What is Middle Class in 21st Century America?

[finehoe]

How much do average Americans make after the Great Recession? Examining the income of U.S. households. 65 percent of U.S. households live on $65,000 or less.

http://www.mybudget360.com/how-much-average-household-income-us-recession-income-distribution

[ChriswUfGator]

Speaking personally, I don't know how people live on what the average HHI figure is. You can't get out of Publix for $100 anymore, gas is $3+/gal, insurance costs have risen, etc. I think to be comfortable the real amount needed is probably $80-$100k. How people squeak by on $20k/yr gross with few/no benefits/health insurance, etc., is mind boggling to me. Not fair that the reality of life must suck for so much of this country.

[ESHC]

From the National Alliance to End Homelessness:
On Wednesday, April 21, the National Low Income Housing Coalition (NLIHC) released Out of Reach, an annual analysis of the cost of rental housing in the United States. Primary among the findings of the report was the level of this year's "housing wage;" the report found that a household must earn $18.44 per hour in order to afford a modest rental, two-bedroom home in the United States. This amounts to $38,360 per year - $16,310 more than the federal poverty level for a family of four. Other key findings of the report include:
•   In 2010, the estimated average wage for renters in the United States is $14.44, a decline from $14.69 in 2009;
•   At the federal minimum wage of $7.25, a household would have to work 102 hours a week to afford the national average fair market rent (FMR); and
•   There is no county in the United States in which a full-time minimum wage worker can afford even a one-bedroom apartment at FMR.
Link to the report: http://www.nlihc.org/oor/oor2010/

[Doctor_K]

That'd sure as hell motivate me to move beyond my minimum-wage job.

What's 'modest' though?  That income of $38,360 a year is $3,196 and change per month.  You mean to tell me that that modest two-bedroom home is that much in rent or mortgage??  I call shenanigans on that one.  If it is indeed true, get a cheaper house or apartment!  

If you can find an apartment for $1000 or $1200 or so a month, based on that $38K figure, that's still $1,900 (rounded down) for gas, groceries, car insurance, per month.  

And Chris - normally I agree with your points on a lot of topics.  However: you can budget, plan your meals, and coupon it up and get out of Publix with a week's worth of groceries (minus the two boxes of fudge rounds and the 24-case of beer) for around $80 per week.  It's definitely doable.  My fiancee and I do it all the time and we eat well (sometimes too well!) and are not wanting.

Our combined household income is in the less-than-$100K range too.  Is it ideal?  Maybe not.  Is it possible and plausible?  Absolutely.  To say otherwise is a lie and a travesty.

Again, it's going to motivate me to at least try to better my circumstances and get to that next level.  I may never own a boat, but that's fine with me too!

[JagFan07]

In 1999 I read a book that forever changed the way I viewed wealth and Income. It may be a little dated for today, but I still think it is well worth the read. It is "The Millionaire Next Door".

Here is an excerpt:

http://www.nytimes.com/books/first/s/stanley-millionaire.html

PORTRAIT Of A MILLIONAIRE

Who is the prototypical American millionaire? What would he tell you about himself?(*)

* I am a fifty-seven-year-old male, married with three children. About 70 percent of us earn 80 percent or more of our household's income.

* About one in five of us is retired. About two-thirds of us who are working are self-employed. Interestingly, self-employed people make up less than 20 percent of the workers in America but account for two-thirds of the millionaires. Also, three out of four of us who are self-employed consider ourselves to be entrepreneurs. Most of the others are self-employed professionals, such as doctors and accountants.

* Many of the types of businesses we are in could be classified as dullnormal. We are welding contractors, auctioneers, rice farmers, owners of mobile-home parks, pest controllers, coin and stamp dealers, and paving contractors.

* About half of our wives do not work outside the home. The number-one occupation for those wives who do work is teacher.

* Our household's total annual realized (taxable) income is $131,000 (median, or 50th percentile), while our average income is $247,000. Note that those of us who have incomes in the $500,000 to $999,999 category (8 percent) and the $1 million or more category (5 percent) skew the average upward.

* We have an average household net worth of $3.7 million. Of course, some of our cohorts have accumulated much more. Nearly 6 percent have a net worth of over $10 million. Again, these people skew our average upward. The typical (median, or 50th percentile) millionaire household has a net worth of $1.6 million.

* On average, our total annual realized income is less than 7 percent of our wealth. In other words, we live on less than 7 percent of our wealth.

* Most of us (97 percent) are homeowners. We live in homes currently valued at an average of $320,000. About half of us have occupied the same home for more than twenty years. Thus, we have enjoyed significant increases in the value of our homes.

* Most of us have never felt at a disadvantage because we did not receive any inheritance. About 80 percent of us are first-generation affluent.

* We live well below our means. We wear inexpensive suits and drive American-made cars. Only a minority of us drive the current-model-year automobile. Only a minority ever lease our motor vehicles.

* Most of our wives are planners and meticulous budgeters. In fact, only 18 percent of us disagreed with the statement "Charity begins at home." Most of us will tell you that our wives are a lot more conservative with money than we are.

* We have a "go-to-hell fund." In other words, we have accumulated enough wealth to live without working for ten or more years. Thus, those of us with a net worth of $1.6 million could live comfortably for more than twelve years. Actually, we could live longer than that, since we save at least 15 percent of our earned income.

* We have more than six and one-half times the level of wealth of our nonmillionaire neighbors, but, in our neighborhood, these nonmillionaires outnumber us better than three to one. Could it be that they have chosen to trade wealth for acquiring high-status material possessions?

* As a group, we are fairly well educated. Only about one in five are not college graduates. Many of us hold advanced degrees. Eighteen percent have master's degrees, 8 percent law degrees, 6 percent medical degrees, and 6 percent Ph.D.s.

* Only 17 percent of us or our spouses ever attended a private elementary or private high school. But 55 percent of our children are currently attending or have attended private schools.

* As a group, we believe that education is extremely important for ourselves, our children, and our grandchildren. We spend heavily for the educations of our offspring.

* About two-thirds of us work between forty-five and fifty-five hours per week.

* We are fastidious investors. On average, we invest nearly 20 percent of our household realized income each year. Most of us invest at least 15 percent. Seventy-nine percent of us have at least one account with a brokerage company. But we make our own investment decisions.

* We hold nearly 20 percent of our household's wealth in transaction securities such as publicly traded stocks and mutual funds. But we rarely sell our equity investments. We hold even more in our pension plans. On average, 21 percent of our household's wealth is in our private businesses.

* As a group, we feel that our daughters are financially handicapped in comparison to our sons. Men seem to make much more money even within the same occupational categories. That is why most of us would not hesitate to share some of our wealth with our daughters. Our sons, and men in general, have the deck of economic cards stacked in their favor. They should not need subsidies from their parents.

* What would be the ideal occupations for our sons and daughters? There are about 3.5 millionaire households like ours. Our numbers are growing much faster than the general population. Our kids should consider providing affluent people with some valuable service. Overall, our most trusted financial advisors are our accountants. Our attorneys are also very important. So we recommend accounting and law to our children. Tax advisors and estate-planning experts will be in big demand over the next fifteen years.

* I am a tightwad. That's one of the main reasons I completed a long questionnaire for a crispy $1 bill. Why else would I spend two or three hours being personally interviewed by these authors? They paid me $100, $200, or $250. Oh, they made me another offer--to donate in my name the money I earned for my interview to my favorite charity. But I told them, "I am my favorite charity."

[finehoe]

The current recession has stoked deep-seated fears about a declining middle class. A great collective anxiety about such a decline has been floating around for years now, and for good reason. As abundant data make clear, middle class families are being squeezed by stagnant incomes and rising expenses, and have been since the 1970s.

This week, Elizabeth Warren, chair of the Congressional Oversight Panel that is monitoring the TARP bailout funds given to banks, jumped into the debate on the topic. In an interview with The Washington Post, she said: "I believe that the middle class is under terrific assault."

An astute political player, she added: "And I don't want to play this as a capitalism issue." Actually, capitalism has quite a bit to do with the squeezing of the middle class -- but so do other factors, including government policy and deep structural changes in the global economy.

Here is more of Warren's statement on the subject, which provides a good sense of where middle class families stand today: "When we compare middle class families today with their parents a generation ago, we have basically flat earnings -- a fully employed male today earns on average about $800 less, adjusted for inflation, than a fully employed male earned a generation ago. The only way that families could increase their household income was to put a second earner into the workforce, and, of course that's now flattened out because there aren't any more people to put into the workforce. So you've got, effectively, flat income in this time period, with rising core expenses: housing; health insurance; child care; transportation, now that it takes two cars to get everywhere, two jobs to support; and taxes . . . families are spending a lot more on what you describe as the basic nut."

So how did we get here? Today, the top one percent now takes in 16 percent of national income, up from eight percent in 1980. The top 20 percent receive over 50 percent of all income.

This represents a major change from the glory years of the great American post-war boom, when the modern middle class came into its own. Historically, income inequality reached a peak in 1929, just before the stock market crash, and declined all through the postwar boom decades of the 1950s and '60s as progressive tax rates and restrictions on financial speculation limited the income of the upper class. Widespread prosperity in the post-war period raised incomes in the middle and bottom income brackets. But that trend reversed in the early 1970s, and income inequality has again reached the extremes last seen in 1929. By some measures, inequality is now more pronounced than ever before.

What happened?

What changed in the early 1970s to reverse the great postwar income convergence? A number of factors come into play, some more important than others. Three factors stand out: globalization, the emergence of a financial economy, and changes in government policy. Let's look at each one.

Globalization offers capital higher returns, consumers lower costs and employers what is known as "wage arbitrage" -- seeking out the highest value, lowest cost global workforce. Regardless of whether you agree with those who see globalization as the engine of wealth creation or as the force gutting middle class wages, it is capitalism writ large: capital flows to the highest returns.

Capital also flows along the path of least resistance. Contrary to received wisdom, capital doesn't flow to competition -- it seeks to bypass it or find markets which have no competitors. That is, it seeks the maximum risk/return ratio: the lowest risk, the highest return. The ideal risk/return scenario is a monopoly, in which the return can be raised even as the risk is reduced to near zero. A cartel or price-fixing scheme is near-ideal, too.

Though rarely noted, this is a longstanding trait of capitalism stretching back to Renaissance Venice. When trade became less profitable than farming due to rising competition, the Venetian elite stopped funding trade and bought farms on the Italian mainland. As a side effect, Venice ceased to be a military and trading power. But the elite remained immensely wealthy.

In other words, simply seeking out the lowest-risk, highest return can have pernicious consequences -- not just for the citizenry but for the nation.

Another important change in the early 1970s was the increasing flow of capital into the FIRE economy (finance, insurance and real estate), eschewing real-world investments as comparatively unprofitable. Some of this was due to globalization -- steel, for instance, could be produced cheaper in East Asia than in America -- but policies and regulations influenced this capital flow. For example, while the environmental regulations enacted in the U.S. in the 1970s have been a major success in terms of cleaning up the air, land and water we all share, in some cases they raised costs to the point that moving production overseas made financial sense.

The 1970s also saw the first beginnings of a loosening of financial regulations and the growth of credit and financial "innovations," such as securitization and derivatives. Capital increasingly fled real production for finance, which became the key profit-center of corporate America. GM didn't make money manufacturing autos; they made money selling loans to buy their cars. General Electric made more with its GECC finance arm than it did selling light bulbs and generators.

As a result, where finance and banking once generated a mere six percent of total U.S. corporate profits, by the height of the housing bubble in 2006 it was churning out 45 percent of all corporate profits. Indeed, U.S. "financial services and innovations" were the most heralded exports of the nation.

The pernicious result of this rising reliance on financial innovations and real estate was the growing appeal of speculation over the production of goods and services. To mention but one example: the average compensation of the top 10 hedge fund managers in the 2004-6 era was $600 million each. That is not a misprint: $600 million each.

Government policies actually encouraged this sort of risky speculation over actually investing in productive assets. To name but one example: hedge funds were allowed to report much of their speculative income as long-term capital gains, lowering their tax rate to 15 percent. Meanwhile, the tax rate paid by manufacturers of washing machines (for example) was 35 percent. Why invest in jobs, goods and services when playing with leverage and "innovations" was essentially rewarded by government policy?

Where Bill Gates, Michael Dell and Steve Jobs had built billion-dollar companies and fortunes developing real products for the real world, the fortunes made in the last decade resulted in large part from speculation and financial churn. Nothing was produced except an ephemeral kind of wealth that vanished in the meltdown of the very risk-laden "financial innovations" which were heavily touted as "safe" enough for the middle class to join in.

And join in we did, by the tens of millions. Having watched bigshot financiers speculate their way to hundreds of millions of dollars via leverage, the middle class household -- squeezed by flat wages and rising costs -- jumped into the housing and credit bubble with both feet. Millions extracted equity to spend on an upper-middle class lifestyle, while millions more speculated with extreme leverage (no or low down payments) to buy spec houses to flip for quick profits.

Borrowing capital on the cheap to invest in high returns is capitalistic to the core, and the result was the 1990s dot-com stock bubble (fueled by margin borrowing) and the 2000s housing bubble (fueled by low mortgage rates and minimal down payments). But we should note it was government policy which kept interest rates at historically unprecedented low levels.

Alas, the risks -- presented as low in each case -- turned out to be high, and each easy-credit-fueled bubble imploded, wiping out trillions of dollars in middle class wealth. The housing bubble bursting has been far more devastating to middle class wealth than the dot-com implosion of Internet stocks, for the reason that the house has long been the major store of middle class household wealth, not the 401K or stock trading account.

Studies have shown that the top 10 percent of American households own three fourths of all stocks and bonds; most middle class stock and bond holdings are modest. Thus the meltdown of the NASDAQ bubble did not do irreparable damage to middle class household wealth. But the bursting of the housing bubble did do irreparable damage to many household balance sheets. Seduced by cheap, easy credit, middle class households filled the gap between their flat wages and rising bills with borrowed money. While housing was rising, this debt could be offset with rising equity. But once housing popped, then assets receded, leaving only the debt.

Something else changed in the early 1970s: the U.S. government launched a long-term policy of devaluing the dollar. While this is often referred to as "inflation," it is in essence a devaluation of the U.S. dollar. It now takes $486 to equal $100 in 1973. A dollar bought over 300 Japanese yen in 1973; now it buys about 90 yen. The net result of this stealth depreciation of the dollar is that purchasing power has declined even as nominal wages and wealth have increased.

While "inflation" has risen almost five-fold, the cost of many essentials has risen much more than that. Chief among these is health care, which has skyrocketed to 16 percent of the entire GDP. Are we two times healthier than we were a few decades ago? That is hard to pin down, but we certainly pay two times more for medical care, adjusted for inflation.

This tremendous rise in health care costs acts as a hidden tax on the entire U.S. economy, making the nation less competitive and diverting discretionary household income to the health care complex. What's often lost in the current health care debate is that very few are willing to tackle the elephant in the room: skyrocketing costs. Merely shifting the burden from employers to taxpayers is accomplishing very little in the overall picture.

Where do we go from here?

The story of the middle class squeeze is complex, but its effects are not hard to see. Despite an increase in national wealth over the last 40 years, the wages and wealth of most of the U.S. population are flat at best. Owners of capital and the professional class, who make up the top five percent (or less), are the only ones who received the benefits of economic growth over the last few decades.

While some observers point to middle class ownership of stocks and bonds as evidence that this trend benefits the middle class as well as the wealthy, they fail to note that middle class ownership of stocks and bonds is a mile wide but an inch deep. The vast majority of households own less than $10,000 in stocks or bonds, including IRAs.

During the recent speculative mania, elite and middle class interests seem to converge, as everyone appeared to benefit from the real estate bubble except the poor. But this convergence was illusory; while the financial elites and government benefited (via stupendous capital gains taxes), the private-sector middle class was in essence the bag-holder. When the newfound "wealth" in housing and stock market gains vanished, it was middle class wealth which was destroyed en masse.

Both capitalism and government policy have brought the nation to its present financial situation. To blame one and hold the other blameless is missing a lot of history. And just as each contributed to the current recession, so each must be part of the solution.

See full article from DailyFinance: http://www.dailyfinance.com/story/middle-class-squeeze-the-deep-roots-of-an-economic-and-social-t/19189842/?icid=sphere_copyright

[JC]

We made it in NY on less than 2,500 a month for over a year, a family of five mind you.  Everyone was fed, rent and utilities paid on time every month.  We just didn't have anything extra and there was not room for savings or error, in fact saving at that point would have been an error because something like the rent would have had to have been sacrificed.

[JagFan07]

We made it in NY on less than 2,500 a month for over a year, a family of five mind you.  Everyone was fed, rent and utilities paid on time every month.  We just didn't have anything extra and there was not room for savings or error, in fact saving at that point would have been an error because something like the rent would have had to have been sacrificed.

Wow, that is a laudable feat. I consider myself frugal, but you could probably teach me a thing or two.

It's not always what you make, it's usually what you spend.

[JC]

We made it in NY on less than 2,500 a month for over a year, a family of five mind you.  Everyone was fed, rent and utilities paid on time every month.  We just didn't have anything extra and there was not room for savings or error, in fact saving at that point would have been an error because something like the rent would have had to have been sacrificed.

Wow, that is a laudable feat. I consider myself frugal, but you could probably teach me a thing or two.

It's not always what you make, it's usually what you spend.

"make due" takes on a whole new meaning  

We didn't live in the city mind you but rent still wasn't cheap.

[sheclown]

All of us could do with much less than we have now.  Let's just hope we don't find out... how well.

[finehoe]

Middle-skills jobs have lost share in the employment pool in the last three decades, a trend of labor-market "polarization" reinforced by the recession, according to a report released Friday.

"Employment losses during the recent recession were far more severe in middle-skill white- and blue-collar jobs than in either high-skill, white-collar jobs or in low-skill service occupations," according to the report by economist David Autor of the Massachusetts Institute of Technology that was presented at a Washington conference about the future of American Jobs.

The four middle-skill occupations -- sales, office and administrative workers, production workers and operators -- accounted for 57.3% employment in 1979. That portion fell to 48.6% in 2007, and declined to 45.7% in 2009, according to the report.

Male workers have been particularly hard hit, as their educational attainment has slowed and labor force participation declined, according to Autor.

"Perhaps most alarmingly, males as a group have adapted comparatively poorly to the changing labor market," Autor wrote. "For males without a four-year college degree, wages have stagnated or fallen over three decades. And as these males have moved out of middle-skill blue-collar jobs, they have generally moved downward in the occupational skill and earnings distribution."

The employment and earnings of less-educated males have been particularly harmed by fewer middle-skill, blue-collar jobs in manufacturing, according to the report.

"The job opportunities available to males displaced from manufacturing jobs, particularly those displaced at midcareer, are likely to be primarily found in lower-paying service occupations," Autor wrote.

Why have middle-skilled jobs declined? Changes in technology, international trade, and the off-shoring of jobs all play a part.

The report also noted a historic high for the return to skills. In 2009 the hourly wage of the typical college graduate was 1.95 times the hourly wage of the typical high school graduate, up from 1.5 times in 1963. All of the gain took place after 1980.

"This simple comparison of the wage gap between college and high school graduates probably understates significantly the real growth in compensation for college graduates relative to high school graduates in recent decades," according to the report. "College graduates work more hours per week and more weeks per year than high school graduates, spend less time unemployed, and receive a disproportionate share of nonwage fringe benefits, including sick and vacation pay, employer-paid health insurance, pension contributions, and safe and pleasant working conditions."

Copyrighted, MarketWatch. All rights reserved. Republication or redistribution of MarketWatch content is expressly prohibited without the prior written consent of MarketWatch. MarketWatch shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.

http://finance.yahoo.com/career-work/article/109424/labor-force-polarized-as-middle-skill-jobs-disappear-report?mod=career-worklife_balance&sec=topStories&pos=5&asset=&ccode=

[JaxNative68]

I'm still trying to wrap my head around this statement "(minus the two boxes of fudge rounds and the 24-case of beer)".  I'm guessing I would have to do away with my bourbon and rum as well, now that is just crazy talk.  Ok, I know how to bake cookies and brew beer, can anyone assist me in making a still?

[Doctor_K]

My point was (poorly presented,for which I apologize) that things like fudge rounds and beer (ok, maybe not so much the beer, but...) are non-essentials.  You don't need junk food to survive. Stuff like that is a luxury, not a necessity.

Budget and spend the money on other things like veggies, fruits, and other more nutritious food - the staples, if you will.  It's still pretty easy to do that for under $100 a week from even Publix, which I think was Chris' point.

[Bostech]

Speaking personally, I don't know how people live on what the average HHI figure is. You can't get out of Publix for $100 anymore, gas is $3+/gal, insurance costs have risen, etc. I think to be comfortable the real amount needed is probably $80-$100k. How people squeak by on $20k/yr gross with few/no benefits/health insurance, etc., is mind boggling to me. Not fair that the reality of life must suck for so much of this country.

Gee,you need to get your math straight...maybe that's why you cant live on anything less then 80K.
Average person can live nicely around 30K unless you are spoiled and need to have ipad,$150 Nikes and eat out all the time..then good luck.
Many people in other countries survive on 1/100 of that 30,000 so for an American to complain is just being spoiled.

[Dog Walker]

$80K-$100K is good solid upper middle class income - big house, two new cars, kids to college with their own cars. 

On the equivalent of today's $30-$40,( about $7K-$9K then) my in-laws in the '40's, '50's and '60's had a modest house, sent three daughters to state colleges, took camping vacations every year, bought used cars and had a rich life in spite of no luxuries that we take for granted now.  They were children of the Depression themselves and knew how to be comfortable on little. 

Three great, well educated kids too.  I've been married to the eldest for over 40 years and she is still careful with the budget.  (Thanks, honey!)

Bos is right.  There are too many people out there who are measuring their lives by what they don't have rather than what they do have.