Tuesday, December 15, 2015

The U.S. Middle Class is Losing Ground

Pew Research Center recently published a very interesting report on what is happening to the middle class in the US.  The report itself freely available online is recommended for reading, however if you do not have time to go through all 74 pages of it, I will share my observations and reaction to it. In 2015, 20% of American adults were in the lowest-income tier, up from 16% in 1971.   
Financial Independence - Household income in the USA 2014 - http://www.niterainbow.com
        For the three person household the middle-income range was about $42,000 to $126,000 in 2014 dollars. Lower income households have incomes less than two thirds of the median and upper  income households have incomes that are more than double the median. Under this definition, the middle class made up 50% of the U.S. adult population in 2015, down from 61% in 1971.      In early 2015 120.8 million adults were in middle-income households, compared with 121.3 million in lower and upper-income households combined. Number of adults living in the middle income households has been steadily declining from 1971 to 2015.  As one commentator put it: American dream used to be a to own a house and two cars, new American dream it is to have a job. 
It is important to start with definitions, as numbers is the name of the game.  Middle class households in the US are those with an income that is two-thirds to double that of the U.S. median household income, after incomes have been adjusted for the household size.
       The income it takes to be middle income varies by household size, with smaller households requiring less to support the same lifestyle as larger households. For a three-person household, the middle-income range was about $42,000 to $126,000 annually in 2014. However, a one-person household needed only about $24,000 to $73,000 to be middle income. For a five-person household to be considered middle income, its 2014 income had to range from $54,000 to $162,000.
Financial independence - Do the Benefits of College Still Outweigh the Costs? http://www.niterainbow.com
        Education: There were no income status winners among educational attainment groups from 2001 to 2015, though the least educated adults (those with less than a high school diploma) and the most educated adults (those with at least a college degree) had the smallest losses. However, from 1971 to 2015, only one educational attainment group did not lose income status: college graduates.
         College educate adults are more likely than others to be upper income, however if in 1971 people with bachelor's degree or more combined represented 92% middle or upper class, in 2015 it is 88%. Degree is lesser guarantee of income in nowadays.
Financial independence -  correlation between income and education in the USA - http://www.niterainbow.com
         The Great Recession of 2007-09, which caused the latest downturn in incomes, had an even greater impact on the wealth (assets minus debts) of families. The losses were so large that only upper-income families realized notable gains in wealth over the span of 30 years from 1983 to 2013 (the period for which data on wealth are available). The wealth gap is growing:

Financial independence - wealth gap between rich and poor in the USA is growing since 1971 - http://www.niterainbow.com
This is how income has been re-distributed in the USA over the last 45 years between rich and poor:
Financial independence - income distribution between the rich and the poor in the USA for the last 45 years - http://www.niterainbow.com
What does it mean? In the practical terms, unless you came from extremely wealthy family it means that nobody is protected.  The well paid manufacturing jobs are now shipped overseas.  Give it another 20-40 years and with no change other well paid jobs will follow them, as it is very hard to be devoted from the real economy and be paid.

For clarity: difference between "median" and "average" The median income refers to the income that is directly in the middle if you figuratively write down all the income in order from least to the greatest. So, in essence, no more than half the population has a greater (or lesser) income than the median income. The average is simply adding all these incomes together and dividing by the number of incomes.

Example: Here are 11 fictional home prices.
The median price of these 11 homes is $105,000. Five homes were lower priced and five homes were higher priced. The average price of these 11 homes is $498,000. That's what you get if you add up all those prices and divide by 11.

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