Why The Middle Class Is Disappearing
Over the last 50 years housing, medical and education costs have increased 2X to 7X while median income has barely increased at all.
By David Grace (Amazon Page — David Grace Website)
The Shrinking Middle Class
As shown in the above chart, over the last fifty years basic expenses of housing, medical insurance and college have grown by between two and almost seven times while gross median household income has increased by only a paltry 15%.
The Costs Of Educating A Child Are Climbing Much Faster Than Wages
As we all know, it costs a great deal of money to raise a child from birth through graduation from college.
The Cost Of Entry Into The Middle Class: Food, clothing, housing, medical care, etc. through the first eighteen years of life, plus food, transportation, internet, phone, medical care, housing, clothing, etc. from age eighteen through college and graduate school plus tuition and books through college and graduate school.
Family Wealth
The greatest factor in whether or not a child can get a college degree is the wealth of his/her family. If the family has unlimited wealth none of these costs are a factor. As the family’s wealth declines the brilliance, determination, diligence and energy of the individual can, to some degree, compensate for the family’s financial shortfall.
To put it differently, if John Smith’s parents are multimillionaires he won’t need to work summers, get a part-time job during the school year, qualify for a scholarship, etc. in order to graduate with the degree he needs to embark on a career.
The Child’s Ability To Pay His Own Way
If John is brilliant, brimming with energy, supremely dedicated, incredibly hard working, depending on the cost of living and cost of college, he may still be able to get the education he needs to have a career in spite of his family’s limited wealth.
But the poorer Smith’s family is and the more tuition, dorm, food, books, clothing, transportation, medical, dental, personal care items etc. cost, the more brilliant and energetic Smith will need to be to get that degree.
At some point the family’s poverty compared to the costs of living and costs of education through age 22 or 23 or 26 reach the point where even a genius with a superhuman work ethic will be unable to cover the gap in the costs of getting a college or graduate school education.
Family Wealth Vs. The Child’s Brilliance & Determination
Consider the above graph with Family Wealth + Student Loans on the vertical axis and the child’s brilliance, determination, mental toughness, and physical endurance on the horizontal axis.
At some point the family’s wealth will be so high that any child with the minimum intellectual ability to complete the course work will be able to graduate.
At the other end of the scale, the family’s wealth will be so low and the costs so high that no matter how brilliant and determined the child may be, almost no one will be able to come up with the money needed to complete the six, seven or eight years of post-high-school course work.
Connect the line between the John Smith who has a low level of brilliance, determination, and energy but whose family is wealthy enough to fully fund his living expenses and educational costs and the John Smith who is brilliant and able to work while still attending classes and getting good grades but whose family cannot afford to pay a large enough portion of his living and college expenses for him to be able to graduate.
This is the “American Dream” line.
Above this line, talented children have the opportunity to obtain a successful, prosperous middle-class, upper-middle-class life. Below it, talented children do not.
To Stay In The Middle Class Children Need Post-High-School Education
Most good jobs require a college degree for a candidate to even be allowed to submit an application. Most young people can’t get a job that will pay a middle class to upper-middle-class income without a college degree.
With the increases in expenses vastly outpacing increases in earnings, the children of families in the bottom 60% of the population are increasingly unable to get the education they need in order to get a job that will keep them and their children in the middle class.
Year by year, people are falling out of the middle class and when they do they take their children and their grandchildren with them.
The American Dream Line Is Moving Higher And Higher
Unfortunately, after adjustment for inflation, over the last fifty years huge increases in the fundamental cost of living and costs of education have far exceeded wage growth.
This massive increase of expenses in relation to wages has moved this American Dream Line higher and higher, trapping more and more Americans in quicksand poverty and paycheck-to-paycheck lives.
I’ve put the numbers and calculations I’ve used in a section at the end of this column.
A caution: the numbers are approximate, general, ball park, NOT precise, specific, or exact. They are meant to give a good idea of what’s happening, the trend, but are not intended to be exact.
In order to compare apples to apples, all number have been adjusted to year 2000 dollars. So the actual median income in 1970 is expressed in year 2000 dollars and the actual median income for year 2019 is similarly expressed in year 2000 dollars, as are all the other numbers except where specifically noted to the contrary.
The American Dream Line Is Getting Higher & Higher
Let’s imagine two people, John Smith living in 1970 and earning the 1970 median income expressed in year 2000 dollars and Bill Jones, living in 2020 and earning the 2019 median income expressed in year 2000 dollars.
Smith Vs. Jones Disposable Income
Smith’s 1970 monthly take-home pay in year 2000 dollars is about $2,500/month and Jones’ 2020 monthly take-home pay in year 2000 dollars is about $2,800/month. Note that after adjustment for inflation, in 2020 Jones’ take-home pay is only $300/month greater, about 12% higher, than Smith’s was in 1970.
But, where inflation-adjusted income has increased by only a small amount, between 1970 and 2020, housing costs have increased about twice as fast as inflation; college costs have increased about 2.75 times as fast as inflation, and medical insurance costs have increased about 6.75 times as fast as inflation.
On top of that, Bill Jones has additional necessary expenses of at least $275/month for internet access, cell phone services, cable TV, prescription and nonprescription drugs and personal nutritional and care products that John Smith did not have.
After rent (at the 1970 era standard of 30% of gross pay) and medical insurance (assuming his employer pays 80% of the cost), John Smith has about $1,535 left to pay for food, utilities, clothes, etc. and savings to create a college fund for his child.
After rent (about double what it was in 1970), medical insurance (assuming his employer pays 80% of the cost), and additional expenses (cell phone, internet, etc.) Bill Jones has about $535 left to pay for food, utilities, clothes, etc. and savings to create a college fund for his child.
Because of new 2020 expenses and faster than inflation increases in rent and medical insurance costs, 2020 Bill Jones has about a thousand dollars per month less money available to cover food, clothing, utilities etc. than 1970 John Smith, leastwise less money available to pay college costs that have almost tripled from what they were for Smith in 1970.
Smith Versus Jones College Costs
If John Smith’s child was starting college in 1976, a dorm room, food, and tuition would cost about $7,000/year or someplace between $30,000 and $35,000 including books or about $250/month for ten years. That’s about 16% of the money Smith has left over after rent and medical insurance.
Bill Jones knows that three years before, in 2017, a dorm room, food, and tuition cost about $20,000/year or someplace between $80,000 and $90,000 for four years of college including books.
If Bill Jones followed the same plan as John Smith he would have to save over $8,000/year, $670/month, for ten years.
So, we have to ask, how much would Bill Jones have to earn in order to put himself in the same financial position to build a college fund for his son in 2020 as John Smith was in 1970?
After saving $250/month in a college fund, John Smith had $1,535 — $250 = $1,285 left over for other living expenses.
How Much Would Jones Need To Earn To Have The Same Disposable Income As Smith?
So, to be in the same position, Bill Jones would need $1,285 + $670 remaining after rent, medical care and new 2020 expenses. After adding in rent, medical, etc. he would need a total take-home pay of $4,220 or a gross pay of $5,792/month or a gross salary of $69,500/year in year 2000 dollars instead of his actual gross median-income salary of $42,500 in year 2000 dollars.
$69,500/$42,500 = 164%.
In order for Bill Jones to be in approximately the same position in 2020 to create a college fund for his son as John Smith was in 1970, Bill Jones would need to earn a salary about 64% above the median income where John Smith’s salary was equal to the median income.
Jones Also Has Much Higher Finance Charges Than Smith
Also, an additional cost I didn’t include is credit card interest. In 1970 most consumer purchases were financed by retail lenders at an interest rate of 12%-15% with a payoff period of three years or less.
In 2020 almost all consumer purchases are financed through credit cards with interest of 20%-25% compounded monthly. The average debt of the households in the bottom 20% is over $11,000 which translates to an interest expense of over $200/month. This makes the financial position of the bottom half of the households in this country that much worse.
What Do All These Numbers Mean?
They mean that after adjusting for inflation and after saving the same percentage of college expenses, a family in the 2020s needs have at least two-thirds more gross income to end up with the same amount of disposable income as a family in 1970 BUT median gross income has only increased by about 15%.
That and the approximate tripling of the cost of a college education are two of the major reasons why the American Dream Line has been moving higher and higher and why more and more Americans are trapped in a no-man’s-land of paycheck-to-paycheck lives and quicksand poverty with no chance of escape.
By David Grace (www.DavidGraceAuthor.com)
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THE NUMBERS I’VE USED
College Expenses
In 1976 the average annual cost for tuition, dorm room and food for a university student was about $2,600. In year 2000 dollars that would be $6,960.
By 2017 that 1976 $6,960 in year 2000 dollars had increased to $19,218 in year 2000 dollars or an increase of about 276%. If the starting point was the 1970 cost instead of the 1976 cost the percentage increase would probably have been at least 300%.
John Smith’s College Fund Numbers
At $6,960/year plus the cost of books times 4 years that’s at least $30,000. Over ten years that’s $3,000 per year or $250/month for the 1970 John Smith family in year 2000 dollars. That’s $250/$1,543 disposable income = about 16% of disposable income that John Smith would have saved in a college fund.
Bill Jones’ College Fund Numbers
At $19,218/year plus the cost of books times 4 years that’s at least $80,000. Over ten years that’s $8,000 per year or about $670/month that the 2020 Bill Jones family would have to put in a college fund.
If Bill Jones was also saving 16% of disposable income like John Smith that would translate to a take-home pay of about $4,190 plus rent, medical insurance and additional expenses, raising his take-home pay to $6,455 or a gross pay of about $9,560 or $115,000/year or an increase of about 270%.
Major Medical Insurance Costs
In 1970 the annual cost of high-level medical insurance plan expressed in year 2000 dollars was about $2,040.
In 2019 the annual cost of a similar medical insurance plan, again expressed in year 2000 dollars, was about $13,800. After adjustment for inflation that’s an increase of about 677%.
If a worker was paying 20% of the cost of his medical insurance, in 1970 he would be paying about $32/month in year 2000 dollars.
In 2019 he would be paying $230/month in year 2000 dollars.
Housing Costs
In 1960, adjusted for year 2000 dollars, the median home cost was $58,600.
In 2000, the median home cost was $119,600.
Adjusted for inflation, in 1950 the ratio of the average cost of a home to the median household income was about 1.85 to 1 meaning that the average home cost about 185% of a year’s median gross income.
In 1960 that had fallen to about 180% of a year’s median income.
In 1970 it fell again to about 170% of a year’s income.
In 1980 the cost of an average home rose to about 250% of a year’s median income.
In 2000 it has risen to about 285%.
By 2017 it had climbed to 325% of a year’s median income.
Between 1970 and 2017, after adjustment for inflation, the cost of housing had increased from about 1.7 times the median income to about 3.25 times the median income, or, an increase of about 190%.
A house that cost $925/month (in year 2000 dollars) in 1970 would have cost about $1,760/month in year 2000 dollars in 2017.
Median Household Income
In 1960, the median household income, adjusted for year 2000 dollars, was $32,500.
The median household income for 1970 (in year 2000 dollars) was about $37,000. That’s a gross income of about $3,083/month and a take-home pay of about $2,500/month.
In year 2000, the median household income was $40,550.
The median household income for 2019 (expressed in year 2000 dollars) was about $42,500. That’s a gross income of about $3,540/month take-home pay of about $2,800/month.
2019 median income $42,500 minus 1970 median income of $37,000 = $5,500/$37,000 = 15% increase in median income between 1970 and 2019, all numbers expressed in year 2000 dollars.
$2,800 take-home pay minus $2,500 take-home pay = $300. $300/$2500 = about a 12% increase in take-home pay over the fifty years between 1970 and 2020.
New Necessary Expenses
In the sixties and seventies there was no internet, no cell phones, no cable TV, no daily Claritin, no Nexium, no Lipitor, no fish oil, few dishwashers so no expensive dishwasher soap, etc. etc.
In 2019 people are paying at least $200/month for internet access, cell phone services and cable TV, none of which would have been an expense in 1970.
In 2019 the worker would be paying prescription drug co-pays, nonprescription drugs and personal care costs (sun block, dental floss, deodorant), dishwasher soap, nutritional supplements, etc. of at least $75/month more than the 1970 worker.
Rent In 1970
In 1970 the general rule was that you should be spending about 30% of your gross pay on rent so 30% X $3,083 = $925/month for rent in 1970 for someone earning the median income as expressed in year 2000 dollars. With costs increasing by 190% rent would increase to about $1,760 in 2020.
Disposable Income Calculations
1970 Worker: $2,500 minus $925 rent, $32 medical insurance = $1,543 to cover all other expenses of living. (All in year 2000 dollars)
2019 Worker: $2,800 minus $1,760 rent, $230 medical insurance, $200 internet/cell phone, $75 personal care products & prescriptions = $535 to cover all other expenses of living. (All in year 2000 dollars)
After all costs and income (expressed in year 2000 dollars), the 2019 worker making the median income will have about a thousand dollars per month less available to pay his/her expenses of living than the 1970 worker.
This short fall will be made up with credit card borrowing which in turn will saddle the worker with interest charges of 20% — 25% compounded monthly.
So, with vastly less disposable income the 2020 worker earning the median household income will be faced with college expenses, after adjustment for inflation, almost three times greater than they were in 1970.
