The American Middle Class Is Among the Richest in the World
If Your Family Makes $52,000 or More Per Year, You Are the Global 1 Percent
When I first penned this article, my goal was to talk about the American middle class, especially in light of the global picture. It was originally published on August 31st, 2012 after my husband and I had gone to dinner with some people in our inner circle. As we enjoyed steak and potatoes, the discussion turned to an area it so often does give our careers in finance, economics, and investing: Money. Specifically, our dining companions were interested in discussing the state of the middle class and middle-class incomes; what has happened to working families, to middle-class jobs, and to the opportunity to enjoy a good standard of living for millions of hardworking American men and women.
Before we revisit that discussion about the condition in which the middle class now finds itself, many of you know that this is a topic dear to my heart. We've discussed class and household income in the United States here at Investing for Beginners. I've also delved into some of the more interesting, advanced data sets on my personal blog for those like to know what is really going on with their friends, family members, neighbors, and coworkers. In those posts, we:
- Looked at the level of annual household income required to be ranked among the top 1 percent of all households in each of the 50 states;
- Discovered how, specifically, the top 1 percent of all households in the United States generate income (wages, business ownership, etc.);
- Examined how much wealth (net worth) it takes to be among the richest 1 percent of households in the entire country;
- Calculated how many people in the United States earn more than $1,000,000 per year;
- Looked at some of the unique data points from the top 1 percent of households in the United States;
- Broke down the median net worth by age group and other characteristics such as education, looking at both the 2010 Federal Reserve data and, later, the 2013 Federal Reserve data;
- Looked at the 1,821,745 households in the United States that have investment portfolios worth $3,000,000 or more;
- Saw where the top 5 percent of households by annual income live on a map of the United States; and
- Talked about the hierarchy of "the rich" in the United States, breaking down wealthy families into five categories.
We even went into phenomenon such as stealth wealth, which is the practice of seemingly ordinary looking secret millionaires to accumulate their money without even their children discovering it. You learned that credit card debt simply isn't a problem for a vast majority of American families — in fact, 1 out of 2 have no credit card debt at all either because they pay their balance off in full or they don't use a credit card in the first place. And that's not all. Nearly 1 out of 3 homeowners have no mortgage. When you get into senior citizens, that number jumps to 2 out of 3.
Despite being a much larger problem than it has been historically, even student loan debt isn't as bad as it seems, at least not on a societal basis. In fact, 2 out of 5 college graduates leave school with no student loan debt, either because of working their way through college, getting scholarships, receiving grants, having an employer cover the cost, or enjoying parental or other support. Of the remaining 3 out of 5 graduates who do have debt, the median student loan is fairly insignificant relative to the massive increase in lifetime earnings—barely above $10,000. (The "average" figure you hear the media so often tout is a case of mathematical illiteracy because it doesn't reflect the ordinary undergraduate leaving school but, rather, results from including medical school and other professional school graduates who drag up the figures in a drastic way after years of specialized study. It is extremely uncommon for, say, an undergraduate liberal arts major to graduate with $30,000+ in student loan debt. People don't talk about this because nobody wants to be the jerk at the table who speaks up admitting they don't owe anything or owe only modest amounts.)
But that is beside the point. We were talking about the middle class. Before we get into that, let's answer an important question: From a purely quantitative perspective, what is the middle class?
Looking at the Middle Class in Cold, Hard Numbers
Using the most recent data published a few years ago, if you and your family live in this country and your household generates a combined pre-tax income of between $2,894.83 and $4,335.75 per month, you are middle class on a national level. Specifically, you are the middle quintile if economist breaks up all households into five groups based on 1/5th of households falling into different income brackets. On a national level, this figure—$2,894.83 to $4,335.75—is true regardless of whether you live in an expensive city like New York or on a farm in Kansas. That is what it takes.
People sometimes like to say this wouldn't hold for a person living in a place like San Francisco when the reality is, the product is different. Yes, $2,894.83 to $4,335.75 wouldn't make you the middle quintile of household income for that municipality, but you are still middle class on the national level because the product you are getting for your money is superior; better weather, access to far more cultural, educational, legal, commercial, shopping, and leisure opportunities, proximity to vast stores of specialized human capital, and more. Despite having lower discretionary income, you aren't poorer than if you were living in a house in the middle of South Dakota. In the case of the latter, you'd walk out your door and not find much. You're simply choosing to spend most of your money on a better location rather than better housing, cars, furniture, or clothes.
From a quantitative point of view, if you make less than that, you are not middle class.
From a quantitative point of view, if you make more than that, you are not middle class.
Sure, you may have middle-class values. You may even feel middle class. You're kidding yourself if you think you are, though, because the middle class is an economic distinction that breaks out the income necessary to fall into the center quintile based on the distribution of household income.
The Recent Struggles of the Middle Class
One of the interesting things is that some people at the table talked about how it is, "impossible to raise a family on a middle-class income these days, especially compared to the 1950s or 1960s". Which is both nonsensical and ignorant. Yes, a greater share of productivity gains has gone to the wealthy, which does not strike me as particularly ideal for a society. However, the reality is, expectations have increased for the middle class. To put it more directly, you could replicate a middle-class income of the past, more or less, on a present middle-class income if you really wanted to do so. In other words, it's a nonsensical talking point that might sound emotionally convincing but lacks accuracy and intelligence.
- Median square footage space in a "middle class" home has skyrocketed during the interim timeframe, expanding by more than 50 percent. That requires more electricity, more carpet, more maintenance, more furniture, and higher property taxes to maintain. Additionally, the quality of the home itself in many regards has increased.
- The typical American family now demands two cars instead of one, which was the expectation in the past. That means more interest expense to banks on the car loan. It means more sales tax at the time of purchase. It means more property tax each year. It means higher automobile insurance premiums. Additionally, these cars are of exponentially higher quality than the cars of the past. You are far less likely to die when driving in one should you get in an accident due to superior engineering and materials. You have a myriad of entertainment and comfort options ranging from heated seats and navigation to integrated, quality sound systems and power windows.
- The typical American family no longer has a single television set, it now has more than three, spread out throughout the house, many of which have video game consoles, DVD players, and Apple TVs hooked up to them, generating satellite or cable bills, rental expenses, and online recurring subscriptions.
- The typical American family now considers air conditioning an absolute, non-negotiable necessity rather than the exceptional luxury it was. Even things beyond consideration by most people — electricity and running water — had not reached all households by the 1950s.
- Individual members of families, even among the poorest households in the United States, have multiple iPhones and other smartphones, resulting in four-figure annual billing charges per person, instead of a single landline that rings into the home.
This is just the tip of the iceberg. The Federal Government has been tracking these sorts of things for a very long time. It's right there in the economic data, black and white, crystal clear. Healthcare was a far cry from what it is today—have a heart attack, for example, and your physician would give you a glass of water, some aspirin, and tell you to rest in a hospital bed.
In fact, if a member of the typical American household complaining about conditions today could go back in time and live a middle-class lifestyle during that earlier era, he or she would be scrambling to return to the present as the reduction in living standards would likely be too much to bear. Even despite the bottom, low-skill wage group receiving no increase in inflation-adjusted income, they're still better off than they were in a material way.
What makes all of this even worse is the fact that assortative mating has been exerting a powerful influence on household income levels and childhood outcomes, which changes social mobility opportunities. It is not considered polite to talk about outside of academic circles (look at the blowback some on the staff of Harvard University got in recent years) but there is no doubt that the fact the top half of society waits to have children after getting married, while the bottom half of society increasingly has children out of wedlock and fails to get, and stay, married at anywhere near the same rate, creates an enormous outcome differential. It has to do with the same reason Wal-Mart is able to out-compete smaller stores: Economies of scale. When you have two adults effectively merged into a single economic unit, you get scale (in investing talk, you reduce operating leverage). You spend a lower percentage of income on housing, food, insurance, and transportation. You have an adaptive labor advantage in that if one of you gets laid off, the other can pick up more hours or get another job. You have a built-in childcare advantage that means less money going to third-party babysitting or daycare facilities. Suddenly, you have more free money to put into a Roth IRA or direct stock purchase plan. Suddenly, that's more money compounding for you, producing dividends, interest, and rents.
It's quantifiable. One recent study I read demonstrated the results are so extreme, that even when household incomes are comparable, having two parents in a households results in the child outperforming his or her peers to the point it is equivalent to the parents making an extra $20,000+ per annum. In economics, that is a big deal. It's the closest thing to a panacea society has ever developed, leading to the old economic observation that marriage was the original anti-poverty program. To be completely frank about it, one look at the data and it's easy to see why so many respected sociological and economic professors have commented that a lot of the struggles of the middle class could be alleviated if the group simply adopted the marriage and child-rearing practices of the upper class, who no longer condemn deviation for fear of appearing judgmental. It's not a popular message but math is math; nothing changes the unfortunate and inescapable conclusion that more than a few middle-class struggles are tied to the out-of-wedlock birth rate. Good luck winning an election on that campaign slogan, though. Thus, the topic remains relegated to Ivory Towers and think tanks.
Do not misunderstand me. Acknowledging this does not justify complacency in making sure the rising tide of productivity gains raises most household boats, to borrow a metaphor, but only that it's intellectually dishonest to compare the middle-class today with the middle class of yesteryear. Struggles and all, the middle class of today is positively pampered compared to past generations. That is a fact. No matter what narratives you've been fed, or how you may feel about it personally, it doesn't change reality. We're not living in some dystopian economic system. Life has never been better when measured by the absolute standard of living enjoyed by the greatest percentage of households. You and I are living at the apex of a great civilization.
Why Is the Middle Class So Miserable? There Are Several Reasons
Given the facts, why are people so unhappy despite enjoying the greatest mass affluence in all of human history. There are a handful of reasons.
First, people don't really understand or remember what the past was like. Let's take one example: Time.
People complain about having less time than ever. It's a lie. A factual non-truth. A misperception. The typical American has 5 more hours of free time per week than their parents did, and 40 more hours of free time per week than their great grandparents did, thanks to modern productivity miracles such as washing machines and dryers, dishwashers, refrigerators, microwaves; improvements in lawnmowers. Even things like advances by chemical and textile companies in the materials used to construct garments save time. The most popular dress shirts for managers and executives at places like Brooks Brothers is the non-iron variety, which can be taken out of the dryer and look like they are freshly pressed. Men's socks no longer require garters to be held up, meaning less time to get ready. All of these tiny, laughable, seemingly insignificant things add up.
The tragic part? When you look at what the typical American does with his or her time—that 40 hours more per week he or she has compared to grandma and grandpa—the answer is clear in all of the research: They watch television. Literally. More than books, more than physical activities, when you add in Internet shows and DVR recordings, the average American consumes an incredible 40 hours of television per week. (It isn't an accident that television viewing is inversely related to success in life by most measurable metrics. When you break down the viewing demographic statistics, high-income households are far less likely to watch more than an hour of television each day than all other income groups, spending the time disproportionately reading, exercising, volunteering, or pursuing a hobby.)
Another reason for the middle-class en huit is the rise of mass media combined with an entitlement culture. Americans now demand more. They believe they are entitled to more. And, honestly, provided it is done in a way that doesn't destroy the greatest wealth building system in global history, I think that's a good thing. That is the reason life keeps getting better and better. We should all want to someday get to a point where everybody can afford Elysium-style medical intervention. This entitlement is why we don't think anything of it when every grocery store we visit is air conditioned or nearly everyone we know is carrying what amounts to a supercomputer around in his or her pocket.
The problem? There is a lot of evidence from behavioral economics that indicates people measure their success and affluence relative to what they see. A generation ago, you didn't experience much beyond your own world. Now, someone earning a middle-class income can witness an endless parade of others their same age earning $10,000 a month, $50,000 a month, or $1,000,000 a month, splashed across hundreds of cable channels and innumerable Internet sites as they sit at home in their pajamas. Marketing is targeted, tailored, and delivered in ways you don't even realize influence your desires. This includes practices such as paid product placement in television shows aimed specifically at the demographics of the show viewers; a never-ending stream of messages manipulating your subconscious by telling you that you can be happy if you only buy this product or service; you can be loved if you only have this type of car or wardrobe; you will get the respect of your peers if you only drink this brand of whiskey or vodka. The rich and successful amass millions of followers on Instagram and Twitter. The measuring metric shifts in your mind whether you realize it or not.
For those who remain insular in their networks, this can also create a skewed sense of reality. Honest to God, on the same day this article was originally written back on August 31st, 2012, I had someone tell me that a $20,000,000 net worth producing $80,000 in passive income per month was middle class. That is deranged. When you exist in a socioeconomic bubble, it's an understandable temptation to compare yourself to those in your immediate vicinity rather than the larger population of which you are a member. It's a case of, "out of sight, out of mind".
Lest you be tempted to pick on the rich, consider that even the middle class does this. A middle-class household in the United States earning $52,000 per year is in the top 0.97 percent of household income in the world. That is, they are literally, the global 1 percent. To a vast majority of the planet, their concerns sound as ridiculous as a billionaire complaining about the price of exotic wood for a yacht.
Despite the Challenges of the Middle Class, You Can Still Build Wealth and Achieve Financial Independence
The moral of all of this: Even though there are challenges that seem to hit the middle-class lifestyle harder than other demographics—education costs have risen, healthcare costs are out of control—if you are struggling with saving or investing money, or you feel discouraged about where you are financially, gain some perspective because it can help you take a step back and realize that, by virtue of living in the United States, you have a much better statistical probability of being vastly more successful than most of the people alive at this moment; that we all won the lottery when it comes to being alive right now, at this time, in this country. Short of an unexpected medical disaster, there is no reason to reach the end of life without achieving financial independence, even on a middle-class income. It may not be socially popular to admit, but it really does come down to behavior and trade-off decisions that are within your power. It is entirely possible to build an $8,000,000+ portfolio, given enough time, like the near-minimum-wage earning janitor Ronald Read.
To paraphrase Bill Gates, it isn't your fault if you are born poor in America. It is your fault if you die poor in America. No matter how many people want to coddle you and appeal to your base instincts to justify failure, it's the truth. To the extent events can be controlled, your life is the sum culmination of the past decisions you've made and your reaction to the things that have happened to you. Every single day, every single decision you make takes you one step closer or further away from your goals. Those decisions are often inter-connected, too. For example, if you want to compound your net worth to a high level to leave a huge fortune to your future children and grandchildren, every cigarette you put in your mouth takes you a step further away from that goal. It costs a lot of money that could be compounding for you. It takes days off your lifespan, which means less time to compound in a tax-efficient way before using things like the stepped up basis loophole and estate tax exemptions.
This doesn't mean we, as a civilization, should be complacent. We need to solve issues of affordability in certain areas of the economy such as housing, education, and healthcare. What I want for each of you is to have a good life where money isn't a worry. That is still well within your power. You can retire wealthy. You can enjoy control over your time. It requires discipline, and focus, but so does anything worth having in life, whether that is being in shape and maintaining a healthy weight or learning to play a musical instrument. The rewards are worth the effort so I encourage you to get started. You can do this. It won't necessarily be easy, and it won't happen overnight, but millions of people, myself included, have done it. By changing your behavior, you change your destiny. It all comes down to how you allocate your two buckets and, as it pertains to money, which of the two levers you are pulling.