In my career as a banker, I have been privy to a large number of tax returns over the years, W-2s, 1099s, K-1 Statements and every other form of taxable and non-taxable income. I have seen almost every trick in the book to legally avoid taxes, which always makes me wonder about income statistics reported and collected by various agencies including the US Bureau of Labor Statistics.
Median Household Income is the most popular stat I see when we talk about the health of the American middle class. So we hover at $51,000 for a household as a gross figure, and no I don’t mean disgusting. Out of that gross income you would expect to take 15% in income taxes, although someone with that gross and a couple kids could seriously reduce their income tax burden. Outside of income tax, you have to pay for Medicare and Social Security if you’re a W-2 employee.
“What is a household?” you ask. Well, a household is everyone living at the same address. It could be one, two, three, four or a dozen. Many of you know someone down the street that has about 6 cars in the driveway and you know there are three generations under one roof. So the measure of income there seems a bit skewed.
Cost of living for a single person averages $2731 a month, or $28,458 annually (1). For a married couple with two kids it goes up to $5466 or $65,597. Average rent in the US is $934 (2). With a 30-year mortgage at today’s rates, that payment would probably get you a $150,000 house if you include the escrow, but the average home price in US today is closer to $190,000.
If you take into account cost of living for a family of four of $65,000 and median income of $51,000, there’s a bit of a shortfall. Now granted, there are adjustments that can be made in any budget, but overall middle class America doesn’t make enough money to afford the middle class.
As healthcare costs continue to rise in the US, incomes have failed to keep pace. We can also look at trends in education costs as well and see that it isn’t productivity or a spike in welfare recipients, it is the huge increases of cost in these two areas primarily combined with regular rise in housing and other comestibles. Thank god the $5 gas gallon never materialized!
All the evidence would point to a squeeze on the middle class, but I often wonder how many are masquerading in the middle class because of how self-employment or business ownership income is reported and recorded by labor statisticians. An S-Corp filing is required to pay owners a “reasonable” salary, but that is probably not often challenged, and so owners have little incentive to pay themselves a high W-2 income. So say I pay myself $30K in wages, but the company makes $200K in a good year and I pay taxes on that money, but does it get measured as wages? No. At least not by labor statisticians. Self-employed or business owners make up about 10% of the labor pool and employ another 20% of it (3).
So how can we bring middle class more within reach and easier to afford? Follow the money. Healthcare spending continues to tick upwards and despite the gains at the lower end under Obamacare, the middle class cannot receive a subsidy and must bear the market cost or do without and be penalized. Healthcare must be fixed on the insurance side or become a government entitlement. Insurance follows a pretty basic principle generally speaking: the lower the risk, the lower the cost. When we insure regular visits to the doctor, it is akin to insuring an oil change at the auto shop. Free market capitalists want government out of health insurance to encourage competition and innovation. Progressives socialists want government spending to fund and manage healthcare.
Education spending is at an all-time high and why shouldn’t it be? Anecdotally, I talk with very few people whose undergraduate college experience has led directly to a job. I often question why we spend 13 years in public education in order to spend another 2-4 years matriculating before we join the middle class. You can spend 19-21 years in school and still not attain that upper class life we are told education will bring! When you consider that less than half of the US gets a bachelors or associates (4), it means to me that we need to make that education more attainable or more meaningful. When I was a kid, my parents sold me on the tale that you go to college and you get a job and Bob’s your uncle. The dream Boomers grew up with has changed. Most Millenials will never walk down the street and get hired on the spot, nor will they get a pension, and their employer may not subsidize their healthcare or offer other benefits.
What can the middle class do to reduce cost of living? Major metro cities have a higher cost of living based on housing, transportation, taxes, and other factors, and a minimum wage in rural Hiram, GA looks much different than the ATL. The idea of raising the minimum wage to $15, more than doubling the national standard some would argue would put small business owners out of business. It would certainly increase income, but may have the effect of reducing employment especially at entry level positions. Some research has been done by the Federal Reserve in San Fransisco on the effects of raising minimum wage and the evidence points to a negligible but measurable decrease in employment on the lower end of the income spectrum.
For a more reasonable cost of living, flee to the suburbs, flee to the smaller towns. Many companies looking to relocate or add a new location are very conscious of their costs, and like Caterpillar did in Athens, GA, many large corporations want to keep their wage and other costs down by keeping them out of major metro areas. If finding gainful employment discourages you from small town life, start your own business. Business owners have several advantages. First, working for yourself means never having to suck up to a supervisor, not having to punch a clock, and your success is entirely in your own hands. Second, depending on how you are structured, your income taxes should be lower because you now have very legitimate business expenses that will reduce your taxable income.
Don’t over-educate. Many jobs can be done without a bachelors or associates. Most of my friends in IT have bachelors in a different field but got into IT with certificates in different programming languages or by understanding networking architecture. Also, don’t spend $30,000 on a degree that makes you $30,000 a year.
Oh yeah, and don’t get sick. There is virtually nothing you can do to reduce your healthcare cost besides going uninsured and not getting sick.