Pew Study: American Middle Class is Steadily Shrinking
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. Pew Research: American Middle Class is Steadily Shrinking
2. Pew’s 5 Takeaways About the American Middle Class
3. American Middle Class Also Losing Ground Financially
4. Wealth Gap Between Upper, Middle & Lower Incomes
5. Political Implications of the Shrinking Middle Class
Most of us grew up believing that the so-called “Middle Class” represented the large majority of Americans. And for decades, that was true. In 1970, when such data was first collected, middle class Americans made up 62% of all US households.
Yet a recent study from the Pew Research Center found that for the first time in decades, the US middle class fell below a majority in early 2015. According to Pew’s data released earlier this month, the US middle class shrank to just below 50% (49.9%).
The Pew study earlier this year found that upper-income Americans and lower-income Americans combined now outnumber the middle class for the first time in recorded data. The question is whether this is a good thing or a bad thing.
The mainstream media would have us believe that the shrinking of the middle class is a very bad thing. I would argue that the shrinking of the middle class is a function of more people moving into upper-income class status and the aging demographics of our population.
In any event, there are many interesting gems in this latest study from Pew, and I will try to hit the highlights as we go along today. It should make for a very interesting E-Letter.
Pew Research: American Middle Class is Steadily Shrinking
Americans in middle-income households have lost significant ground since 1970, according to the new Pew Research Center analysis of government data. The middle class has long been the country’s economic majority, but Pew’s new analysis finds that’s no longer true.
Meanwhile, the middle class has fallen further behind upper-income households financially, which now hold a larger share of aggregate household income than ever before in the 44-year period examined.
Pew defines middle-income households as those whose annual household income is two-thirds to double the US median household income, after incomes have been adjusted for household size. This amounts to a range of $42,000 to $126,000 annually, in 2014 dollars and for a household of three.
If you make less than $42,000 annually you are in the lower-income group, whereas if you make over $126,000 you are in the upper-income group. Lower-income households have incomes less than two-thirds of the median US income, while upper-income households have incomes that are more than double the median.
As you can see in the chart above, the middle class has been steadily shrinking as a percentage of all households, from 61% in 1971 to just under 50% (49.9%) by early 2015. Lower income households made up 29% of the total, whereas 21% were upper-income households early in 2015.
Obviously, these findings will make for some heated debates in the upcoming presidential election year. Those on the left will argue that the rising lower-income group is not acceptable, nor is the significant increase in the upper-income group. Those on the right will argue that the rapid rise in the upper-income group has been the result of more and more middle-income households doing well enough to advance into the upper-income bracket.
Pew’s 5 Takeaways About the American Middle Class
American Middle Class Also Losing Ground Financially
From 1971 to early 2015, the nation’s aggregate household income has substantially shifted from middle-income to upper-income households – driven by the growing size of the upper-income tier and more rapid gains in income at the top. Fully 49% of US aggregate income went to upper-income households in 2014, up from 29% in 1970. The share accruing to middle-income households was 43% in 2014, down substantially from 62% in 1970.
And middle-income Americans have fallen further behind financially in the new century. In 2014, the median income of these households was 4% less than in 2000. Moreover, because of the housing market crisis and the Great Recession of 2007-09, their median wealth (assets minus debts) fell by a whopping 28% from 2001 to 2013.
Meanwhile, the left and right edges of the income spectrum have shown the most growth. In early 2015, 20% of American adults were in the lowest-income tier, up from 16% in 1971. On the opposite side, 9% are in the highest-income tier, more than double the 4% share in 1971. At the same time, the shares of adults in the lower-middle or upper-middle income tiers were nearly unchanged.
Fortunately, the news regarding the American middle class is not all bad. Although the middle class has not kept pace with upper-income households, its median income, adjusted for household size, has risen over the long haul, increasing 34% since 1970. That is not as strong as the 47% increase in income for upper-income households, though it is greater than the 28% increase among lower-income households.
Moreover, some demographic groups have fared better than others in moving up the income tiers, while some groups have slipped down the ladder. The groups making notable progress include older Americans, married couples and blacks. Not surprisingly, Americans without a college degree experienced a substantial loss in economic status (more on this below).
Wealth Gap Between Upper, Middle & Lower Incomes
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).
Before the onset of the Great Recession, the median wealth of middle-income families had increased from $95,879 in 1983 to $161,050 in 2007, a gain of 68%. But the economic downturn eliminated that gain almost entirely. By 2010, the median wealth of middle-income families had fallen to about $98,000, where it still stood at the end of 2013.
Upper-income families more than doubled their wealth from 1983 to 2007 as it climbed from $323,402 to $729,980. Despite losses during the recession, these families recovered somewhat since 2010 and had a median wealth of $650,074 at the end of 2013, about double their wealth in 1983.
The disparate trends in the wealth of middle-income Americans were largely due to the fact that housing assumes a greater role in the portfolios of middle class families.
The crash in the housing market that preceded the Great Recession was more severe and of longer duration than the bear market in stocks. Thus, the portfolios of upper-income families performed better than the portfolios of middle-income families from 2007 to 2013. When all is said and done, upper-income families, which had three times as much wealth as middle-income families in 1983, had seven times as much in 2013.
In addition to the wealth gap between the income groups and the hit to wealth delivered by the Great Recession, Pew also identified the demographic winners and losers from 1971 to early 2015. Even as the middle class has shrunk, some demographic groups have been more likely to advance up the income tiers (winners), while others were more likely to retreat down the economic ladder (losers).
The biggest winners since 1971 are people 65 and older. This age group was the only one that had a smaller share in the lower-income tier in 2015 than in 1971. Not coincidentally, the poverty rate among people 65 and older plunged from 24.6% in 1970 to 10% in 2014.
Evidence also shows that rising Social Security benefits have played a key role in improving the economic status of older adults. The youngest adults, ages 18 to 29, are among the notable losers with a significant rise in their share within the lower-income tiers.
The economic status of adults with a bachelor’s degree changed little from 1971 to 2015, meaning that similar shares of these adults were lower-, middle- or upper-income during that period. Those without a bachelor’s degree tumbled down the income tiers, however. Among the various demographic groups examined, adults with no more than a high school diploma lost the most ground economically.
Winners also include married adults, especially couples where both work. On the flip side, being unmarried is associated with an economic loss. This coincides with a period in which marriage overall is on the decline but is increasingly linked to higher educational attainment.
Gains for women edged out gains for men, a reflection of their streaming into the labor force in greater numbers in the past four decades, their educational attainment rising faster than among men and the narrowing of the gender wage gap.
Political Implications of the Shrinking Middle Class
As noted above, the state of the American middle class is at the heart of the economic platforms of many presidential candidates ahead of the 2016 election. Policymakers and candidates, especially on the left, are engaged in debates about the need to raise the minimum wage and on how best to curb rising income inequality.
Meanwhile, a flurry of new research points to the need for a larger middle class to provide the economic boost sought by the US and many advanced economies. Unfortunately, the trend has been moving in the opposite direction for over four decades, as illustrated in the opening chart.
In addition to changes in the size and economic standing of the American middle class, its demographic profile has changed significantly in recent decades, and in many ways is a mirror of the broader population. For example, the aging of the country, the growing racial and ethnic diversity, the decline in marriage rates and the overall rise in educational attainment are all reflected in the changing composition of the middle class.
Finally, my thanks to the Pew Research Center for this exhaustive study on the changes in America’s various income groups. I could have written much more on this topic but I’ll have to leave it there for today.
MERRY CHRISTMAS EVERYONE!!
Warmest holiday wishes,
Gary D. Halbert
ProFutures, Inc © 2017