The Economic Consequences of Divorce

The scholarly research concerning the economic effects of divorce has been referenced by politicians, lawyers, judges, activists, and many other people. However, researchers have disagreed not only with the results of the analyses, but with how to define the fundamental components of their research, such as the “standard of living.” If the meaning of the term “standard of living” is not well defined, it is difficult to compare the research results of different studies. This article provides an overview of some of the seminal research articles in the area of the economic consequences of divorce, and an individualized framework for assessing the possible consequences of divorce for a particular person.

An Overview of Scholarly Research

In the past, a widely cited source regarding the economic consequences of divorce was Harvard sociologist Lenore Weitzman, PhD's book, The Divorce Revolution: The Unexpected Social and Economic Consequences for Women and Children in America (Free Pr; September 1985). Since its publication, certain statistics found within the book have been discredited. Nonetheless, the book left a mark on policymakers and possibly the public in general.

In that 1985 book, Weitzman proclaimed that after a divorce, women and children suffer on average a 73% drop in their standard of living, whereas the average divorced man's standard of living increases by 42%. On the book jacket, the past President of the American Sociological Association called it “social science at its best.” The U.S. Supreme Court cited Weitzman's figure in at least one of its cases, and even President Clinton cited the statistic in his 1996 budget request. Richard Peterson, PhD, gained access to Weitzman's computer files and paper records and could not reproduce Weitzman's findings, as stated in his 1996 article. Richard Peterson, PhD, Re-Evaluation of the Economic Consequences of Divorce. American Sociological Review, (1996): Vol. 61. Pg. 528. Using Weitzman's data, Peterson found that divorced women actually experienced a 27% drop in standard of living, and divorced men experienced a 10% increase in their standard of living. Id. Weitzman later tried to reproduce her findings, but stated that the original records were damaged or lost, and that her statistics may have been incorrect due to a statistical error. Lenore J. Weitzman, PhD, The Economic Consequences of Divorce are Still Unequal: Comment on Peterson. American Sociological Review (1996): Vol. 61. Pg. 537.

Even though Weitzman's statistics on the topic have been discredited, the majority of the literature on this topic suggests that the hardship falls disproportionately on divorced mothers. G.W. Peterson and K.R. Bush, Handbook of Marriage and the Family (New York: Springer Science, 2012), Pg. 494. In their 2001 article, Matthew McKeever, PhD and Nicholas Wolfinger, PhD, cite 14 separate studies on the economic consequences of divorce for women with datasets ranging from 1967 through 1994. Looking at family income, the studies find a slight trend of lessening negative economic consequences for women during the time periods analyzed (1967 to 1994). The literature supports an average loss in a woman's family income (not remarried) following a divorce of 44% in the 1960s, which improved to a mean loss of 26% in the 1980s and early 1990s. Matthew McKeever and Nicholas Wolfinger, Reexamining the Economic Costs of Marital Disruption for Women. Social Science Quarterly (2001): Volume 82, Number 1, March 2001. In their 1998 book, Sanford Braver, PhD and Diane O'Connell, PhD, correct what they believe are errors in previous studies (e.g., outdated data, treatment of taxes, etc.) on the topic of the economic consequences of divorce. In making these changes, Braver's and O'Connell's results show a 5% decrease in standard of living for mothers post-divorce and a 5% increase for fathers. Sanford Braver and Diane O'Connell, Divorced Dads. Shattering the Myths. (New York: Penguin Putnam, 1998), Pg. 79.

In a more recent January 2012 report, The PEW Charitable Trusts' report found that in the 1970s, 11% of women experienced an income gain of 25% or more following a split from their partners (compared with 14% of men who experienced an income gain of 25% or more). This statistic improved by the early 2000s, with 20% of women experiencing an income gain of 25% or more, and 16% of men experiencing an income gain of 25% or more. The report also found that 63% of women who split from their partners in the 1970s experienced an income decline of at least 25%. In the early 2000s, that figure had dropped to 49% of women experiencing a decline in income of at least 25% following divorce (47% of men experienced a decline of 25% or more in the early 2000s). Despite these improvements for women over time, nearly 50% of men and women experience an income decline of 25% or more following a split from their partners.

Many professionals involved in divorce will be able to recognize their past clients in these startling statistics from PEW. In general, there is nearly a 50% chance that a man or woman will have a 25% decline in income following a split from a partner. Identifying the typical risk factors and fact patterns of people who experience dramatic negative financial declines following a divorce will aid professionals and judges in lessening the negative consequences. The individualized analysis described in a subsequent paragraph herein will aid professionals and judges in structuring reasonable settlements and decisions.

All of the studies mentioned herein are limited to the short-term economic effects following a divorce. Most of these studies contain data only for the first 18 months after the divorce. The long-term economic consequences of divorce have not received as much attention.

Remarriage

One issue that can have a substantial effect on a divorced person's long-term economic well-being is remarriage. Most divorced parents remarry as time progresses. According to a 1990 study (Bumpass, Sweet, and Castro-Martin), about two-thirds of divorced mothers and three-quarters of divorced fathers remarry. In a separate 2003 study (Fabricius, Braver, and Deneau), when remarriage occurs, mothers typically gain more income than expenses, whereas fathers do the reverse. However, this factor is difficult to anticipate and model during the divorce process, and is typically handled when and if remarriage occurs. Two other post-divorce factors that require significant consideration are the income producing capacities of each ex-spouse, and their respective annual expenses.

Individualized Forecasts of Net Worth

A hypothetical example of an individualized forecast of net worth is shown in the tables'below in tabular format so that the detailed calculations can be viewed. In the simplified example, the planning date is Aug. 1, 2014. The financial analyst has prepared a forecast of a Ms. Smith's future financial circumstances.

Ms. Smith currently has wages of $60,000 per year, which are expected to grow into the future until her retirement at age 65. Mr. Smith has offered $55,000 in annual taxable spousal maintenance for five years. Estimated payroll and income taxes are subtracted from $115,000 in total income in the first year of the forecast to arrive at total income (net of taxes) of $78,992.

In the first year of the forecast, Ms. Smith's total expenses of $78,000 are subtracted from her after-tax income to arrive at her cash surplus of $992. However, this forecast shows that, after the first year, Ms. Smith is expected to have a net cash shortfall every year into the future. The forecast presented herein only shows the first six years of the forecast and her age 81.5, but it is typical to show each year of the forecast. The cash surplus or shortfalls from the previous table are first applied to Ms. Smith's investable assets allocated to her in the divorce settlement proposal. In this example, Ms. Smith is allocated $175,000 in non-retirement investable assets, which are expected to generate taxable gains and income. She was also allocated $800,000 in retirement assets, which will grow tax-free, and income taxes will be paid in the year of distribution. Once all of Ms. Smith's Non-Retirement Investable Assets are depleted, the cash shortfalls from the previous table are satisfied with distributions from her Retirement (Pre-Tax) Assets.

In this particular example, Ms. Smith depletes her Non-Retirement Investable Assets at age 66. And, as shown in the previous table, she depletes her Retirement (Pre-Tax) Assets at age 81 (with the last withdrawal of $71,802 at age 81). Ms. Smith has a life expectancy of approximately 86, which means that her assets are not sufficient to meet her expenses past her estimated life expectancy.

Following the preparation of this scenario, Ms. Smith may decide to accept her husband's proposal, or prepare a second scenario. A possible counter proposal may need to be drafted so that the ultimate settlement or court decision provides sufficient support to Ms. Smith, while also taking into account Mr. Smith's ability to pay spousal maintenance. For example, by increasing spousal maintenance to $65,000 per year for six years instead of five, and reducing her living expenses by $6,000 per year, Ms. Smith will have sufficient retirement assets through her life expectancy of age 86.

Conclusion

While the scholarly research on the topic of the economic consequences of divorce has led to varying conclusions, it is clear that there is a very significant potential for a particular person to experience severe negative financial consequences following a divorce. There are risk factors that may help identify who will be severely affected, but the best way to know how a particular settlement offer will affect a person's long-term financial future is to prepare an individualized forecast using reasonable assumptions. By using a tool like this, legal counsel and other advisers to a divorcing party can help the client avoid unpleasant, or even disastrous, surprises down the road.

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Scott M. DeMarco is a Partner at SaxBST LLP. Reach him at 1-800-724-6700, or [email protected].

The scholarly research concerning the economic effects of divorce has been referenced by politicians, lawyers, judges, activists, and many other people. However, researchers have disagreed not only with the results of the analyses, but with how to define the fundamental components of their research, such as the “standard of living.” If the meaning of the term “standard of living” is not well defined, it is difficult to compare the research results of different studies. This article provides an overview of some of the seminal research articles in the area of the economic consequences of divorce, and an individualized framework for assessing the possible consequences of divorce for a particular person.

An Overview of Scholarly Research

In the past, a widely cited source regarding the economic consequences of divorce was Harvard sociologist Lenore Weitzman, PhD's book, The Divorce Revolution: The Unexpected Social and Economic Consequences for Women and Children in America (Free Pr; September 1985). Since its publication, certain statistics found within the book have been discredited. Nonetheless, the book left a mark on policymakers and possibly the public in general.

In that 1985 book, Weitzman proclaimed that after a divorce, women and children suffer on average a 73% drop in their standard of living, whereas the average divorced man's standard of living increases by 42%. On the book jacket, the past President of the American Sociological Association called it “social science at its best.” The U.S. Supreme Court cited Weitzman's figure in at least one of its cases, and even President Clinton cited the statistic in his 1996 budget request. Richard Peterson, PhD, gained access to Weitzman's computer files and paper records and could not reproduce Weitzman's findings, as stated in his 1996 article. Richard Peterson, PhD, Re-Evaluation of the Economic Consequences of Divorce. American Sociological Review, (1996): Vol. 61. Pg. 528. Using Weitzman's data, Peterson found that divorced women actually experienced a 27% drop in standard of living, and divorced men experienced a 10% increase in their standard of living. Id. Weitzman later tried to reproduce her findings, but stated that the original records were damaged or lost, and that her statistics may have been incorrect due to a statistical error. Lenore J. Weitzman, PhD, The Economic Consequences of Divorce are Still Unequal: Comment on Peterson. American Sociological Review (1996): Vol. 61. Pg. 537.

Even though Weitzman's statistics on the topic have been discredited, the majority of the literature on this topic suggests that the hardship falls disproportionately on divorced mothers. G.W. Peterson and K.R. Bush, Handbook of Marriage and the Family (New York: Springer Science, 2012), Pg. 494. In their 2001 article, Matthew McKeever, PhD and Nicholas Wolfinger, PhD, cite 14 separate studies on the economic consequences of divorce for women with datasets ranging from 1967 through 1994. Looking at family income, the studies find a slight trend of lessening negative economic consequences for women during the time periods analyzed (1967 to 1994). The literature supports an average loss in a woman's family income (not remarried) following a divorce of 44% in the 1960s, which improved to a mean loss of 26% in the 1980s and early 1990s. Matthew McKeever and Nicholas Wolfinger, Reexamining the Economic Costs of Marital Disruption for Women. Social Science Quarterly (2001): Volume 82, Number 1, March 2001. In their 1998 book, Sanford Braver, PhD and Diane O'Connell, PhD, correct what they believe are errors in previous studies (e.g., outdated data, treatment of taxes, etc.) on the topic of the economic consequences of divorce. In making these changes, Braver's and O'Connell's results show a 5% decrease in standard of living for mothers post-divorce and a 5% increase for fathers. Sanford Braver and Diane O'Connell, Divorced Dads. Shattering the Myths. (New York: Penguin Putnam, 1998), Pg. 79.

In a more recent January 2012 report, The PEW Charitable Trusts' report found that in the 1970s, 11% of women experienced an income gain of 25% or more following a split from their partners (compared with 14% of men who experienced an income gain of 25% or more). This statistic improved by the early 2000s, with 20% of women experiencing an income gain of 25% or more, and 16% of men experiencing an income gain of 25% or more. The report also found that 63% of women who split from their partners in the 1970s experienced an income decline of at least 25%. In the early 2000s, that figure had dropped to 49% of women experiencing a decline in income of at least 25% following divorce (47% of men experienced a decline of 25% or more in the early 2000s). Despite these improvements for women over time, nearly 50% of men and women experience an income decline of 25% or more following a split from their partners.

Many professionals involved in divorce will be able to recognize their past clients in these startling statistics from PEW. In general, there is nearly a 50% chance that a man or woman will have a 25% decline in income following a split from a partner. Identifying the typical risk factors and fact patterns of people who experience dramatic negative financial declines following a divorce will aid professionals and judges in lessening the negative consequences. The individualized analysis described in a subsequent paragraph herein will aid professionals and judges in structuring reasonable settlements and decisions.

All of the studies mentioned herein are limited to the short-term economic effects following a divorce. Most of these studies contain data only for the first 18 months after the divorce. The long-term economic consequences of divorce have not received as much attention.

Remarriage

One issue that can have a substantial effect on a divorced person's long-term economic well-being is remarriage. Most divorced parents remarry as time progresses. According to a 1990 study (Bumpass, Sweet, and Castro-Martin), about two-thirds of divorced mothers and three-quarters of divorced fathers remarry. In a separate 2003 study (Fabricius, Braver, and Deneau), when remarriage occurs, mothers typically gain more income than expenses, whereas fathers do the reverse. However, this factor is difficult to anticipate and model during the divorce process, and is typically handled when and if remarriage occurs. Two other post-divorce factors that require significant consideration are the income producing capacities of each ex-spouse, and their respective annual expenses.

Individualized Forecasts of Net Worth

A hypothetical example of an individualized forecast of net worth is shown in the tables'below in tabular format so that the detailed calculations can be viewed. In the simplified example, the planning date is Aug. 1, 2014. The financial analyst has prepared a forecast of a Ms. Smith's future financial circumstances.

Ms. Smith currently has wages of $60,000 per year, which are expected to grow into the future until her retirement at age 65. Mr. Smith has offered $55,000 in annual taxable spousal maintenance for five years. Estimated payroll and income taxes are subtracted from $115,000 in total income in the first year of the forecast to arrive at total income (net of taxes) of $78,992.

In the first year of the forecast, Ms. Smith's total expenses of $78,000 are subtracted from her after-tax income to arrive at her cash surplus of $992. However, this forecast shows that, after the first year, Ms. Smith is expected to have a net cash shortfall every year into the future. The forecast presented herein only shows the first six years of the forecast and her age 81.5, but it is typical to show each year of the forecast. The cash surplus or shortfalls from the previous table are first applied to Ms. Smith's investable assets allocated to her in the divorce settlement proposal. In this example, Ms. Smith is allocated $175,000 in non-retirement investable assets, which are expected to generate taxable gains and income. She was also allocated $800,000 in retirement assets, which will grow tax-free, and income taxes will be paid in the year of distribution. Once all of Ms. Smith's Non-Retirement Investable Assets are depleted, the cash shortfalls from the previous table are satisfied with distributions from her Retirement (Pre-Tax) Assets.

In this particular example, Ms. Smith depletes her Non-Retirement Investable Assets at age 66. And, as shown in the previous table, she depletes her Retirement (Pre-Tax) Assets at age 81 (with the last withdrawal of $71,802 at age 81). Ms. Smith has a life expectancy of approximately 86, which means that her assets are not sufficient to meet her expenses past her estimated life expectancy.

Following the preparation of this scenario, Ms. Smith may decide to accept her husband's proposal, or prepare a second scenario. A possible counter proposal may need to be drafted so that the ultimate settlement or court decision provides sufficient support to Ms. Smith, while also taking into account Mr. Smith's ability to pay spousal maintenance. For example, by increasing spousal maintenance to $65,000 per year for six years instead of five, and reducing her living expenses by $6,000 per year, Ms. Smith will have sufficient retirement assets through her life expectancy of age 86.

Conclusion

While the scholarly research on the topic of the economic consequences of divorce has led to varying conclusions, it is clear that there is a very significant potential for a particular person to experience severe negative financial consequences following a divorce. There are risk factors that may help identify who will be severely affected, but the best way to know how a particular settlement offer will affect a person's long-term financial future is to prepare an individualized forecast using reasonable assumptions. By using a tool like this, legal counsel and other advisers to a divorcing party can help the client avoid unpleasant, or even disastrous, surprises down the road.

[IMGCAP(1)]

[IMGCAP(2)]

Scott M. DeMarco is a Partner at SaxBST LLP. Reach him at 1-800-724-6700, or [email protected].