Being middle class used to be a badge of honor. You made enough money to sleep easy, and when you woke up, you’d hear people call your lifestyle the American Dream. You weren’t exactly rich in regard to developed-world standards, but you had a comfortable life filled with occasional luxuries that made you feel like anything was possible with enough perseverance. Those were the days.
Now, the middle class is a tarnished label, most often described as shrinking, disappearing, or dying. Numerous reports warn that if you aren’t improving your economic standing, you’re falling behind. Despite more than four decades as the nation’s economic majority, the American middle class is now matched in number by the economic tiers above and below it, according to the Pew Research Center. In 1971, 80 million adults were in middle-income households, compared to 51.6 million in lower- and upper-income households combined. In 2015, 120.8 million adults were in middle-income households while 121.3 million were in the other two tiers.
“Since 1971, each decade has ended with a smaller share of adults living in middle-income households than at the beginning of the decade, and no single decade stands out as having triggered or hastened the decline in the middle,” explains the report. It also notes the share of adults living in middle-income households has fallen from 61% in 1971 to 50% in 2015. However, the share living in the upper-income tier jumped from 14% to 21% over the same period, nearly double the 4 percentage point increase at the bottom. In other words, it’s not all bad news for members of the middle class, but if you’re not moving up the economic ladder, it’s only a matter of time before you slide down it.
Middle Class income isn’t enough
Building wealth is becoming increasingly difficult if you don’t grow your middle class income. Pew Research Center finds upper-income families had three times as much wealth as middle-income families in 1983. In 2013, this wealth gap more than doubled as upper-income families had seven times as much wealth as middle-income families. Thanks to the Great Recession, upper-income families were the only ones to experience notable gains in wealth from 1983 to 2013.
It’s not hard to see how today’s economic cocktail of debt, sluggish labor conditions, and rising expenses impair the middle class. Before you can even think about a middle class lifestyle, you’ll likely need to go to college, as 11.5 million of the 11.6 million jobs created after the Great Recession went to workers with at least some college education, according to the Center on Education and the Workforce at Georgetown University. In fact, 8.6 million of those jobs went to workers with a bachelor’s degree or higher. For the first time ever, workers with a bachelor’s degree make up a larger proportion of the workforce (36%) than those with a high school diploma or less (34%).
On the other hand, college may also serve as a financial obstacle for the middle class. America has almost $1.3 trillion in college debt, more than all other types of household debt with the exception of mortgages. More than 40 million people have college debt, and the average 2016 graduate carries a college debt load of about $37,000. It’s not unusual to hear about people saddled with $100,000 or more of student loans. Any debt upon graduation can be detrimental in today’s labor market. The Federal Reserve estimates the true 90+ day delinquency rate for student loans is over 20%, far higher than other types of debt.
College debt is only the beginning. If the middle class prides itself of anything these days, it’s their houses and cars. American households have $8.4 trillion in mortgage debt and $1.1 trillion in auto debt. Sometimes paychecks don’t quite cover monthly expenses, so we also have $729 billion in credit card debt. Households with at least some credit card debt owe an average of $15,355.
There’s certainly nothing wrong with wanting nice things, but affordability issues are becoming more evident. New cars are like mini-mortgages on wheels. Experian reports the average loan amount for a new vehicle hit an all-time high of $30,032 in the first quarter of 2016. The average monthly payment for a new vehicle loan also reached a fresh all-time high of $503, while the average loan term hit 68 months. Making matters worse, Bankrate finds the average-priced new car is unaffordable to median-income households in all of America’s 50 largest cities.
Even if the middle class manages to handle their money responsibly by avoiding the consumerism trap, health care is perhaps the biggest financial pitfall. Premiums continue to rise like clockwork at a rate faster than wages, while patients have to shoulder more out-of-pocket costs. Between 2014 and 2015, TransUnion finds the average deductible ($1,278) and out-of-pocket maximum ($3,470) costs rose 13%. Furthermore, in case the middle class wasn’t already depressed about retirement, Fidelity says a couple that retires in 2016, both aged 65, can expect to spend an estimated $260,000 on health care during their so-called golden years, up from $245,000 last year.
The list of expenses eroding the middle class goes on. Company pensions are going the way of the dodo. Rent prices continue to climb higher — more so on lower-end rentals. Child care expenses are rising nearly twice as fast as overall prices, and in 41 states, sending a 4-year-old to full-time preschool exceeds 10% of a median family income. There’s no telling how far the middle class will fall, but you should start reaching for that next step as soon as possible.
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