Changing the Conversation About Income Volatility

According to the Pew Charitable Trusts, the group of workers whose incomes rise and fall by as much as 25 percent over the course of a year is mostly made up of hourly workers in retail and gig economy workers. But while they make up a large segment of those affected by income volatility, they are far from alone.

Self-employed contract workers, commission-based employees, tip-based workers, small business owners and seasonal workers all face variations on income volatility, according to Joanna Smith-Ramani, program director of the Aspen Institute Financial Security Program’s Expanding Prosperity Impact Collaborative (EPIC). And those workers are increasingly represented at all points of the earnings spectrum.

“One of the mistakes people make is to associate income volatility as an issue for lower-income families. The worst consequences of income volatility are most apparent in lower-income workers, but income volatility is becoming the reality of more middle-class and upper-middle workers as well,” said Smith-Ramani in a conversation with PYMNTS and LendUp CEO Sasha Orloff about the issues caused by income volatility and how they can be solved.

Those issues are not only pressing, but both Smith-Ramani and Orloff agreed that they are likely to become magnified before they’re diminished. According to experts, income volatility is growing in the American economy – 90 percent said it has been on the rise in the last decade, 56 percent recognize it as a problem, and almost a third say it is a “critical problem.”

And it is a problem, Orloff noted, that can be seen in the damage it does to the emerging middle class’ ability to make good financial decisions, if for no other reason than because it means they are ill-equipped to plan for events like financial shocks and can find themselves in need of a cash advance.

“The customer group we serve – the over 50 percent of which report volatile income – are being hit with a variety of challenges brought on not by not having money, but by not being able to access it when it’s needed. That turns into income lost to high interest rates and fees, and possibly being less able to gain future access,” Orloff said.

And as the number of workers who experience income volatility is growing, the reach of the problem is growing as well. “This isn’t something that is becoming a problem for one industry, race, gender, or age group – or in one place. This is now something that touches every corner of the country,” Orloff said.

Better solutions are needed – and together Aspen and LendUp are hoping to open the dialog necessary to build them.

Big Problems Need Joint Solutions

So together, LendUp and the Aspen Institute’s EPIC are launching Finance Forward, a national conversation to discuss the issue from the perspective of individuals, local government, nonprofits, for-profits, employers, tech and anyone else with an ability to lend or take action.

The series kicked off June 1 in Columbia, S.C.,  with two events – an open-to-the-public meeting at the South Carolina Bar Conference Center, and an invite-only roundtable at the University of South Carolina, where they were joined by Columbia Mayor Stephen Benjamin, the Pew Charitable Trusts, the Cities for Financial Empowerment Fund, the Urban Institute, the Cooperative Ministry, the Columbia Office of Community Development and the USC Alumni Center.

The tour will wrap up later this year in Oakland, Calif., with stops across the country and more partners, including local and regional bank partners.

The cross-sectional nature of the conversation, Smith-Ramani and Orloff said, is particularly important given the scope of the problem is such that no one group could possibly build a single solution. Both groups expect that solutions will be a collaborative effort among the various stakeholders. They hope to create a movement that will build solutions to meet the needs of the enormous group of Americans whose needs are not being met by the current financial system.

“Private industry can contribute a lot here in building the tools that don’t exist, but are increasingly needed. Tech is an enabler of solutions and of problem-solving, and we think the tech industry should be part of the discussion around solutions. LendUp is very proud to lead the charge,” Orloff said, noting that once the tools are built, it will still be a collaborative effort to put them into the hands of the leaders and employers who best understand their communities’ needs.

“If you are a community leader, this is absolutely something that is not just affecting your members’ financial lives and ability to plan for the future. This is also affecting individuals’ health and well-being, as well as the well-being of the community and local government. And forward-thinking leaders are seeing it is absolutely in everyone’s interest to be looking for these solutions,” Smith-Ramani said.

Re-Framing the Problem

Because there is a mistaken impression that income volatility is restricted to lower-income workers, people tend to assume those affected by income volatility are all the same. This is not the case, and according to Smith-Ramani there are actually two groups: Those for whom income volatility is the primary problem, and those for whom timing of their payments are the issue.

“For a lot of workers, the problem is when they get paid, not what they get paid. For example, if they were paid their entire income on Jan. 1st every year, they would have enough money to cover their expenses. The problem is they aren’t paid that way, and the timing of their paychecks clearing and the dates their bills are due often overlap by a few days – meaning frequent and high overdraft or check-bouncing fees.”

The solutions for those two groups are different, and clarifying the needs of both helps refine understanding of the products that can be built, the programs that can be offered by employers, and the policies that can be put in place by local elected officials.

“I don’t know just yet [what policies and solutions will be built]. I do know from years of experience working in the Columbia community that when we put thoughtful people from diverse backgrounds and experiences in a room and encourage real problem solving – we can find the answers,” Benjamin said on why his city has joined Finance Forward.

As working families still recovering from the Great Recession have been caught up in difficulties associated with shifts in the economy, Mayor Benjamin expressed gratitude to the Aspen Institute and LendUp, and the other local and national participants, for bringing this meeting of the minds together.

“Managing this transition during the rise of the gig economy only makes finding solutions to financial insecurity for America’s families that much more complex and important. I hope that a robust and frank discussion surrounding the issue will inspire Columbia to be a thought leader on the issue and an incubator for some of the most compelling ideas discussed,” Benjamin said.

None of the participants thought the process would be fast – or that the answer would be easy. But all agreed the potential rewards are great – for consumers that are able to focus on things other than their volatile income, the private industry players that build the tools to better serve an increasingly large demographic, and the communities that will be in a better financial position when their members are financially secure.

For more information, visit financeforward.org. To get involved, contact press [at] lendup [dot] com.