Sep 19 2012

Defining The Middle Class

Posted by Steve Ross in Policy

Once upon a time home ownership was a prime indicator. Now its a bit more complicated.

There’s been a lot of talk about the middle class, and entitlements, and who benefits from what. Newscoma reminded me I wanted to talk about this yesterday. The notion that a household income of $200,000+ makes you “middle class” is not only misguided, its not supported by the facts.

Being the research goob that I am, I decided to look at what family income looks like these days, and break that down into something useable. Its important to understand where people are, and why our concepts of “middle class” have shifted to something that isn’t anywhere near the middle.

Middle Really is the “Middle”

Below is a chart that shows family income broken into groups of 20% each (quintiles), plus the top 5%. The rest is pretty self explanatory. Data comes from the US. Census. Median Family size is 3.

Now, let’s really look at these numbers.

The bottom quintile averages about $15,000/yr…or less than poverty for a family of 3 ($19,000/yr). The upper limit of this quintile is 140% of poverty, which means you’re less than 1 paycheck away from falling into poverty. So 20% of all the earners in the nation are at or near the poverty level and most likely qualify for benefits from the US government (TANF, SNAP, Medicare/Medicaid, etc.). In addition, the majority of these families have only one income earner and at least two children. A tiny fraction of these earners have a college degree.

It should also be noted that earners making the current minimum wage, $7.25/hr, working 40 hours a week for 52 weeks gross $15080/year or 135% of poverty for a household of 1. Also, the current poverty thresholds assume that 30% of income will be spent on housing. Current averages show that 45%-50% of income is spent on housing throughout the bottom 3 quintiles of earners.

Th second quintile is the working class. The average income is 200%, or 2 times the poverty level. The top limit of the working class is 250% of poverty. Everyone in the working class is about 1 paycheck away from falling into poverty. It is important to note that virtually no one in the working class qualifies for government assistance, including TANF child care credits. This means that if they have an infant or toddler, nearly $7,000 of their income is consumed by childcare, which puts additional pressure on their financial situation.

The third quintile is the middle class. The average income is 3 times the poverty level and tops out at 4 times poverty. The majority of these families have at least 1 income earner who has a college degree. Depending on the debt load of the family they may be as little as 2 paychecks away from poverty (1 month) or as much as much as 3 months.

So what we’re seeing so far is that 60% of all families in the United States are 3 months, or less of earnings away from poverty.

I don’t think I need to cover the top two quintiles. Unless earners in those classes have massive debt (which isn’t out of the realm of possibility) or are in an industry that is bleeding jobs, they’re likely safe. Both typically have two earners with college degrees, and options should they lose employment for a while. Its not that these earners necessarily have it easy, but claims of poverty should fall on deaf ears. More often than not, financial concerns don’t impact their ability to live, but their ability to maintain the life they’ve built. Two very important distinctions.

While earners making up to $140,000/year may qualify as Upper Middle Class, its important to understand that they represent the top earners in the United States. Only 11% of earners make more than $150,000 and just over 5% of families in the US make more than $200,000.

$200,000+/year isn’t middle class. Its wealthy, even though it may not seem like it to the people making that kind of money.

In order to make policy that creates conditions where more people reach that threshold, we have to have our facts straight. Based on the discussions by both Presidential candidates over the past few weeks, we don’t have a realistic understanding of that yet.

Edited to Add: Per a request in the comments, the same year by Household Income.