The real source of middle-class money woes

By Kimberly Palmer

There are many reasons middle-class Americans feel squeezed right now: The high unemployment rate (8.1 percent), rising cost of college tuition, or the fact that close to one-third of homeowners are underwater. But it's a combination of three other factors that led the Pew Research Center to label the 2000s a "lost decade" for the middle class: declining household income, shrinking net worth, and a smaller middle class.

"Income peaked in 1999 and it has not yet returned to that peak," says Paul Taylor, a coauthor of the report and the executive vice president of the Pew Research Center. "It's the first decade in modern U.S. history where that's the case," he adds.

While income tends to be more volatile as people lose and gain jobs, Taylor says net worth is also a valuable measure of financial security, because it indicates whether people are able to afford an unexpected medical bill or other unplanned expenses. "It's enormously important to people's sense of economic well-being," says Taylor.

Pew measured the size of the middle class by defining it as those earning between two-thirds and double the national median income. Around 51 percent of Americans fell into that category in 2011, compared to 61 percent in 1971. Taken together, these numbers show that "the middle has gotten poorer and smaller," says Taylor.

Survey respondents' perceptions of the economy and their own well-being also reflect those negative numbers. Among middle-class adults, 85 percent said it was more difficult now than it was 10 years ago to maintain their standard of living, and most respondents also agreed that "It is more difficult to get ahead today than it was 10 years ago." Meanwhile, the majority of middle-class respondents said they "had to reduce household spending in the past year because money was tight."

Respondents also estimated that it takes a household income of $70,000 a year for a family of four to live a middle-class life. (Pew estimates that the median income for a four-person household is just under that figure.)

Young people had a particularly rough decade. Their income declined and a greater share are unemployed now than 10 years ago. In addition to the challenging job market, Taylor points out that the housing market was rough on young people as well. Many of them bought their first homes at bubble prices, and then watched as those homes lost value, and in many cases became worth less than the money owed on them.

"That's affected people of all ages, but older adults tend to have purchased their houses longer ago, already paid of their mortgages, and purchased at pre-bubble prices," explains Taylor.

Young adults, in fact, were the only age group where the percentage of people who describe themselves as "middle class" declined between 2012 and 2008. In 2012, 4 in 10 young adults labeled themselves "lower class," compared to just 1 in 4 in 2008.

Adults age 65 and older fared best over the last decade; their income grew the most—10 percent—between 2001 and 2011. Taylor attributes that to the fact that many sources of income for older Americans, such as Social Security and proceeds from retirement accounts, are fixed, so they are relatively immune to economic swings.

Still, Americans have managed to retain their optimism, especially over the long term. Most respondents said their own standard of living beats that of their parents at the same age. Given the growth in income over four decades, that statement rings true: Since 1970, median household is up 32 percent. "Over the long haul, in the long arc of their lives, Americans are doing better, but they had a very bad decade," says Taylor.

Respondents also drew a distinction between their own personal finances and those of the country, and they tended to be more optimistic about the former. More Americans believe their children's standard of living will be better than their own than believe it will be worse (43 percent versus 26 percent).

"It's a phenomenon in survey research: 'The world is going to hell, but I'm doing okay,'" says Taylor, adding, "It's hard to beat the optimism out of the American public."

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