The Long and the Short of It: Financial Fragility in America

By Annamaria Lusardi
Annamaria Lusardi (@A_Lusardi) is the Denit Trust Chair of Economics and Accountancy at the George Washington University School of Business, where she focuses on financial literacy and personal finance. She is also the founder and academic director of the Global Financial Literacy Excellence Center.

Much media and policy attention is devoted to enhancing Americans’ long-term financial security. For example, financial planners work hard to help people boost their savings for the long term. Many firms automatically enroll workers in pension plans, sometimes with company matches, to help their employees build up retirement assets. Also, government policy promotes saving for old age, including the important tax deferral provided to qualified retirement plans.

Nevertheless, Back in 2016, several of the main presidential candidates talked about raising Social Security benefits. But few dared talk about realistic suggestions about how to close the system’s existing shortfall, much less how to raise money to cover new benefits. A large number of U.S. households are financially fragile today, and their well-being as well as that of the entire economy rests on households’ capacity to deal with shocks.

My own work (in collaboration with other researchers) shows that far too many Americans are unprepared to handle even a mid-size financial shock, such as a car repair or a medical bill. When people were asked if they could come up with $2,000 in a month, over one-third of working-age Americans said they could not. Also, having a job and earning high income need not provide a protective buffer. That is, we estimate that 20 percent of Americans earning $75,000-100,000 annually cannot manage a financial shock requiring $2000 in liquid cash. Even more concerning is women’s greater vulnerability: two-fifths of women tell us that they could not handle this sort of financial shock even when they could take 30 days to locate the money. The ability to deal with short term shocks has improved slowly since the financial crisis and the Great Recession.

The 30-day test is a very useful indicator of peoples’ financial fragility, as it takes into account American ingenuity in the short term. That is, people have many ways to secure emergency funds in a hurry: some can borrow, others turn to families and friends, and still others take on additional work to increase their incomes.  This resourcefulness, however, does not negate the fact that many of us live on the financial edge.

As one of our focus group respondents said, “I can make it through the month if nothing goes wrong.” Of course, this is not a plan for financial success!

Financial fragility has two key drivers. First, people who are not financially literate tend to be disproportionately financially fragile. People on the edge turn to high-cost methods of borrowing, such as payday loans and use credit cards in ways that generate high interest payments and high fees, and our research shows we can link this behavior to lack of understanding of interest compounding and other basic concepts. Second, financially fragile Americans tend not to plan for retirement, and many also withdraw funds from their retirement accounts too early. These patterns leave them in far worse shape than those who preserve their savings for old age.

As a nation, our institutions and politicians have done much to promote long-term financial security. Unfortunately, more must be done to help families build protection against near-term financial shocks. Financial health requires understanding the interactions between short- and long- term financial security, and the fact that short-term financial fragility can undermine long-term financial security.


Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.