Human Capital

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“Do not be fooled into believing that because a man is rich he is necessarily smart. There is ample proof to the contrary.” – Julius Rosenwald

 

The concept here is the anticipated post-marital disparate economic relative positions between the now former spouses – and to what extent, if any, should that be taken into account in the divorce process, whether through alimony, equitable distribution or both. For ease of illustration, we will assume the stereotypical situation of the husband being the major breadwinner/business owner, and the wife the classic “dependant” (even if only semi-dependent) spouse. Deepest apologies to all of our female readers – feel free to reverse the spousal identifications.

At least in theory, the financial results of a divorce are supposed to put the wife (often with the children) on some roughly equivalent financial footing, both as to income and assets, as the husband. As to income, that means that the alimony the husband is paying to the wife (along with the child support) – and typically also with what the wife will be earning in the job market, or is imputed to earn – will make them, if not equal, at least relatively close, or in some way that is considered equitable. A problem with this concept is that the marriage was an economic partnership, with each spouse contributing to that partnership in some roughly equivalent fashion (the husband with money from the outside world, the wife with household and child rearing services, and possibly also some level of outside employment). As a result, the marital unit grew and prospered. Each party – though generally this is much more so as to the wife – sacrificed something in terms of future employability, employment rewards and the like, by working for that marital partnership within the context of what was agreed to (whether that agreement was implicit, explicit, or just generally assumed through the traditional gender roles).

However, after a 20 year marriage, where the husband has established himself in the corporate world or in some similar fashion, and the wife has not, no matter what one does through alimony, outside employment, rehabilitative alimony, etc., the wife will never achieve the level of financial success that the husband has. Further, she will likely continue to have – and this is perhaps key to this concept – a relative disparity which will not only continue (which is not necessarily bad economically because the alimony in theory compensates for that), but will actually widen. This is so because in general that is the way careers go. But it is also because if we assume some ongoing percentage increase in income, the husband, having a larger base to start with, will get, even with the same percentage increases, a greater dollar increase than will the wife.

To compound the matter, this directly translates to discretionary income. It is far more likely that the husband will have more money than he needs to live on (discretionary income) than will the wife. Thus, growing the overall income by greater dollars (even if by the same percentage) will give the husband proportionately more discretionary income, more savings, more comfort level, etc. than will have the wife. Compounding same, the alimony typically is at a fixed amount. Therefore, the wife will only see an increase on the portion of her income generated by outside employment – leaving what can be a relative substantial base (the alimony) fixed, without growth.

In a similar sense, is the matter of the pension element of equitable distribution. Of course, not every case is blessed with a retirement benefit to be allocated between the spouses, and some of them are very modest IRA or other type of retirement plan accounts where the employment, per se, will not make a difference as to the rate by which they will increase. However, for some people, especially those who are with a company having a defined benefit type retirement plan, the likely future rate of increase will be far greater than what the wife, now employed, will be able to experience, assuming she will experience any kind of retirement benefit.   The husband, having already established his career and with a solid employment base, has a much greater chance of not only general raises and inflationary adjustments, but more substantial merit type raises – which will in turn provide greater increases and retirement plan benefits, in greater dollar amounts, and in greater percentages than the wife could possibly hope to experience. Thus, even after allowing for a QDRO’d allocation of pension benefits, and even assuming equivalent investing, the husband will in all likelihood experience a (maybe significantly) greater increase in retirement plan benefits.

Now that we know there is a future disparity in the offing (go along with me on this one – it is the premise for this article), the next issue is how to address same, if at all.   Addressing it can mean very different things to different people. From an income perspective, one suggestion might be a disproportionate alimony carve-out – whether for a short limited term, a longer limited term, or perhaps an indefinite term. It might even mean continuing same past a point of remarriage, or past a retirement of the husband. Perhaps doing a standard alimony determination based on the husband’s current income situation, but providing for a carving-out of future increases. Obviously, none of this is going to sit well with the husband – but the concept here is to consider the economic realities of the future.   In a similar sense as to the future retirement plan benefits.   Should consideration be given to some carve-out of future pension increases. Perhaps, a future revisit to the QDRO situation – providing the wife with a supplemental QDRO of sorts some years down the road.

Of course, there are those who do not accept this concept of a marital investment in the human capital, and that the divorce creates a loss of the sharing of the investment in each other that each made. If both walked away completely equal (which is not normally the case), then likely this would not be a problem. Certainly, none of this is easy – the concept itself will rankle many. Besides, there is the practical issue of the economics, and the difficulty in even considering carving-out greater alimony than would normally be the case, disproportionate sharing of assets currently, a revisit in the future. All of these would typically be distasteful to the husband, and in many cases keeping this type of connection would also be distasteful to the wife.

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