What Does It Take To Be Middle Class?

middle classWhat does it take to be middle class nowadays?
As costs have risen faster than incomes for decades, households have been priced out of the middle class.
By standards of previous generations, the middle class has been strip-mined of income, assets and purchasing power.


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By Charles Hugh Smith, Of Two Minds:

A recent paper, The Distribution of Household Income and the Middle Class, used Census data to discuss what sort of income it takes to qualify as middle class, but reached no firm conclusion: people tend to self-report that they belong to the middle class based on income, but income is not the only the metric–indeed, it can be argued that 12 other factors are more telling measures of middle class membership than income.

In Why the Middle Class Is Doomed (April 17, 2012) I listed five “threshold” characteristics of membership in the middle class:

1. Meaningful healthcare insurance

2. Significant equity (25%-50%) in a home or other real estate

3. Income/expenses that enable the household to save at least 6% of its income

4. Significant retirement funds: 401Ks, IRAs, etc.

5. The ability to service all debt and expenses over the medium-term if one of the primary household wage-earners lose their job

I then added a taken-for-granted sixth:

6. Reliable vehicles for each wage-earner

Author Chris Sullins suggested adding these additional thresholds:

7. If a household requires government assistance to maintain the family lifestyle, their Middle Class status is in doubt.

8. A percentage of non-paper, non-real estate hard assets such as family heirlooms, precious metals, tools, etc. that can be transferred to the next generation, i.e. generational wealth.

9. Ability to invest in offspring (education, extracurricular clubs/training, etc.).

10. Leisure time devoted to the maintenance of physical/spiritual/mental fitness.

Correspondent Mark G. recently suggested two more:

11. Continual accumulation of human and social capital (new skills, networks of collaborators, markets for one’s services, etc.)

And the money shot:

12. Family ownership of income-producing assets such as rental properties, bonds, etc.

The key point of these thresholds is that propping up a precarious illusion of consumption and status signifiers does not qualify as middle class. To qualify as middle class (that is, what was considered middle class a generation or two ago), the household must actually own/control wealth that won’t vanish if the investment bubble du jour pops, and won’t be wiped out by a medical emergency.

In Chris’s phrase, “They should be focusing resources on the next generation and passing on Generational Wealth” as opposed to “keeping up appearances” via aspirational consumption financed with debt.

What does it take in the real world to qualify as middle class? Let’s start by noting that real (adjusted for inflation) income has barely budged in 40 years, while household income has declined: Soaring Poverty Casts Spotlight on ‘Lost Decade’:


According to the Census figures, the median annual income for a male full-time, year-round worker in 2010 — $47,715 — was virtually unchanged, in 2010 dollars, from its level in 1973, when it was $49,065.Overall, median household income adjusted for inflation declined by 2.3 percent in 2010 from the previous year, to $49,445. That was 7 percent less than the peak of $53,252 in 1999.

Here is a chart of the real income of the lower 90% and the top 10%, which by definition cannot be “middle class”:

The top 10% takes home 51% of all household income:

Here are my calculations based on our own expenses and those of our friends in urban America. We can quibble about details endlessly, so these are mid-range estimates. These reflect urban costs; rural towns/cities will naturally have significantly lower cost structures. Please make adjustments as suits your area or experience, but please recall that tens of millions of people live in high-cost left and right-coast cities, and millions more have high heating/cooling/commuting costs.

The wages of those employed by Corporate America or the government do not reflect the total cost of benefits. Self-employed people like myself pay the full costs of benefits, so let’s “get real” and count *all* costs paid to maintain a middle-class lifestyle.

1. Healthcare. Let’s budget $13,000 annually for healthcare insurance. Yes, if you’re 23 years old and single, you will pay a lot less, so this is an average. If you’re older (I’m 60), $13,000 a year only buys you and your spouse stripped down coverage: no eyewear, medication or dental coverage–and that’s if your existing plan is grandfathered in. (If you want non-phantom ObamaCare coverage, i.e. a Gold plan, the cost zooms up to $2,000/month or $24,000 annually.)

Add in co-pays and out-of-pocket expenses, and the realistic annual total is between $15,000 and $20,000 annually: Your family’s health care costs: $19,393 (this was before ACA).

Let’s say $15,000 annually is about as low as you can reasonably expect to maintain middle class healthcare.

2. Home equity. Building home equity requires paying meaningful principal. Let’s say a household has a 15-year mortgage so the principal payments are actually meaningfully adding to equity, unlike a 30-year mortgage. Let’s say $5-$10,000 of $25,000 in annual mortgage payments is interest (deductible) and $15-$20,000 goes to principal reduction.

3. Savings. Anything less than $5,000 in annual savings is not very meaningful if college costs, co-pays for medical emergencies, etc. are being anticipated, and $10,000 is a more realistic number given the need to stockpile cash in the event of job loss or reduced hours/pay. So let’s go with a minimum of $5,000 in cash savings annually.

4. Retirement. Let’s assume $6,000 per wage earner per year, or $12,000 per household. That won’t buy much of a retirement unless you start at age 25, and even then the return at current rates is so abysmal the nestegg won’t grow faster than inflation unless you take horrendous risks (and win).

5. Vehicles. The AAA pegs the cost of each compact car at $6,700 annually, so $13K per year assumes two compacts each driven 15,000 miles. The cost declines for two paid-for, well-maintained clunkers. Average cost of auto ownership: $8,946 per year. let’s assume a scrimp-and-save household who manages to operate and insure two vehicles for $10,000 annually.

6. Taxes. Self-employed people pay full freight Social Security and Medicare taxes: 15.3% of all net income, starting with dollar one and going up to $113,700 for SSA. Since an adjusted gross income (AGI) of $66,193 or more puts you in the top 25% of earners, let’s use a base income (self-employed) of $68,000 to calculate our SSA/Medicare taxes: that’s about $10,000 annually.

Property taxes: These are low in many parts of the country, but let’s assume a New Jersey/New York/California level of property tax: $10,000 annually.

Income tax: Since the mortgage interest is only $5-$10K a year, itemized deductions are less than the standard deductions of around $18,000. One-half of the self-employment tax is deductible, as well as the health insurance and IRA retirement contributions, so that’s another $30,000 in deductions. That leaves about $20,000 in taxable income and about $3,000 in Federal tax, and let’s assume $2,000 in state and local taxes for a total of $5,000.

7. Living expenses: Some people spend hundreds of dollars on food each week, others considerably less. Let’s assume a two-adult household will need at least $12,000 annually for food, utilities, phone service, Internet, home maintenance, clothing, furnishings, books, films, etc., while those who like to dine out often, take week-ends away for skiing or equivalent will need more like $20,000.

8. Donations, church tithes, community organizations, adult education, hobbies, etc.: Let’s say $2,000 annually at a minimum.

Note that this does not include the cost of maintaining boats, RVs, pools, etc., or the cost of an annual vacation.

Here’s the annual summary:

Healthcare: $15,000
Mortgage: $25,000
Savings: $5,000
Retirement: $12,000
Vehicles: $10,000
Property taxes: $10,000
Other taxes: $15,000
Living expenses: $12,000
Other: $2,000

Total: $106,000

Oops. That’s more than double the median household income. OK, let’s assume the mortgage is a bit high, ditto the property taxes. Let’s say we need “only” $96,000.

Oops again: our tax calculations were based on $68,000 in self-employed net earnings. To earn $96,000, our taxes are going to skyrocket, as we’re still paying the full 15.3% SSA/Medicare taxes while we’ll jump into the 25% tax bracket when our taxable income exceeds $35,000. Since we’ll be paying at least $15,000 more in SSA and income taxes, then we’re up to $111,000 as the minimum household income to maintain a middle class lifestyle for two self-employed adults.

An individual earning $111,000 is in the top 10% of all wage earners. A houshold earning $111,000 is in the 80%-90% income bracket–the lower half of the top 20%. This suggests that the “middle class” has atrophied into the 10% of households just below the top 10%. Households in the “bottom 80%” are lacking essential attributes of a middle class lifestyle that was once affordable on a much more modest income.

Note that this $111,000 household income has no budget for lavish vacations, boats, weekends spent skiing, etc., nor does it budget for luxury vehicles, SUVs, large pickup trucks, etc. There is no budget for private schooling. Most of the family income goes to the mortgage, taxes and healthcare. Savings are modest, along with living expenses and retirement contributions. This is a barebones budget.

If costs had stagnated along with wages, it would take a lot less to maintain a middle class lifestyle. But costs for most middle class essentials have skyrocketed. I was struck by something I read recently in a history of the Tang Dynasty in China, circa 700-900 A.D. When costs are cheap, goods and trade are abundant and prosperity is widely distributed. Once costs rise, trade declines and living standards stagnate. Poverty and unrest rise.

Here are a few charts that illustrate the pressures on the middle class:

Wages have risen modestly while debt has increased enormously.

Social Security taxes have skyrocketed:

So have property taxes: they rose right through the last recession even as property values tanked:

Labor’s share of national income has plummeted:

Interest income has fallen through the floor (thank you, Federal Reserve):

The bedrock of Main Street, small business, has cratered:

Net worth of the middle income households has been reduced to a sliver:

As costs have risen faster than incomes for decades, households have been priced out of the middle class. By standards of previous generations, the middle class has been stripmined of income, assets and purchasing power.

Of related interest:

Financialization and Crony Capitalism Have Gutted the Middle Class (July 13, 2012)

Healthcare “Reform”: the State and Plutocracy Stripmine the Middle Class (Again) (November 9, 2009)

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  1. A bleak picture to say the least. I fear it’s going to get much worse before it gets better. I’m prepping for the worst and praying for the best. My heart goes out to those who are doing all they can and it’s still not enough….that’s probably most. Goodwill thrift stores are a great place to get warm clothing and blankets for pennies. Water storage also cheap. Food….as much as you can afford to have on hand. Hold on to your hats……this depression is not subsiding like we are being told, that’s no surprise to most here. The madness will continue and there will be no taper in December.

    • @SilverSlicker
      Agreed.  It is a bleak picture that is painted here but then bleak pictures tend to capture eyeballs… which is the primary purpose of such articles.  Having read dozens of articles of this type, I have to say that virtually all of them over-estimate living costs.  Those of us who watch our spending carefully and have a satisfying but modest standard of living do not rack up the kinds of expenses that are listed here.  For example:  I drive a decent car.  It’s a Cadillac Eldorado.  It is a low-mileage car that I paid $18,000 for back in 2003.  In the 10 years that I have owned it, I have done routine maintenance to it, bought 1 set of tires for it, and had the power steering unit replaced.  I put about 3,000 miles a year on it.  It is a gorgeous car with 54k miles on it now.  It was 1/2 that when I bought it.  My average annual cost of ownership has been WAY less than this article suggests.  Ditto for most of our house and medical insurance expenses.
      Any number of great preps can be found at the local $1 stores and thrift stores.  My wife bought a beautiful blouse at one for $4 once that still had the original store price tag on it.  It was $66.  I find tools, paperback books, glass, metal, and plastic containers, and other goodies at the local thrift stores all the time.  We also contribute articles that we no longer need from time to time.  These places are great prepper resources and shopping there not only nets some terrific buys on really good preps but also supports the good work that these places do in our communities.
      I also agree on no taper in December… MAYBE by April 2014… but then again maybe not.
      Yes, this IS a depression and not simply a recession.  We know this to be true because recessions last for months and employment always rises when they end.  Depressions last for YEARS and unemployment remains persistently high for much of that time.

  2. Agree witth much of this, but is “stuff” (i.e. the generational wealth) really necessary to be middle class?  I know a couple who are quite rich with very little to none of the family heirloom type stuff mentioned.  Able to earn a wage, exist without support from. others, save for the future (education and retirement) and look after your family’s health and safety?  I think if you had all of that you are comfortably in the middle class.

  3. Lower Middle Class means you have put your savings in Gold and Silver at a Loss! When it was upper Middle your money was in Fiat. Now the Middle Class is mostly screwed, but long awaiting of the date that keeps moving out to the future by the Gurus and make excuses or don’t make any sense at all, but we are supposed to keep stacking?????
    Do you really think the investigations now threatened by the British and German authorities into Gold and Silver price fixing is actually going to go any further than the CFTC investigations went? Shit No, we all still in the dark like Mushrooms and getting shit for no growth and telling us that the sun will shine! Oh something wonderful is going to happen soon?

    • @Ranger
      “… but we are supposed to keep stacking?????”
      Do or do not.  The choice is yours.  Do not allow others to make up your mind for you.  Lots of stackers are REALLY enjoying these low prices.  This allows them to stack a LOT more than they could if the metals prices were a lot higher.  Low prices favor buyers, while high prices favor sellers.  Once you know which of these is your goal, you’ll KNOW what to do.  :-)

  4. Ravings of a Mad Stacker!!
    By the way, have you actually seen a chart that manifests itself to doing what it actually projects doing? Hell no and charts are only as good as the Crayolas and Big Chief tablets that they are made from. Real and theoretical silver and Gold prices on a chart from 40 -50 years ago compared to today’s date and economics are really senseless as a positive or negative venue. The enormous paper market that did not exist 40 – 50 years ago sets the theme price for Silver and Gold today? So why do the chartists keep going back and bringing a time forward? It’s Bullshit for a comparison as Studebaker, Kaiser, Henry J, Hudson, Plymouths and Oldsmobiles would still be for sale. The whole of your minds eye can view the realism of precious metals as a sin wave if you are in love with charts, Positive to Negative. repeat for infinity. Further, do you really believe the TBTF banks are really scared? Nada in my opinion, Do you believe the recent comments by Eric Sprott that any one of any country Central Banks that fail could cause the entire world banking system to fail? Ditto Nada Now please do remember that good ole Jimmy Joe Sinclair recently stated that Gold could go as high as 50 thousand dollars. Ask yourself how is that possible if there are no dollars to evaluate Gold by? Rest assure the only notice that you have that precious metals may have gone to the moon and beyond is when all of a sudden without due notice, the haven’t gots and unprepared will be tearing down your doors to take what you have. Sure they might have Fiat, but it won’t buy a thing, but we will still have our Gold and Silver which at that time we won’t even know what it’s worth! Okay so let’s go bartering, whose going to make change if it is established that one ounce of Silver is worth two cows, 3 chickens and one pig, and you only want a loaf of bread and a dozen eggs? Now do we look for a reset created by defaulted debt of our Fascist government that instantly takes over Bit Coin, gives all depositor accounts a nice hair cut along with our 401ks and IRAs, the Army and militarized police forces clear the dead bodies from the streets from the riots and uprising. Now if any of you folks have some concrete answers, feel free to advise all. Folks we are no eventual King David that will slay Goliath. 

    • @Ranger
      “Rest assure the only notice that you have that precious metals may have gone to the moon and beyond is when all of a sudden without due notice, the haven’t gots and unprepared will be tearing down your doors to take what you have.”
      Which is EXACTLY why a lot of us also stack brass and lead.  They are part of that “hope for the best but prep for the worst” philosophy.  Considering the rising cost and falling supply of ammo, it is actually quite a good investment these days.
      “Okay so let’s go bartering, whose going to make change if it is established that one ounce of Silver is worth two cows, 3 chickens and one pig, and you only want a loaf of bread and a dozen eggs?”
      OK, let’s.  For one thing, there are silver coins available that contain as little as 1/20th of an oz. of silver.  A US 90% silver dime contains about 1/14th of an oz. of silver.  A US 90% silver quarter, just under 1/5th of an oz.  So, yes change CAN be made.  Even if that fails, one can still do barter with silver coins via running an account, just like the Old West Mercantiles used to do.  If you need 3/8 oz. of silver to buy something, you hand over one of your 1-oz. coins, and the store hands over the item(s) AND credits your account with 5/8 oz. of silver.  Next time you buy something that costs less than 5/8 oz. you don’t need to hand over any silver to get it.  The store simply reduces your credit line by the cost of that item.  Wash, rinse, and repeat.
      Steel yourself, Ranger.  Be strong, resilient, and fearless.  Have faith.  I don’t know about moving any mountains but I do know that faith will get people through the damnedest times imaginable.  But if it does not, then it sure puts us in good with The Lord… and if we are good there, what else really matters?

    • @Ed_B
      If you wait with those chickens long enough you may be able to make change in eggs :-P
      People figured it out and it worked.  Here is another option…  you need the animals because you can’t raise meat, but you are a skilled craftsman and the farmer needs his roof patched.  You pledge a couple hours labor instead of “change”
      I’ve done this myself, helped a buddy move and he offered me dinner which I flatly refused.  He has an extensive background in construction and I had a remodel project and knew I needed help learning a few basic skills (one, drywall mudding, is coming in handy again tonight).  I told him I would be calling him in the not to distant future to have the favor returned.

  5. @mikeyj80
    “If you wait with those chickens long enough you may be able to make change in eggs ”
    Indeed so… good point.  Few people have the skill necessary to raise large animals for food but almost anyone who has ever owned a pet and care for small animals, such as chickens and rabbits.  Chickens are dual use, giving both meat and eggs, which is nice.  Not that they don’t have their particular needs but at least they are of a manageable size, don’t take up a lot of room, and either can roam free to get most of their food or they can live on grass if one does not have alfalfa.  I raised both chickens and rabbits as a kid and it wasn’t difficult.  I even raised a pig once but made the mistake of giving her a name.  Never name anything you’re gonna eat! 
    “People figured it out and it worked.”
    Yes, they did.  Whatever it was that people have done before, can be done again.  Many of our ancestors were no smarter than we are but they tended to have a lot of low-tech real-world experience.  But what is experience?  For the most part it is nothing more exotic than surviving your mistakes and learning how and how not to do things.  We can do that.  :-)
    “You pledge a couple hours labor instead of “change””
    Yes, labor is an important commodity, especially for those who have necessary skills.  Helping neighbors used to be something that just about everyone did as a matter of course.  Systems like that work when everyone contributes.  Those who slack soon become known to all and then not allowed to participate in such things because they never show up in time for work but are always around whenever the food for the workers is put on the table.  I am WELL acquainted with this type, having had one in my own family.  :-/
    “I’ve done this myself, helped a buddy move and he offered me dinner which I flatly refused.”
    Feeding those who help us is a common way to say “thanks for the help”.  It’s one way of saying “we appreciate the effort you are making for us”.  Of course, helping them at some future time is expected.  Give and take.  That’s how it works best.  I’ve helped friends and relatives with moving, roofing, landscaping, carpentry, plumbing, hauling, clean-up, and electrical work.  I know that I can call on them to help out when needed.  There’s no tab involved but there would be for other people.  As long as both parties are satisfied with the cost and work, all is well.  It helps a lot to describe the help that will be given as well as the extent of the job.

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