Ladies and gentlemen, the middle-class household that the United States was built upon is slowly, but continuously, disappearing before our eyes.
The backbone of the American economy is disappearing
A recently released report from the Pew Research Center highlighted America's shrinking middle class by examining household income trends In 229 of the country's 381 "metropolitan statistical areas," as defined by the federal government, in the years 2000 and 2014. Pew's analysis wound up covering 76% of the nation's population, thus getting a good representation of shifting income trends within U.S. households.
Pew's findings showed that the share of adults living in middle-income households dropped in 203 of the 229 metropolitan areas examined between 2000 and 2014, with percentage declines of 6% or more noted in 53 metropolitan areas. Nationally, the share of adults living in middle-income households tapered by 4% during this 14-year period. Conversely, the share of adults in upper-income households rose in 172 of 229 metropolitan areas, while the share of adults in lower-income households grew in 160 metropolitan areas.
Pew's analysis merely confirms what many of us may have surmised all along: that the middle-class is shrinking and/or facing some very difficult challenges. Here are four additional statistics, aside from Pew's analyses, which suggest the American middle-class is in trouble.
1. $72,036 annual household income
To be fair, the definition of what entails a "middle-class household" can differ from study to study, or researcher to researcher. For the Economic Policy Institute, the middle class is defined as any household between the 20th and 80th income percentiles.
In 1979, using this criterion, the average middle class household brought in $61,542 annually. By 2011, the last year of EPI's study, middle-class household income had only increased to $72,036, or just 17% overall. By comparison, the annual household income of the top 1% of American households rose by almost 150% over that same timespan to more than $1.5 million. The EPI estimates that if middle-class household incomes had kept pace with the top 1% between 1979 and 2011, they would have had an average annual income of $156,318 in 2011.
The EPI has suggested that the failure of the minimum wage to keep up with inflation has pressured middle-class wages, and further blamed the weakening of unions in America, which have in the past used their bargaining power to command wage increases for skilled workers.
2. 122% debt as a percentage of annual income
Being in debt is another all-too-common component of being in a middle-class household. Based on data supplied by the Federal Reserve's Survey of Consumer Finances, a survey commissioned by the Federal Reserve every three years, middle-class household debt has been on a fairly regular incline as a percentage of household income for two decades.
As of 2013, the debt burden of the average middle-class household stood at 122% of annual household income. Amazingly, this is down from a reading of more than 140% immediately following the Great Recession in 2010, but it's almost double the debt-to-household-income ratio witnessed in 1989 of just north of 60%. Having high levels of debt means middle-class families are likely limited in their ability to save and invest for their future.
3. A median of $20,000 saved for retirement
Based on a survey commissioned in 2014 by Wells Fargo and conducted by Harris Poll that questioned about 1,000 middle-class adults across the U.S. ranging in age from 25 to 75, the median middle-class household had just $20,000 saved for retirement.
Some of the chilling findings of this survey were that about a third (34%) of working middle-class adults weren't contributing anything to retirement savings plans, such as IRAs or 401(k)s, through their employers. A further 55% of middle-class adults surveyed suggested that they were planning to save for retirement later and putting it off for the time being. Also, half of the respondents in this study who were in their 50s stated that they planned to work until they were 80 years old (or older) because they believed they wouldn't have enough money saved to retire comfortably.
4. 19.6% of cumulative U.S. wealth
Lastly, the 2015 Credit Suisse Global Wealth Report demonstrates just how far the mightiest class in American history has fallen. In terms of cumulative wealth, the U.S. middle-class households are still by and large the wealthiest, holding $16.85 trillion in wealth. Japan's middle class is in second, more than $7.1 trillion in total wealth behind. But in terms of the wealth U.S. middle-class households possess as a percentage of the nation's wealth, the U.S. ranks dead last of the 21 countries the Global Wealth Report examined. Within the U.S., the $16.85 trillion in wealth possessed by middle-class households represents just a 19.6% share of total U.S. wealth.
As we previously examined, stagnant wage growth, indebtedness, and the housing price collapse are all reasons why the U.S. middle-class has only 19.6% of total country wealth. However, rising wealth inequality seems to be another major factor. According to CNN, the U.S. has 42% of the world's millionaires, and basically half of all people with $50 million or more in assets.
Two things that desperately need to change
To some degree, a shrinking middle class could be good if we're witnessing movement into the upper class. Pew's report does indeed suggest there were a number of metropolitan areas with an increase in the percentage of adults living in upper-income households. But when taken as a whole, an increase in the percentage of adults living in lower-income households, along with income stagnation and retirement savings stagnation in middle-class households, aren't too encouraging. Two things in particular are in desperate need of change if the middle-class is to ever grow again.
First, the mentality of "I'll save more later" needs to be buried and never unearthed again. When we're in our late teens, 20s, or 30s, it's easy to be tempted by the desire to spend our income on things we want knowing we have 20, 30, or 40 years of working history still in our future with which to save. Unfortunately, choosing to kick the can down the road can be a grave mistake. Time can be the greatest ally of investors, but it can also represent their greatest enemy. The longer you wait to invest, the more time and compounding work against you.
For example, the stock market has historically returned about 7% annually. This means stocks tend to double investors' wealth, assuming they remain invested for the long haul, about once a decade. If you began investing $1,000 per quarter at age 20 and did so for 45 years with an annual return of 7%, you'd have more than $1.24 million upon hitting retirement. If you wait just 10 years and begin putting $1,000 away each quarter at age 30, by age 65 you'd have less than $600,000. Waiting 10 years reduced your nest egg potential by half! That's the importance of getting started as early as possible and not kicking the can down the road.
Secondly, middle-class households need to consider how to invest. Saving and investing for your future early and often is great, but having to pay a portion of what you make in investment gains back to Uncle Sam isn't so great. This is where a Roth IRA would really be a smart move. The income limitations of a Roth IRA don't apply to middle-class households and individuals, meaning anyone in that group should be able to open and contribute up to $5,500 a year ($6,500 for persons aged 50+) in 2016. What's key is that Roth IRA distributions don't count as income, meaning as long as you make only qualified withdrawals, you'll never pay a cent in tax on your investment gains within a Roth.
How is this valuable? In our original example, saving and investing $1,000 per quarter beginning at age 20 resulted in about $1.24 million by age 65. Assuming a 25% federal tax rate and a 6% state tax, this left our fictitious retiree with about $855,000 after taxes. This means he or she parted with roughly $385,000 of gains in taxes. If this money were invested within a Roth IRA, there would be no taxes to be paid and you'd get to keep every cent. That's a big difference!
If middle-class households invest early and often, and they choose smart and efficient ways to invest, it's possible the middle class could be great once more.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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