As compared to years past, today’s American families face much greater income insecurity. The average annual income swing, based on data from the end of the 1990s, was 30 percent, with 17 percent of families experiencing an income drop of 50 percent or more. This economic insecurity causes ripple effects for communities as well as for overall national economic performance.
A national universal insurance program would assist families experiencing a sharp decline in income due to unemployment, disability, illness, or the death of a spouse, with benefit eligibility beginning when income declines by 20 percent and replacing a larger share of income losses for lower-income families than for higher-income families. Financing could come from a payroll-based contribution or a broad-based tax on capital income and earnings.
The economic risks faced by American families have increased dramatically over the past three decades. For example, while the share of families experiencing a drop in real income over any two-year period has remained steady at about half, the median income drop for such families has risen from approximately 25 percent of income in the early 1970s to around 40 percent by the late 1990s and early 2000s.
Meanwhile, the volatility of family incomes — how much they fluctuate over time — has increased substantially. Several possible policy options need to be debated in response to this increase in economic insecurity. This paper puts forward one potential approach, focused on providing temporary and partial relief from severe economic shocks. This proposed program, Universal Insurance, would be available to the majority of American families and would build on, rather than supplant, existing social insurance programs. It would provide short-term, stop-loss protection to qualifying families whose income suddenly declined by 20 percent or more, or whose out-of-pocket health costs in one year amounted to 20 percent or more of their combined income for that year. Although most families would be eligible, the program would be most generous for lower-income families, which have the fewest resources with which to weather economic shocks. This type of broad-based, stop-loss insurance — covering a range of risks but focused on particularly dramatic cases to minimize incentive problems and target those most in need — could provide a flexible new platform for enhancing economic security in a world of rapidly changing risks. As the nation struggles with rising income insecurity, this proposal, along with other potential policy responses, should be actively debated.