April 2018
Abstract: This project examines financial fragility in the United States, which is measured as individuals’ ability to cope with unexpected expenses. Using data from the 2015 National Financial Capability Study and the 2015 Survey of Household Economics and Decisionmaking, we identify subgroups of the U.S. population that are most financially fragile. We observe widespread fragility across the entire population – more than one third of Americans are financially fragile. Several years after the financial crisis, financial fragility is not only pervasive, but many middle-income households also suffer from the inability to deal with shocks. Our measure captures several factors that contribute to financial fragility, including lack of assets and indebtedness. The quantitative findings are also supported by qualitative data from focus group interviews. We explore the long-term implications of being financially fragile and its effects on retirement planning – individuals who are fragile in the short term may end up being financially insecure in the long term as well. Our findings point to the need to incentivize short-term savings in a way that is complementary to the institutionalized mechanisms of saving for retirement and other long-term goals. Focus groups also complement our empirical findings regarding the need and benefits of improving
financial literacy to make individuals less financially fragile.
National Endowment for Financial Education | April 2018
Summary: The capacity to cope with unexpected expenses is a crucial component of financial wellbeing. The lack of such preparedness is like balancing on a beam—a shock or unexpected financial adversity can immediately shake one off and it is hard to regain footing. Lusardi et al. (2011) introduced an innovative measure of the capacity to cope with shocks, which they termed financial fragility, by assessing U.S. households’ capacity to come up with $2,000 in 30 days. In the aftermath of the financial crisis of 2007–09, they found that almost 50% of the U.S. population could be classified as financially fragile. Using the same measure to analyze data collected in 2015, we find that financial fragility still affects more than one-third of the population. Such high incidence of fragility is concerning when we juxtapose the crisis,which occurred nearly ten years ago, with an economy that has been recovering steadily.
To read the National Endowment for Financial Education’s Summer 2018 Digest, which features GFLEC’s research on financial fragility as its covers story, click here. This research was supported by NEFE.