering a work-stopping illness or of a catastrophe like a house fire -- that were once largely borne on the broad shoulders of business and government were being shifted onto the backs of ordinary families, from the working poor to the reasonably rich.

That means that even before the current crisis struck, families were primed to take steeper financial falls than in the past, ones from which they'd have a harder time recovering. And now that trouble is upon us, they are falling in greater and greater numbers.

The changes that have made Americans more vulnerable have occurred in the struts that hold up working families and that have held them up for generations. Jobs, benefits, housing, health coverage, college and retirement savings, even bought-and-paid-for insurance all played crucial roles in maintaining families' economic stability during the second half of the 20th century. But the protective value of each has been weakened over the last generation.

Take two examples: benefits and housing.

When Washington officials and the presidential candidates talk about benefits, they usually mean public benefits such as Social Security and Medicare. But the benefits that really count for the vast majority of working-age Americans are their employer-provided benefits -- the health insurance and disability coverage and the 401(k) they've been building -- that taken together form a crucial safety net for themselves and their families.

However, although most Americans are not aware of it, their grasp on these benefits -- their assurance of receiving them, their remedy if they do not -- is governed by a single federal law, the Employee Retirement Income Security Act of 1974, or ERISA.

ERISA's congressional authors intended the law to protect employee benefits. We know this because they said so right in the law's preamble. But over the last generation, the Supreme Court and increasingly conservative federal appeals courts have rendered a series of decisions involving ERISA that have made it easier for employers and their agents to deny benefits to workers and their families.

Diane Andrews-Clarke learned exactly what these decisions meant when her husband (and father of the couple's three daughters), Richard Clarke, began drinking heavily. Under Andrews-Clarke's employer-provided family health insurance policy, and under Massachusetts law, anyone covered by the policy who needed alcohol treatment was due 30 days of inpatient care paid for by insurance.

However, when Andrews-Clarke tried to collect, the insurer refused to cover more than a handful of days. When she tried a second time, the insurer refused again. Richard Clarke eventually died, and Andrews-Clarke sued. But because the Supreme Court and appeals courts have limited employees' rights under employer-provided health policies such as hers to essentially getting the benefits that were originally denied, and because Clarke, being dead, wasn't available to receive any benefits, Andrews-Clarke got nothing.

"People who try to claim their employer-sponsored benefits are worse off than they were two or three decades ago," said Judge William Acker Jr., who was appointed by President Reagan to the U.S. District Court for the Northern District of Alabama in Birmingham and who has written extensively about ERISA. "The law that was supposed to protect them has been turned on its head."

Now consider housing.

On average, 60% of the value of American homeowners' possessions -- 60% of everything we own -- is accounted for by the value of our homes, according to my analysis of the Federal Reserve's most recent Survey of Consumer Finances.

That means houses are a big deal for families' finances. And so therefore is what protects them -- homeowners insurance.

Homeowners insurance is a classic case in which people go out and try to buy their own private safety nets rather than turning to government or to their employers for security. But homeowners have not had very good luck with this do-it-yourself approach in recent years.

That's because over the last two decades -- with relatively little notice and almost no awareness on the part of the buying public -- the insurance industry has changed the nature of its policies in ways that leave homeowners on the hook for vastly more than they used to be on the hook for.

As recently as the early 1990s, the most widely sold type of policy, especially in the nation's most populous areas, was a "guaranteed replacement cost" policy. Under it, your insurer promised to replace your home if it burned or was destroyed by a hurricane, essentially no matter what the cost. It was up to the insurer to get the price right and keep the coverage current.

However, following a rash of disasters that included the Northridge earthquake in Los Angeles, insurers phased out guaranteed replacement cost policies in favor of "extended replacement cost" policies. Under these, the insurer provides you with up to a certain fixed dollar amount of coverage, plus typically 10% to 20%. It is up to you to decide what the amount should be. It is up to you to figure out what it would cost to rebuild your home. And it is up to you to keep your policy current.

Theoretically, you could do this job. But the industry's own estimates show that more than half of American homeowners simply have too much else going on in their lives to keep tabs on changing building codes, the fluctuating price of plywood or what carpenters and plumbers are making in their neighborhoods.

Similar changes -- with similar shifts of economic risk from business and government to families -- have occurred in retirement, where the switch from traditional pensions to 401(k)s has left individuals largely on their own to provide for old age.

Essentially, the numbers have flipped. The fraction of private-sector workers relying on traditional pensions has dropped from 62% a generation ago to a mere 10% today, while the fraction depending solely on 401(k)s has jumped to 63%.

Similar changes have occurred in the way people pay for college education, where rocketing costs and the declining availability of federal grants have meant that most families can no longer pay as they go to send their kids to school, but must borrow. That's left parents more financially exposed. And it's meant that after they graduate, most young people are saddled with debt and, in many cases, must make a beeline to the best-paying jobs to help defray the costs of college.

Twenty years ago, loans were used to pay about 15% of the tuition, room and board and fees that parents and students paid for college. Today, they account for fully one-third, according to the College Board.

And similar changes have occurred in health coverage, which costs more today and covers less. In just the last eight years, employees' average annual premium costs have more than doubled, from $1,600 to almost $3,300, according to the Kaiser Family Foundation.

Indeed, similar changes have occurred in just about every corner of Americans' financial lives.

Some argue that in the new, globally competitive economy, U.S. business and government simply cannot afford to provide the kinds of protections against financial peril that they used to. Perhaps not. But that doesn't mean that we should automatically shunt the job of bearing these dangers to families alone. And it most assuredly doesn't mean that we should pass along the task without letting people know they've just been assigned the job of bearing a big new load of risk.

But that's essentially what has happened. As a result, working Americans and their families are operating on an economic high wire -- only one or two missteps from a steep financial fall. Little wonder people are so bleak about their prospects now that times are tough.

Peter Gosselin is the national economics correspondent for The Times and the author of "High Wire: The Precarious Financial Lives of American Families," released last month by Basic Books.

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