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Is The Middle Class Really Shrinking

5 January 2016 in Investing Insights

In most countries there are three main income classes: the poor, the middle-class, and the rich. Many people might assume that the upper classes are just lucky because they were born into riches, but that typically isn’t the case.

Studies have shown that only about 30 percent of billionaires and 8 percent of millionaires actually inherited their wealth. The majority of the rich acquired their money over time through hard work, taking risks, and smart investing.1, 2 Many famous billionaires have great habits that you can adopt in your own quest to grow your wealth.

In The Spotlight

The class that tends to get the most attention in the U.S. is the middle class. This makes sense because it has been the largest of the three income groups. The middle class is also the class politicians like to pander to the most, as we are witnessing in this coming US Presidential election.

But are the majority of Americans likely to remain in the middle class with trends of declining household income and rising cost of goods? Maybe not. Studies have shown over recent years that the middle class is shrinking. A recent Pew study verified that the decline continues.

The chart below illustrates the downward trend of adults in the middle class compared to the rising number of adults in the lower and upper class. It’s quite pronounced that the middle class has declined over 10 percent in the last 44 years.

The Middle Class Is Shrinking

Source: CNN Money

The definition of middle class that was used in the Pew study is based on American households earning between two-thirds to two times the median income. To put that in perspective, that would correspond to an income range of $41,900 and $125,600 for a three-person household in 2014.3

The number of adults in each of the three income groups is broken out as follows:4

  • Upper-income: 51 million
  • Middle-income: 120.8 million
  • Lower-income: 70.3 million

Income Trends To Note

The groups that have seen the most upward momentum in wealth since 1971 are senior citizens, married couples without children, and African Americans. Meanwhile, the lower class has consisted mostly of adults who dropped out of high school, completed high school but didn’t go to college, and unmarried men.

The study also found that since 1970, upper-class households have had a 47 percent rise in median income to $174,600. Compare that to just a 34 percent increase for the middle class to $73,400 and only a 28 percent rise for the lower class to $24,074.

What’s also interesting is that the share of American income held by the U.S. middle class has shrunk from 62 percent down to 43 percent. Compare that to the upper class, which climbed upwards from 29 percent to 49 percent while the lower class stayed pretty flat.

Widening Wealth Gap

It’s pretty clear in looking at the chart below showing the median net worth of families in 2014 dollars that the rich have been getting significantly richer in recent years. During the same time period, the middle class has barely ticked upwards and the lower class actually went in reverse.

Widening Wealth Gap
Source: CNN Money

What do the results of this study mean? They seem to indicate signs of economic polarization, increasing income inequality, and social mobility challenges. Rakesh Kochhar, associate director of research at Pew said, “There are fewer opportunities that place people in the middle of the income distribution.”5

Some people attribute the shrinking middle class and increasing lower class to technology and automation reducing the number of available well-paying jobs for high school graduates. High amounts of student loan debt for college graduates could also be contributing to the trends.

The upside of the data is that more people are gaining wealth rather than losing it as the upper class is growing the fastest. The hope is that with the Internet essentially free, more people can utilize the web and lower cost technology to help improve their education and increase the quality of their lives.

Income Trends By State

Where you live can greatly impact how much you spend, save, and invest for retirement.

Here’s a look at which states have seen the largest (dark blue) and smallest shrinkage (light blue) of the middle class between 2000 and 2013.6 Median incomes have also been shrinking in many states after adjusting for inflation.

Income Trends By State
Source: Pew

According to the map, Idaho, Montana, Alaska, Hawaii, West Virginia, Texas, Oklahoma, and Alabama have seen a much more stable middle class. Whereas, Nevada, New Mexico, North Dakota, Wisconsin, Ohio, Georgia, and Vermont all have seen a more aggressive decline in middle class households.

Some highlights from the data are below.

The combination of decreasing median income levels and rising housing expenditures is contributing to the shrinking middle class.

You can see how the combination of decreasing median income levels and rising housing expenditures is contributing to the shrinking middle class.

Politicians Continue To Focus On The Middle Class

With the upcoming Presidential election, there is a lot of campaigning taking place on how to strengthen the middle class. This class has long been the nucleus of America and their votes are widely sought after by candidates on both sides. Some of the challenges the middle class has been struggling with in recent years include sluggish wages and rising costs.

Even though middle-income families are the target of many political campaigns, some are questioning how candidates define the middle class. For example, Hillary Clinton outlines the middle class as households making $250,000 or less, whom she has vowed not to subject to any tax hikes.

The $250,000 household income cap has been a popular definition used by other Democratic policy makers including former President Bill Clinton and current President Barack Obama. The reason some are critical of this definition is the most recent Census Bureau reported that the median American household income is only $53,657 while the top level was at $206,568 or more.7

Stretching The Meaning of Middle Class
Source: The New York Times

Move Yourself On Up The Wealth Ladder

Regardless of where you fall on the income scale right now, you have the potential to increase your own wealth and secure your financial future. According to the Federal Reserve, the wealthiest one percent of Americans own 52 percent of all directly owned, publicly traded stocks in the United States. The top 5 percent own 82 percent of directly held stocks.8

Take charge of your money and discover new ways to invest and work on building wealth with Motif Investing. Our tools can quickly help you get started on the road to achieving your financial goals. Get started today.

 

  1. Frank, Robert, “Did The Forbes 400 Billionaires Really ‘Build That’?, CNBC, September 25, 2012.
  2. FA Staff, “Most Millionaires Self-Made, Study Says,” FA Magazine, June 13, 2013.
  3. Luby, Tami, “Middle Class No Longer Dominates In The U.S.,” CNN Money, December 9, 2015.
  4. Alton, Jon, “The Incredible Shrinking Middle Class,” Seattle Times, December 26, 2015.
  5. Ibid.
  6. Henderson, Tim, “The Shrinking Middle Class, Mapped State By State,” The Pew Charitable Trusts, March 19, 2015.
  7. Covert, Bryce, “$250,000 A Year Is Not Middle Class,” The New York Times, December 28, 2015.
  8. Frank, Robert, “Why The Wealthiest Benefit Most From Dow 14,000,” CNBC, February 1, 2013.
  1. Rod
    13 Jan at 8:41 am

    On the INCOME BY STATE chart by Pew, you have incorrectly labeled Wyoming as Montana.
    Your analysis of the map states, “According to the map, Idaho, Montana, Alaska, Hawaii, West Virginia, Texas, Oklahoma, and Alabama have seen a much more stable middle class.” According to the map Wyoming is the absolute most stable state.

    You may want to correct it. But most people probably don’t care anyway!

    Reply
  2. Thanh Nguyen
    13 Jan at 8:46 pm

    A wonderful article!

    Reply
  3. Rob
    17 Jan at 10:52 pm

    The widening wealth gap graphic is shocking. What a huge difference in the upper bracket, but practically no change for the middle class. I can’t believe the lower class income has gotten worse, especially with all the inflation that’s taken place since 1983. Lots to think about.

    Reply

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