What Does It Take To Be Middle Class?

Tyler Durden's picture

Submitted by Charels Hugh-Smith of OfTwoMinds blog,

By standards of previous generations, the middle class has been stripmined of income, assets and purchasing power.

What does it take to be middle class nowadays? A recent paper, The Distribution of Household Income and the Middle Class, used Census data to discuss what sort of income it takes to qualify as middle class, but reached no firm conclusion: people tend to self-report that they belong to the middle class based on income, but income is not the only the metric--indeed, it can be argued that 12 other factors are more telling measures of middle class membership than income.

In Why the Middle Class Is Doomed (April 17, 2012) I listed five "threshold" characteristics of membership in the middle class:

1. Meaningful healthcare insurance
2. Significant equity (25%-50%) in a home or other real estate
3. Income/expenses that enable the household to save at least 6% of its income
4. Significant retirement funds: 401Ks, IRAs, etc.
5. The ability to service all debt and expenses over the medium-term if one of the primary household wage-earners lose their job

I then added a taken-for-granted sixth:

6. Reliable vehicles for each wage-earner

Author Chris Sullins suggested adding these additional thresholds:

7. If a household requires government assistance to maintain the family lifestyle, their Middle Class status is in doubt.
8. A percentage of non-paper, non-real estate hard assets such as family heirlooms, precious metals, tools, etc. that can be transferred to the next generation, i.e. generational wealth.
9. Ability to invest in offspring (education, extracurricular clubs/training, etc.).
10. Leisure time devoted to the maintenance of physical/spiritual/mental fitness.

Correspondent Mark G. recently suggested two more:

11. Continual accumulation of human and social capital (new skills, networks of collaborators, markets for one's services, etc.)

And the money shot:

12. Family ownership of income-producing assets such as rental properties, bonds, etc.

The key point of these thresholds is that propping up a precarious illusion of consumption and status signifiers does not qualify as middle class. To qualify as middle class (that is, what was considered middle class a generation or two ago), the household must actually own/control wealth that won't vanish if the investment bubble du jour pops, and won't be wiped out by a medical emergency.

In Chris's phrase, "They should be focusing resources on the next generation and passing on Generational Wealth" as opposed to "keeping up appearances" via aspirational consumption financed with debt.

What does it take in the real world to qualify as middle class? Let's start by noting that real (adjusted for inflation) income has barely budged in 40 years, while household income has declined: Soaring Poverty Casts Spotlight on ‘Lost Decade’:
 

According to the Census figures, the median annual income for a male full-time, year-round worker in 2010 — $47,715 — was virtually unchanged, in 2010 dollars, from its level in 1973, when it was $49,065.Overall, median household income adjusted for inflation declined by 2.3 percent in 2010 from the previous year, to $49,445. That was 7 percent less than the peak of $53,252 in 1999.

Here is a chart of the real income of the lower 90% and the top 10%, which by definition cannot be "middle class":


The top 10% takes home 51% of all household income:

Here are my calculations based on our own expenses and those of our friends in urban America. We can quibble about details endlessly, so these are mid-range estimates. These reflect urban costs; rural towns/cities will naturally have significantly lower cost structures. Please make adjustments as suits your area or experience, but please recall that tens of millions of people live in high-cost left and right-coast cities, and millions more have high heating/cooling/commuting costs.

The wages of those employed by Corporate America or the government do not reflect the total cost of benefits. Self-employed people like myself pay the full costs of benefits, so let's "get real" and count *all* costs paid to maintain a middle-class lifestyle.

1. Healthcare. Let's budget $13,000 annually for healthcare insurance. Yes, if you're 23 years old and single, you will pay a lot less, so this is an average. If you're older (I'm 60), $13,000 a year only buys you and your spouse stripped down coverage: no eyewear, medication or dental coverage--and that's if your existing plan is grandfathered in. (If you want non-phantom ObamaCare coverage, i.e. a Gold plan, the cost zooms up to $2,000/month or $24,000 annually.)

Add in co-pays and out-of-pocket expenses, and the realistic annual total is between $15,000 and $20,000 annually: Your family's health care costs: $19,393 (this was before ACA).

Let's say $15,000 annually is about as low as you can reasonably expect to maintain middle class healthcare.

2. Home equity. Building home equity requires paying meaningful principal. Let's say a household has a 15-year mortgage so the principal payments are actually meaningfully adding to equity, unlike a 30-year mortgage. Let's say $5-$10,000 of $25,000 in annual mortgage payments is interest (deductible) and $15-$20,000 goes to principal reduction.

3. Savings. Anything less than $5,000 in annual savings is not very meaningful if college costs, co-pays for medical emergencies, etc. are being anticipated, and $10,000 is a more realistic number given the need to stockpile cash in the event of job loss or reduced hours/pay. So let's go with a minimum of $5,000 in cash savings annually.

4. Retirement. Let's assume $6,000 per wage earner per year, or $12,000 per household. That won't buy much of a retirement unless you start at age 25, and even then the return at current rates is so abysmal the nestegg won't grow faster than inflation unless you take horrendous risks (and win).

5. Vehicles. The AAA pegs the cost of each compact car at $6,700 annually, so $13K per year assumes two compacts each driven 15,000 miles. The cost declines for two paid-for, well-maintained clunkers. Average cost of auto ownership: $8,946 per year. let's assume a scrimp-and-save household who manages to operate and insure two vehicles for $10,000 annually.

6. Taxes. Self-employed people pay full freight Social Security and Medicare taxes: 15.3% of all net income, starting with dollar one and going up to $113,700 for SSA. Since an adjusted gross income (AGI) of $66,193 or more puts you in the top 25% of earners, let's use a base income (self-employed) of $68,000 to calculate our SSA/Medicare taxes: that's about $10,000 annually.

Property taxes: These are low in many parts of the country, but let's assume a New Jersey/New York/California level of property tax: $10,000 annually.

Income tax: Since the mortgage interest is only $5-$10K a year, itemized deductions are less than the standard deductions of around $18,000. One-half of the self-employment tax is deductible, as well as the health insurance and IRA retirement contributions, so that's another $30,000 in deductions. That leaves about $20,000 in taxable income and about $3,000 in Federal tax, and let's assume $2,000 in state and local taxes for a total of $5,000.

7. Living expenses: Some people spend hundreds of dollars on food each week, others considerably less. Let's assume a two-adult household will need at least $12,000 annually for food, utilities, phone service, Internet, home maintenance, clothing, furnishings, books, films, etc., while those who like to dine out often, take week-ends away for skiing or equivalent will need more like $20,000.

8. Donations, church tithes, community organizations, adult education, hobbies, etc.: Let's say $2,000 annually at a minimum.

Note that this does not include the cost of maintaining boats, RVs, pools, etc., or the cost of an annual vacation.

Here's the annual summary:

Healthcare: $15,000
Mortgage: $25,000
Savings: $5,000
Retirement: $12,000
Vehicles: $10,000
Property taxes: $10,000
Other taxes: $15,000
Living expenses: $12,000
Other: $2,000

Total: $106,000

Oops. That's more than double the median household income. OK, let's assume the mortgage is a bit high, ditto the property taxes. Let's say we need "only" $96,000.

Oops again: our tax calculations were based on $68,000 in self-employed net earnings. To earn $96,000, our taxes are going to skyrocket, as we're still paying the full 15.3% SSA/Medicare taxes while we'll jump into the 25% tax bracket when our taxable income exceeds $35,000. Since we'll be paying at least $15,000 more in SSA and income taxes, then we're up to $111,000 as the minimum household income to maintain a middle class lifestyle for two self-employed adults.

An individual earning $111,000 is in the top 10% of all wage earners. A household earning $111,000 is in the 80%-90% income bracket--the lower half of the top 20%. This suggests that the "middle class" has atrophied into the 10% of households just below the top 10%. Households in the "bottom 80%" are lacking essential attributes of a middle class lifestyle that was once affordable on a much more modest income.

Note that this $111,000 household income has no budget for lavish vacations, boats, weekends spent skiing, etc., nor does it budget for luxury vehicles, SUVs, large pickup trucks, etc. There is no budget for private schooling. Most of the family income goes to the mortgage, taxes and healthcare. Savings are modest, along with living expenses and retirement contributions. This is a barebones budget.

If costs had stagnated along with wages, it would take a lot less to maintain a middle class lifestyle. But costs for most middle class essentials have skyrocketed. I was struck by something I read recently in a history of the Tang Dynasty in China, circa 700-900 A.D. When costs are cheap, goods and trade are abundant and prosperity is widely distributed. Once costs rise, trade declines and living standards stagnate. Poverty and unrest rise.

Here are a few charts that illustrate the pressures on the middle class:
Wages have risen modestly while debt has increased enormously.

Social Security taxes have skyrocketed:

So have property taxes: they rose right through the last recession even as property values tanked:

Labor's share of national income has plummeted:

Interest income has fallen through the floor (thank you, Federal Reserve):

The bedrock of Main Street, small business, has cratered:

Net worth of the middle income households has been reduced to a sliver:

As costs have risen faster than incomes for decades, households have been priced out of the middle class. By standards of previous generations, the middle class has been stripmined of income, assets and purchasing power.

 

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knukles's picture

Another speech from Dear Leader and I'll be all OKayed for another week or so.
Hungry, tired, cold, frightened, with no fucking prospects, but happy to be in the arms of my Grand Federal Family.

Die you fuckers.

hedgeless_horseman's picture

 

 

If I get rid of the wife and kids I think I can make it.

Ignatius's picture

The wife is gone and the kid is grown.

It works, but it's lonely. 

hedgeless_horseman's picture

 

 

Oh to be gay with an income-producing partner. 

The new middle class?

Ignatius's picture

I'll send you a pic, HH, if you'll wedge me in the middle.

Janice's picture

They look like twins, except one with long hair.  I have often wondered if attraction to the same sex was a type of self-love...narcissism???

EnslavethechildrenforBen's picture

WHO do you have to do to be middle class

Killer the Buzzard's picture

Is that Phil Leotardo behind Ellen?  I thought he got whacked.

AldousHuxley's picture

Middle Class = WORKING Class

 

0.1% Owners who decide which game to play

1% Rulers who decide rules of the game

10% Enforcers who decide how to execute the game

20% Prized game players

50% Benchwarmers

bottom 50% workers outside the stadium not even allowed to see the game in person

AldousHuxley's picture

Egypt

 

Royalty decides to get buried in a giant 3D triangle

Aristocrats and Advisors decide to build a pyramid next to a river and have citizens work on it instead of some other work such as farming for food

Military guards make sure to keep everyone in line

Skilled tradesmen and builders are allowed to lead other workers and how to get stuff done

Slaves drag stone from one place to another till they die

The old, children, women are kept far away from the pyramid

AldousHuxley's picture

America

 

Royalty decides to get buried with lots of digital 1's and 0's in their bank account in database in switzerland

Aristocrats and Advisors decide to build factories of both goods and services and have men and women work on it instead of some other work such spending time with their their family

Military, NSA, police make sure to keep everyone in line and break up unions, unauthorized protests, etc.

Skilled businesspeople, atheletes, and scholars are allowed to lead the unwashed masses

Wage slaves shuffle pieces of paper one place to another till they die.

The old, children are kept far away from reality with TV.

Raymond K Hessel's picture

High holy fuck!!!  

 

What a shitty premise....puh lease----- 

 

M E D I A N   I N C O M E   <>   M I D D L E   C L A S S

 

You can't look at an economic chart and say here's the middle class anymore than you can find Goths, Bikers, Immigrants, College Grads, Pedophiles..... it doesn't work.  Middle Class is a social demographic, not economic.  Economically, most middle class people fall in the top 10% range of income.  Always has, always will.

 

You're fucktards are talking about the Median Class.

Overfed's picture

Need to get rid of the ugly cunt on the left.

Ignatius's picture

I'm younger and better lookin', but not by much.

knukles's picture

Sorry, but that's upper crust 1%, in this case psychotic bat shit crazy as all hell limousine liberal

kaiserhoff's picture

You forgot bugs in their heads;)

0b1knob's picture

Didn't Ellen drive her previous partner to become heterosexual?  Or crazy?

Agent P's picture

No, we're not homosexual...but we are willing to learn. 

marketheretic's picture

There's a reason why this is the number 1 demographic for new accounts/assets in the financial services industry.  Every branch manager I know is actively looking for the "right" people that can reach the LBGT market!

Sleepless Knight's picture

I'd rather be lonely than miserable.

novictim's picture

So you are saying that a wood chipper is the path to middle class status?

max2205's picture

And that's why the government is buying a lot of bullets

centerline's picture

Nah.  The middle class is being crushed into a lower class in what is becoming a two class society.  The current lower class is going to be crushed into oblivion.

The system always requires slaves.  Those who do not work do not quality as slaves and are more expendable as a result (unless smokin' hot).

AGuy's picture

"Nah. The middle class is being crushed into a lower class in what is becoming a two class society. The current lower class is going to be crushed into oblivion. Those who do not work do not quality as slaves and are more expendable"

So far, the Middle class is the only wage slave, feeding the top 0.1% and the bottom 40% collecting welfare benefits. The Middle class is paying both sides: rich and poor. The poor aren't really slaves since they can choose not to work and simply live off welfare, All they need to do is vote for the people that will continue to provide welfare.  Sooner or later the Middle class is not going to pay as thier jobs are getitng outsourced or eliminated. The middle class is becoming extinct.

At this point the poor are much more important to the politicans (at least the DNC) as they depend on the poor to win elections. The DNC and to a lesser degree, the RNC are waging a war against the middle class, and the middle class is getting slaughtered. The Middle class no longer has the voting power to influence elections.

 

 

Flakmeister's picture

Instead of projecting what you would like things to be, why don't you actually breakdown what demographic votes what....

You know, real research....

You will be suprised at what you might learn...

AGuy's picture

"Instead of projecting what you would like things to be, why don't you actually breakdown what demographic votes what"

Lets see. Who won the last two elections? Do you think the majority voters were taxpayers or takers?  Boomers: do they vote for those that cut entitlements or increase them? Do you think if boomers are given the option to working until 90, or take SS to retire that they will choose the former? Of those without jobs, do they vote for welfare reform? Speaking of Demographics, is the number of people in the workforce increasing or declining? What was the labor force participation rate in 2000 and what is it today? How about the wages, Wasthe median household income in 2004 higher or lower than 2013?

 Its not what I want things to be, its the way they are. If you asked what I want, i want the number of those living on the dole to disappear, but thats not realistic, wouldn't you agree Mr Flak?

"You will be suprised"

What I to be surprised at? I got all wrong, and the economy is booming?, Are you suggesting there are hardly anyone dependant on the govt? Poverty is going to be extinct soon? Please explain how I got it all wrong. Thanks!

 

 

AGuy's picture

Yup, That's exactly the reply I was expecting.

 

akak's picture

Obamameister always seems to get tired when backed into a corner.

Flakmeister's picture

You still missed the point...

See for example:

http://www.democracycorps.com/Republican-Party-Project/inside-the-gop-report-on-focus-groups-with-evangelical-tea-party-and-moderate-republicans/

There are other polls and studies as well..

In other words quit making shit up...

666's picture

Why bother to work and become middle class when you can stay at home, visit friends, fornicate and smoke weed without working thanks to the dole and ObamaCare?

NOTaREALmerican's picture

Re:  Why bother to work and become middle class

Yeah,  actually, why bother to become "middle class".   Isn't the entire point of life to be happy?   You aren't going to get rewarded for "working or being middle-class" except with more bling.

starfcker's picture

Blah blah blah. What a total crock of shit. defining middle class is much simpler than that. the ability to own a home and raise a family. same criteria as to whether a job is really a job.

SilverRhino's picture

Because I like to avoid the idea of being someone else's farm product and avoid being prepared for slaughter?

DosZap's picture

the difference between me and those couples you mention is that I'm not a debt whore.  I'm not chinese but I'm doing like those old dudes you talk about and building something up for the kids.  Got a 15 y/o car, no iGadgets, but I can manage some modest savings.

 

Here is where one needs to be very watchful.

I raised my chidddren to be hard workers,and when they got out of hand on WHAT kind of clothes,etc they HAD to have.(you know because ALL the other kids had them!).I sat em both down,and told them they would still be dressed appropraitely, just NOT in the style in which they had become accustomed to.AND if they WANTED the $100.00 tennis, and $100.00 blouses, then they would GET a job.

Which they promptly did, took my son about 90 days to decide he did not NEED AiR Jordans,etc.My daughter never learned and she has managed to be a debt slave,along with her hubby.

So, in light of that, WE as parents must pass along any inheritances based on Stewardship.My daughter WILL get some, but she will be 55-60yrs old before she sees a dime,unless I see a vast turnaround prior to.Our Chiddddddddddddddren do not automatically deserve our savings, and the fruits of our labors, and frugality simply by vitrtue of  blood.

That is stupidity,and is a tremendous disservice to them.

 

Mercury's picture

In Why the Middle Class Is Doomed (April 17, 2012) I listed five "threshold" characteristics of membership in the middle class:

1. Meaningful healthcare insurance

 

Think you might want to amend that to just: "Meaningful healthcare"

Remember when "homeowner" was big Middle Class metric?

Don't confuse the marker for the underlying, real value.

Ignatius's picture

I'm middle class.  I have a big screen TV.

just-my-opinion's picture

I own my house....but if I don't pay 8,000(city...state...who the fuck knows)....some dumb-ass will take it in the future...and my taxes are not that high...so I know where the GOV sucks....Take...Take...Take....and take some-moar

Getting Old Sucks's picture

Home owners rent their house from the government and government makes sure the "home owner" maintains that house according to code.

Rubbish's picture

6.5 C-3 acres sitting on a lake, taxes $90 a YEAR. Will be loading a bubble top van and seeing the sights and girls. Rest a bit do it again. Health insurance is a hand loaded special round with my name on it should I get terminal. Damned if I'm gonna let some death panel decide my fate.

 

Gold/Silver bitchez, you can deposit my check in the bank.

FredFlintstone's picture

+1000. If I could get the ol lady to see the wisdom in this, I would be doin the same.

Cannon Fodder's picture

I've started thinking about this lately. How depressing that person can work hard and pay off a property/home only to have it taken away if they don't pay rent to the government. Thus in effect you never really own property. How did this every come to be? I also read a story a while back where cities are selling off the late taxes to debt collectors who just come in and take the property leaving you out in the streets. I'm waiting to see people start making it "interesting" to reclaim that property just because of some late taxes on a full paid off property...

Getting Old Sucks's picture

You're late to the party but an arrow up for showing up.