There’s a ludicrous debate going on in the States about whether or not $250,000 puts a family in the middle class. Say whhhhhaaaaa? The ever-sensible Dan Gross provides some very level-headed perspective over at Slate. Median family income in America was about $50K in 2007. $250,000 is well FIVE TIMES that. As Gross points out, only about two percent of Americans have incomes of $250,000 and above. That would make the middle class mighty small indeed. Even in the richest regions of the United States – Washington, D.C., Boston, San Fran, and NYC – median incomes range from $60K to $85K – nowhere even close to $250K. And even in America’s richest town, New Canaan, CT, the median income is less than that. So what do you think makes a family middle class?
August 28th, 2008 at 2:59 pm
The top 2% sounds pretty high, but there are reasons for including everyone below maybe $1 million in a broadly defined middle class. Certainly someone earning $250K is upper middle class, probably also rich in some terms, but they’re not among the elite rich.
The top 2% earn an average of $250K, the top 1% about $1.1 million, the top .1% about $5.6 million and the top .01% over $25 million. The point is the escalation from upper middle-class rich to very rich is very rapid. Should 5x median family income define you as rich when the next gradation is over 20x? Or taking another approach, where’s the dividing line? 2x, 3x, 3.333x?
Let’s look at taxes. Many people earning $250K are dual income families reporting wage income. Once you get over $1 million, certainly $5 million, much more is business or investment income. The IRS says it manages to identify and tax 99% of wage income, about 70% of other income. Say a 2-income family has two $125,000 earned incomes. Both of them pay social security on the first $90K (13% if you’re self employed), plus top bracket income tax. Someone with $5 million of investment income pays 0 to social security and reports maybe 70% of the top bracket income, plus is in a position to take advantage of tax shelters and defer capital gains.
I’d argue that the true gauge of wealth isn’t income, but assets. Many people earning $250,000 don’t have a lot of assets aside from maybe home equity and IRA’s. They’re like the regular middle class in being a couple of paychecks from broke. Instead of income, I’d put truly rich at over $5 million or $10 million in non-first home assets.
The couple with 2 incomes and 2 kids earning $250,000 is likely spending most or all of their income on mortgage and living expenses, and have to make spending choices. I think this is a telling dividing line, do you have to think about purchases? If school tuition means keeping an older car, or a domestic vacation instead of Europe, then you’re not truly rich.
I’m not arguing against taxes, or saying that someone earning $250,000 is poor. Just that if we’re talking class, they’re more middle class than rich. I guess the best definition may be Fitzgerald’s “The rich are different from you and me.” A family earning $250,000 isn’t that different in their financial concerns and spending patterns from one earning $60,000. They’re both much more similar to each other than to someone earning $5 million — or someone earning $10,000.
August 28th, 2008 at 7:41 pm
I don’t think a $250K family income makes you rich. If you aren’t rich then you must be middle class, right? You might be able to become rich (which I would define by net worth) with a $250K income through saving, investment and living within your means i.e. leading a middle class lifestyle.
I also question the median income statistics. They always seem low to me. Are they skewed by retirees or self-employed people reporting business losses or something? The median income for my county isn’t enough to cover the mortgage on the median house value after taxes are taken into account.
August 29th, 2008 at 8:17 am
Michael,
Well stated, but I have a few points of exception. First, the escalating argument falls away fairly quickly when you throw in a few folks like Buffet and Gates. Their income gradation is likely many times that of most of even the elite rich; so, in comparison are the other elite not really rich after all?
Second, yes, it is possible that a family of four with a household income of $250k might spend most of their income on their mortgage and other expenses, but how big is that house? What kind of car are they driving? Are they sending their kids to private schools? It’s not just a matter of how much disposable income you have left over, but also a matter of what type of lifestyle you are able to purchase with your income. A self-inflicted choice is not equal to a choice dictated by external factors.
Third, I disagree with the implication that first-home asset value should not be included in a “are you rich” calculation. Again, it is a matter of what type of lifestyle you are able to purchase with your income.
Oh, and so as to not just critique without risking my own answer, I think that a household income of $250k puts a family squarely in the upper class. Super-rich? Certainly not, but well above the great majority of Americans.
Cheers
August 29th, 2008 at 9:52 am
Cliff,
OK, no argument, let’s put $250,000 in upper class in terms of pure numbers, absolutely above the great majority. I guess I’m stuck, the top 2% isn’t the middle in any ranking.
I’d still argue that depending on earned income doesn’t put someone in the upper class in my definition. My idea of upper class is having significant investment income, being in the capital side of capitalism. Class is a funny concept, if you look at percentages its one thing, if you look at lifestyle its another.
Finally, as Sophie Tucker famously said “I’ve been rich and I’ve been poor. Rich is better.”
August 29th, 2008 at 10:32 am
Middle class is more about being able to achieve certain life objectives rather than any absolute dollar income range. I think a middle class family should be able to own a home (not a mega-mansion), keep it in good repair, located in a school district that provides an adequate education, less than an hour commute to work (with affordable transportation options to single driver vehicles), not worry about the cost of health care, able to send two kids though a decent college and launch them without debt while accumulating though pensions, social security and personal savings enough for a dignified retirement. How much is that in annual income? Seems to me that with an income of $100k to $200k a family should be able to achieve a “middle class” lifestyle. A substantial majority of Americans do not earn enough for a middle class lifestyle. This may explain a lot of the angst that many people feel.
September 2nd, 2008 at 4:48 pm
It’s all RELATIVE. Where you live, how you live, what your expectations/definitions are for a “comfortable” middle class life…it is all relative!
Personally, observing from the outside, I do not believe a family with both parents working and 3-4 kids to feed, dress, educate, participate in activities (sports, music, etc.), can have a completely “COMFORTABLE” middle class existance at USD$50-150K. HOWEVER, to their immense credit, many families make it work – one way or the other. The numbers just do not add up.
Another question to contemplate is how hard they work and the incredible personal sacrifices they make – to live at these basic and modest levels of the so-called “middle class”. In my humble opinion, this must be EXTREMELY taxing and such families are probably forced to make very hard decisions every week regarding what event to attend, “can we enroll little Joey into the shockey team”, “ballet classes for Lisa”, etc., etc., etc.
Where does this “NEW” middle class family draw the line and cut expenses…ON WHICH ITEMS DO THEY CUT COST just to survive:
1. Food – choose the cheapest, least expensive foods, and rarely provide or be able to afford organic whole foods, supplements, etc?
2. KIDS – on their kids clothing or extracarricular activities?
3. Family vacations or excursions – Simple example to attend an NFL game – can cost a family of four about $800+ for tickets and food PER GAME?
In my humble opinion, this IS NOT the “AMERICAN DREAM” of living “a better life than one’s parents”…this has become a major STRUGGLE on how to make ends meet despite many Amercians having both spouses work full time ATTEMPTING TO MAKE ENDS MEET AND THEN MAKING HARD DECISIONS ON WHERE TO CUT CORNERS just to make ends meet paycheck to paycheck.
THIS IS NOT THE “AMERCIAN DREAM” for those with families in the “middle class”…it seems to be a struggle for survival to live at barely acceptable levels and still worry about the credit crisis, taxes, and possibly losing their homes, because they took second mortgages on their homes to help supplement an insufficient income level or took a bridge loan for a poss. medical expense, etc., for which they are now paying the price.
This is America’s biggest burdeon…how do you take care of the “middle class” which has supported this country on its back, both in taxation and hardwork, for our great expansion and now has been essentially tossed to the side based on the new economic paradigm of globalization and exceedingly poor leadership by US policy makers.