How do we measure prosperity? A look at the Cost-of-Thriving Index

How do we measure prosperity? A look at the Cost-of-Thriving Index

Are we more prosperous today than we were in the 1980s? By some measures, yes. That cell phone in your pocket has more computing power than anything available to consumers in the 1980s. New cars today come standard with features that seemed fantastically luxurious back then. Advances in medicine have saved countless lives.

But, by other measures, we are not. Jobs that comfortably supported a family a generation ago no longer do. We have a generational wealth gap: in 1989, baby boomers controlled 21 percent of America’s wealth, while millennials controlled only 3 percent in 2019.

To answer this riddle, a report by Oren Cass of the Manhattan Institute proposes an alternative to inflation indices: the Cost-of-Thriving Index (COTI), which measures whether it’s easier or harder to make ends meet today than in the past (spoiler alert: it’s harder today).

Problems with inflation indices

As Mr. Cass points out, the problem with inflation indices is that they “are not intended to, and do not, describe all the forces acting on a household budget against which a changing wage might most reasonably be compared.”

Since the 1980s, we have seen many improvements in the quality of things we buy. If this quality improvement makes the item twice as valuable but doubles the price, by inflation standards, the price has not changed. But if the new, improved item becomes unaffordable at the higher price, the price has effectively doubled.

Social norms also impact what a household chooses to buy. Back in the 1980s, one telephone line per household was the norm. Today, almost everyone over the age of 12 has a cell phone.

Elements of the COTI

To approximate the financial pressures on a household, Cass compared the costs of a “basket” of four items that a middle-class family might purchase to weekly median wages. The items in the basket consisted of:

  1. Annual rent for a three-bedroom house. Cass used HUD’s fair-market rent estimate for the 40th percentile in Raleigh as a representative community. Cost in 1985: $5,560; cost in 2018: $15,924.
  2. Annual family health insurance premium. Here, Cass used data from the Kaiser Family Foundation for the cost of employer-sponsored plans. Although many middle-class families today rely on subsidies from an employer or the government, or simply forgo coverage, Cass wanted the index to reflect a self-sufficient family. Cost in 1985: $2,343; cost in 2018: $19,616.
  3. One semester of college. A family sending two children to four-year colleges might expect to pay for 16 semesters of college. Cass used an estimate from the National Center for Education Statistics for the cost of tuition, fees, room, and board at a state college. Cost in 1985: $1,841; cost in 2018: $10,025.
  4. Annual operation of a vehicle. Cass used estimates of average cost per mile driven from the federal Bureau of Transportation Statistics applied to 15,000 miles per year. Cost in 1985: $3,484; cost in 2018: $8,849.

As a proxy for income, Cass used estimates from the BLS for median weekly earnings of full-time male workers over the age of 25. He used data from this group as a means of “holding constant the economic experience of a group that traditionally has been recognized as the family breadwinner.” The purpose of his research was not to examine whether that model is the best, but simply to quantify the financial pressures on households. Weekly earnings in 1985: $443; weekly earnings in 2018: $1,026.

Results of the COTI analysis

To calculate the Cost-of-Thriving Index, Cass determined the number of weeks that a wage earner would have to work to purchase that basket of goods. In 1985, the total cost for the four goods in the basket was $13,227, which meant that 30 weeks of work would be needed. However, by 2018, that cost ballooned to $54,414, which would require 53 weeks of work to pay for them.

As demonstrated by the COTI analysis, in 1985, a single breadwinner could realistically expect to support a family. But, by 2018, this was no longer the case.

What does this mean for advisors?

While this analysis is far from perfect, this new index gives us a tool to quantify how much harder it is to make ends meet today than a generation ago. Cutting expenses isn’t enough when income doesn’t keep up with what families want to buy. Therefore, household income must increase. For advisors, this is a sobering reminder of the importance of helping our clients with financial planning and budgeting.