While the average family spends only about 3% of their budget on education, we hear constantly about the huge education loan debt owed by many Millennials and Xers. Is there a big increase in school debt, and if so, why? This first of two posts on this topic covers college attendance and the trend in college spending; part II will look specifically at student loan debt.
Findings
A lot more people are going to college and spending a lot more! The first half of this equation is attendance. The chart below shows this. While a seemingly large 24% of Boomers got a college degree, nearly 40% of Millennials finished college. This doesn’t even include those who started and didn’t finish college, or went to a two-year school. The combination of those two categories is another 28% of Millennials.
With the increase in demand for college, the prices have been skyrocketing. While there may be many reasons for an education growing in cost, over the past 30 years the cost of a college education has doubled after adjusting for inflation. Whatever you may have paid for your degree, it’s more now!
Implications
While the real implications will be discussed after part II of this post, which will look at student loans, it’s clear that we are becoming a nation of college graduates. Whether it’s parents or students who pay for the education, the rising cost of college means that families are investing a lot of money where they didn’t in the past. The trend in college spending is rising dramatically! Stay tuned to part two where we’ll cover the 45 MM people in this country who are holding student loans.
The small print
College attendance by generation is from the Pew foundation, who used the Current Population Survey to determine what percent of 25-37 year olds in a generation had finished an undergraduate degree. There are some nuances to how the CPS defines this – e.g. in some years it was completing four years rather than actually graduating. The inflation-adjusted cost of college came from an analysis by the College Board.
The average American household spends 8% of their budget, $4900 a year, on health care. This cost has been rising over time (see the How Americans Spend post). However, the average cost hides a world of (financial) pain households are facing. If you get insurance through your employer (50% of households) you pay less than buying on your own (7%). However, but any household that’s not on Medicare (14%) or Medicaid (21%) may be faced with some very difficult spending or saving choices given the high cost of getting care. This post explores the reality for working households and digs deeper than the averages to understand different types of consumers.
This analysis won’t begin to look at the why of rising expenses – that’s an entirely different topic. And because trying to find good data on health spending, and getting clear insurance plan comparisons, is slightly more difficult than inventing perpetual motion, treat the numbers below as a good indication of reality but not the final answer!
Findings
The short story is that many families can’t really afford health care – and financial services firms do them no favors by skirting the issue in their planning tools.
I’ll focus on costs for the stereotypical family of four – two parents and two children. The analysis below excludes their paycheck contributions to Medicare, Medicaid and other governmental programs taxed through employment. The short story is that the middle class can’t afford medical care!
A family getting insurance through an employer probably is spending north of $10,000 per year, because:
The average portion of the premium they share is $6,000.
Their deductible, the amount they must spend before insurance kicks in, averages $3,500.
On top of this, plans have an out-of-pocket maximum capping the insureds’ annual spending. If you’re a typical family with kids breaking arms and getting sick, you’re likely to exceed your deductible and then your out of pocket expenses can be thousands more.
If the family is buying insurance on their own, they’re looking at $25,000 or more a year. This assumes they are above the level of subsidy through the governmental exchanges, which is $103,000 a year – about 30% of US households. No average is available, but we know that the average employer plan premium is almost $21,000. Premiums in the California insurance exchange are $15,000/year for a basic bronze Kaiser HMO plan and $25,000 for a Blue Shield Silver PPO plan. That means that this family is likely paying in the area of $20,000+ for insurance, plus the deductible and copays. Hence, $25K/year may even be a low estimate.
If your income is below $103,000 subsidies kick in on a sliding scale but you still spend on care. If your income is at the US household median of $62K/year, the premium alone on the Blue Shield PPO will still run about $8,000/year. Add onto this deductibles and copays and it gets expensive fast.
Costs are rising dramatically in inflation adjusted dollars: Anyone who’s paid for health care in the past 20 years knows this! Per the chart – employee contributions for premiums have risen 149% while the overall premium cost was up 114%. Deductibles are harder to quantify but in 2004 only half of employer plan participants had them; now it’s 85%.
Implications
Financial services companies like to tell middle class consumers they need to save a lot more money for retirement. Unfortunately, they almost never talk to them about their health care situation and the tradeoffs that they face. If you make $100,000 a year pre-tax, that may equate to $75-80,000 after income tax, and you have to pay for housing, food, clothing and transportation. Spending $10,000 up to $25,000 or more on insurance and health care means either you forgo saving for retirement, or you go without insurance. To adequately advise consumers on how to manage their finances, you have to understand their situation with respect to health care and tailor your recommendations, instead of jumping straight in and saying “just max out your 401(k)”.
Most online financial planning tools offer little or no consideration of the health care cost. The reality is that in many cases, the middle class can’t afford medical care. As an industry, financial services should be addressing health care costs head on, not skirting the issue like a dodgeball player.
The small print
Most of the excellent data for this post came from the Kaiser Family Foundation report, 2019 Employer health benefits survey which has a host of information on employer-offered health insurance plans. The inflation adjustment can be found here. California’s insurance exchange costs came from the Covered California website for 2019 coverage. As mentioned above, the multitude of data sources, vast variations in insurance coverages, and general complexity of the system makes it very difficult to make perfect comparisons or cost of care calculations.
In the previous post we looked at American’s spending on housing doubling since the post-WWII era. From 1950 to 2000, the average home purchase price more than doubled. Are houses just getting pricier – or are we opting for ever bigger abodes in the era of McMansions? What is the trend in the size of American homes?
Findings
Modest increase in price per square foot: Data for the past 30 years shows that adjusting for inflation, the average price per square foot for new homes has increased only 15%, but..
Houses are getting a lot bigger: Since 1950, the average square footage of a new single family home has increased 180%, from 938 square feet to 2,631 square feet.
And fewer people are occupying that home: The average household size dropped from 3.0 in 1973 to 2.5 today. That means that the square footage of living space per person in a new home has nearly doubled to 970 square feet since 1973.
Yet – we are chucking a lot more stuff into storage units, too: Self-storage rentable space in the U.S. totals 2.5 billion square feet – or more than three times the size of Manhattan. This industry took off in the 1990’s when we were already building bigger houses.
Implications
You shouldn’t blame our nationwide big housing expense on real estate market inflation (though if you are currently trying to buy or rent in certain pricey locations like San Francisco, that’s certainly a challenge). The bigger long-term issue is that we’re buying or renting bigger houses, and putting fewer people in them! Add in our thirst for self-storage and it becomes apparent that we are a consumption society – both the trend in the size of American homes, and the stuff we put in them.
If a family needs to reduce spending substantially, for example to fund retirement, downsizing homes and reducing buying of “stuff” are obvious targets. We’ll see in later posts why this is so challenging to accomplish, and ways to potentially help people do it.
One caveat – I’m comparing the average new home size to the average number of persons in an overall US HH – we don’t know the size of family moving into the new homes so can’t be certain of the average living space trend for the average American; the simplifying assumption is that new home buyers are of average HH size. Also, looking only at new home data – which is the cleanest data on homes available – excludes of course purchases of existing homes which sometimes are smaller, and sometimes are remodeled into something much bigger.
If you need to work with your clients on their finances, it’s important to understand the trend in American spending. We know that households’ spending has changed over time, but how? This analysis looks at the Bureau of Labor Statistics’ Consumer Expenditures study; to get a sense of change, it includes 1950, 1997 (the closest date to 2000 available), and 2017.
Findings
House poor? The average household spends 1/3 of their budget on housing, up from ¼ after WW II. Because budgets have grown over time, this is even more dramatic. In constant dollars, Americans since WWII have doubled their annual housing spend to $20K/year.
The love affair with cars: 16% of the budget goes to transportation, almost all of which is for automobiles.
Cheap food and clothing: We’re spending a lot less on these categories, food at 13% down by half and clothing at 3% down by 2/3 since 1950. This is mostly a function of mass production in agriculture and textiles driving down costs.
Big jump in retirement spending, but: This includes both social security and retirement plan/IRA contributions. This item has increased to 11% of “spending” but is largely replacing the pensions which went away as the burden of retirement savings shifted to workers. As we’ll see in later posts, it’s not enough.
Healthcare costs rising: It’s risen from 5% to 8% of the budget in the past 20 years.
It’s not much different for the affluent: If you look at the data for households with the top 10% of income, while they’re spending a lot more ($143K/year vs. $60K for the average household), the percentages on the different categories are very similar. The one large difference is that they’re putting 16% of their budget toward retirement savings.
Implications
In one sense, the findings above about the trend in American spending shouldn’t surprise – anyone managing their own budget probably is dealing with big mortgages or rent payments, spends a lot on cars, and is paying more than they used to for health care. However, this foundational data sets the perspective for future analyses which will look at how to help Americans improve their financial situation. If you want to counsel a customer on how to save more money, it’s unlikely that cutting back on their morning latte’ or a pair of shoes will make a big dent in their finances; you’ll have to focus on the bigger expenses. We’ll explore much of this in future posts.
It is a marketing belief that the first brand/product to market enjoys a competitive advantage. This could be for various reasons. The commonest belief is that merely by being first, consumers will either believe your product is better, or else just get used to buying it. This would create a competitive disadvantage for subsequent competitor entries. But is there really an advantage to merely being first? If so, this would mean that during the COVID pandemic might be a bad time to stop innovating!
This post looks at studies of order of entry impact on market share, which control for other factors. We want to exclude any impact from marketing mix differences (e.g. advertising spend) or product differences. This gets at the real first to market benefit.
Findings
First entrants have a market share benefit over subsequent entrants: The analyses looks at the share of the first entrant after a competitor enters the market. If there were no benefit to being first, the first entrant would have a 50% share after a competitor jumps in . In fact, after a competitive entry,, the first to market product had a 7% higher share in packaged good, and a 16% higher share in Pharma.
Waiting longer means losing more share when you do jump in: The Pharma study found that every three months of delay cost the second entrant almost a full share point.
Implications
The obvious conclusion is that you want to be first to market. Certainly, given the choice, we’d probably all like to be the first-in category leader and gain a first to market benefit. While each category likely has a different order of entry effect, you could model a range of possibilities and build this into your innovation investment models.
One concern with this analysis is that it looks at relatively stable categories — grocery store products and drugs tend to be products that don’t change rapidly once they are introduced. High tech products like computers change so quickly that the “first entrant” may become “forgotten” soon and lose its advantage. That said, category-creating product like the iPhone enjoyed a long period of market share advantage.
The other concern is the cost of failure. The analyses cited here are looking at examples where there were multiple entries, indicating a successful product innovation by the original entrant. If the first-in product flops (think Hoverboard) then there aren’t any competitors and the category goes away. Obviously there is a cost to innovating if you can’t sell the resultant product! Some companies choose a follower strategy, accepting a share penalty but avoiding the risk and expense of developing unwanted products.
Sources: Pharma – Regnier & Ridley, 2015, 29 second entrants over 1998-2009 with at least 4 years of share history and a product considered similar to first entrant. CPG – Kalyanaram & Urban, 1992, 18 second entrants. As mentioned above, these studies looked only at products where there were competitors. They don’t look at the cost of a failed innovation.
