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For the United States, the past century is an incredible story of economic growth and prosperity. The Post WW2 era especially witnessed a tsunami of growth and expansion.
In recent times the media and political rhetoric seem less optimistic. Economic anxiety is highlighted as motivation for everything from voting patterns to the opioid epidemic. Sources of anxiety vary… globalization, income inequality, job insecurity, student loan burden, the gender pay gap, cost of child care, The 1%, and the robot revolution are all cited.
Some even go so far as to predict The End of the Middle Class. Is it really so dire?
The End of the Middle Class
There is seemingly no shortage of fuel for economic anxiety.
NPR highlighted that 2015 was the first year since 1970 that the middle income bracket was no longer the majority.
The New York Times shared how all productivity gains are going to the 1%.
The Atlantic published a panel discussion titled Income Inequality and the End of the Middle Class.
Ain’t nuthin like a bunch of upper class people sittin’ around talking about how times be hard and gettin’ harder for the middle class.
Indeed, economic anxiety is real and justified. But I think there is much more to the story. But first…
What is Middle Class
Being middle class means different things to different people. A lot of math people define the middle class by income: “the middle class is the middle 3 quartiles of income range for a 4-person household.” Others define it by lifestyle: “a chicken in every pot and a car in every garage.” Others still define it as state of mind: a feeling of security from a stable income and a sense of autonomy.
This is probably why everybody thinks they are middle class. A family making $300k/year in San Francisco may say they are middle class just as confidently as a family earning $35k in rural Iowa. Perhaps they would disagree; people on the Internet certainly do.
In modern times a wide range of blue and white collar jobs are considered Middle Class, which encompass a wide range of education and income levels. If we sift through all of the disagreements and dissonance, there is a common trait which applies to all situations and fits with the historical perspective…
For most of Western history there were 2 classes of people, those who labored and those who benefited from said labor. Those who produced and those who controlled the means of production (land, factories, etc…) With the rise of mercantilism a 3rd class arose between the peasantry and the nobility, the middle class… a group with tremendous human capital, but still contributing labor rather than benefiting from it.
Case in point:
1950s Nostalgia
In the United States there is a lot of nostalgia for the 1950s. It is an era of white picket fences, simpler times, and economic prosperity. When asked to highlight the time when America was the greatest, many people referred to this era.
Good-bye 1950s
In the idealized memories, the 1950s were a time when a family could thrive on a single income. Labor unions were strong, and a man could come home from work at 5 pm to a home cooked meal with the wife and kids. Afterwards, they might toss the baseball around their spacious green lawn, chat with the friendly neighbors, and enjoy a slice of apple pie. The company health plan meant everybody got to see a Doctor when they needed it, and Social Security and the company pension ensured a comfortable future.
This was a time when the term Middle Class became widespread, and the population of middle income households exploded. It’s literally when the Baby Boomers were born. Another phrase became common usage during this era: retirement. The Middle Class was now living long enough to enjoy a few years of well earned leisure time.
The American Dream was real.
Connecting the dots
I know to many the 1950s sound like utopia. To me, it sounds like hell.
Punch the clock, work 30 or 40 years for the same company, and get a gold watch and a monthly stipend for life. It all sounds a bit too much like the life of a wagyu beef cow.
How many people were trapped in a job they hated, wth people they hated, because the loss of a pension made it too expensive to leave?
And of those who truly enjoyed their work and coworkers, how many could have had a more rewarding career if they had been able to move to a different company?
And at the end, how many people worked for the proverbial prize only to find that the pension wasn’t even properly funded?
Ultimately, the employer still owned the means of production and therefore owned the worker’s time. Even with 3 weeks of vacation per year, the employer still owns 95% of your time. And you need permission for when you get that other 5%.
I think the Wonder Year’s Jack Arnold sums this up perfectly. (Especially that last line.)
And forgive me for being pessimistic, I am skeptical that Mrs. Cleaver would have regularly invited my non-caucasian spouse over for tea and crumpets with the girls. (Which is all I’m going to say about the overtly sexist, patriarchal, classist, racist aspects of the idealized 1950s.)
Control of the Means of Production
People like to debate nuances in the definition of middle class based on income levels and lifestyle, an important dialog, but those are just differences in degrees. More important would be differences in kind; how people can transition from middle class to upper class. It isn’t so much how much you earn or spend, but who owns your time.
This transition is always done by gaining ownership of means of production (aka capital), both by definition and in practice.
The ideologists who gave the world communism dreamed that one day the working class would rise up and claim the world’s capital for themselves. Of course this has failed miserably whenever it has been tried. (And always will.)
However, ironically, capitalism has provided this very mechanism. Securitization (stocks/equities) made it possible to become a fractional owner of businesses. And then Vanguard enabled even the Proletariat to own land and factories, which is ultimately what stock ownership is.
While many lament the fall of the private-sector pension and defined benefit retirement plans, I welcome the rise of the defined contribution plans that replaced them (e.g. 401k / IRA.) You own the businesses, and aren’t dependent on a pension. You have control of the funds, and aren’t dependent on loyalty to an employer (or vice versa.) The result is economic mobility and control over your own economic destiny. Own enough stocks, and you now own 100% of your own time…
Upward mobility has been democratized.
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The End of the Middle Class?
Today’s economic anxiety is real and justifiable, just as it has been real and justifiable at every major economic transition point in history. Very few felt economically secure during the transitions from an agrarian society through the Industrial Revolution, but with the power of hindsight almost nobody would wish to return to that earlier era.
Change is never easy, but society advances 2 steps forward one step back. This general upward trend is why we have the phrase “the right side of history.”
There are systemic societal issues that will slowly be overcome at the ballot box.
There are personal economic issues for the middle class that will be overcome by accumulating capital.
Through a combination of the two, I am confident that we could indeed see an end to the middle class… not because more people fall out of it, but because more and more people rise above it. At the birth of the middle class, the most successful merchants were able to accumulate enough capital to rival the aristocracy themselves. So perhaps it shouldn’t be thought of as the end of the middle class, but the rise.
I think there will be a lot of people in their 40s or 50s who will those their jobs and be unable to train for ones that require higher skills or be subject on ageism. The future doesn’t seem to hold that big of a need for manual labor, and employers don’t hesitate to fire people to pad the bottom line in the US. I think the middle class should definitely be worried if they aren’t learning new things!
The world keeps moving faster, and you have to keep moving just to stand still.
Depends on the. Type of Manual Labor. A carpenter or home/business reno team or a mechanic? They are pretty safe they still do things most robots would struggle with. a package sorter or a burger flipper? Might be introuble…. Also, with the coming of AI I think people who should be sweating but seem not to be are those with Desk Jobs that are not developing Technology. People who deal with numbers, files, reports, using math, and stats? well, their days are numbered. Because what are AI? Machines that will think based in logic, statistics, math and organization.
I just can’t see it. Can’t see how people today in 2018 are worse off than those of any decade in the past. Technology has democratized knowledge and even if we tried, there’s no way to prevent the lower classes from learning anything they want (if they want).
Looking at social mobility stats, there are plenty from the lower quintiles that bump themselves up a quintile or two during their lifetimes, so it’s certainly possible. Easy? That’s a larger question and the answer is probably “it depends”. Luck plays a role but hard work does too.
As you point out, having easy access to 401k/IRA type investment accounts (and their tax advantages) and being able to self-direct your funds into super low cost investment products which are well-regulated (ie Vanguard ETFs) all lead to the ability to grow the lower class’s wealth into a big pile of money. Certainly sufficient to get oneself into the middle class, if not higher.
I don’t see it either (directly), but I imagine a large part of the downward mobility occurs as a result of medical bills, long term disabilities, and medical related bankruptcies. The US isn’t very kind in this regard.
You’re right – those are big stressors for sure. I think we’ve made a little progress with the ACA (under the current law). Still some way to go, but at least you can get health insurance if you want it. And if you aren’t making a fat salary you’ll get some or a lot of help paying for it. Much less excuse for going uninsured today vs. 5 years ago pre-ACA subsidies.
Also from the massively increased expense of owning/renting a primary residence. In many parts of the country, people can’t afford housing, which is a massive change from the past. Hence the amazing book “Evicted” which discussed the relatively recent phenomenon of evictions on a massive scale.
I can say that despite more education, I am definitely worse off than my parents or grandparents. They managed to buy cheap property where they wanted to live and had jobs that they really enjoyed. For physicians, the world has definitely gotten much worse! I have a career I do not find enjoyable, and I can’t really find a way to live in the same kind of areas as my parents and grandparents.
It depends on where you are coming from, I think. For those who are first generation college grads, sure, life looks rosier than in the past. Those who like living overseas might find the world better, too. But for people who like urban life, or the Northeast, or California, or who work in medicine, publishing, or law, life is definitely worse than 25 years ago.
I have Evicted in my book queue, I’ll read it. Thank you.
Snowcanyon,
From your other posts it seems like you must be a doctor. I would agree that MDs and DOs (aside from a few specialties) do seem to have it tougher than the previous generation. Frequently y’all come out with higher debt and less pay per hour worked than those before you. That can be even worse if you go to an area where pay is lower than average and COL is higher than average.
That said, you can still have a fantastic life and build wealth quickly in almost any medical job, so long as you keep your spending in check. If you accrued crazy levels of debt (300-500K) for school and chose to go into primary care, the path will certainly be longer.
There is definitely a peak earnings period for any profession. I can see a time when 3rd or 4th generation blacksmiths might have talked about how their lives weren’t as good as their grandparents.
Big changes are coming.
You’re right. But the most impressive point about defined contribution plans like 401(k) and IRA plans isn’t just the opportunity for advancement: It’s that these vehicles put the low- to middle-income earners in control of their own destiny to a far larger extent than any other thing that has ever been attempted. I love the line about how “Vanguard enabled even the Proletariat to own land and factories, which is ultimately what stock ownership is,” because it’s so ironic and true. And yet we have so many complainers crying about “late stage capitalism” keeping them down…
Capitalism of the American variety does have issues. Case in point: Goldman Sachs’ recent study asking “Is curing patients a sustainable business model?” The relentless pursuit of profits and shareholder value does leave some bodies in the wake.
Vanguard’s CEO has a nice perspective:
“We might sound socialist, communist, whatever, with our mutual structure, but Vanguard really is the purest form of capitalism, trying to make a profit for the people that we serve…”
More of that approach in other industries could be a good thing.
Ahh, the headlines de jour. I like Twain’s comments…
If you don’t read the newspaper, you are uninformed, if you read the newspaper you are misinformed.
I prefer your writing on travel, spending, credit card hacking and early retirement..
I like that Twain quote. I also like his quotes on literary criticism.
I’ll get back to writing on those topics at some point. I prefer your comments on those posts as well.
For the record, I thought it was interesting. I’d read more.
I agree go back to writing on travel, spending and best credit cards offers. I also liked the video of you on the news story, able to get a better sense of who you are.
I don’t have a budget set aside for editorial work, but I can send you my list of future topics and maybe you could give it a glance to make sure you approve?
If you’re part of America’s working class, you’re fighting outsourcing and technology to just stay even as you get older. You can flip the entire equation by leveraging technology to own the means of production (and your time) and reap the rewards of entrepreneurship. This is my preferred solution.
Entrepreneurship can definitely be a solution for many. The transition from defined benefit to defined contribution helps reduce the cost of making that transition. The ACA was supposed to do the same for health insurance (as many won’t live a career because of the employer provided health insurance.) Hopefully we get some clarity on if that is still a reliable option.
But I wonder…what happens to those aren’t entrepreneurs by nature? Or who simply aren’t that bright? The world is much tougher for them. Much tougher.
Entrepreneurialism isn’t for everyone, myself included. Nor is it guaranteed.
I imagine this conversation has taken place over the last few thousand years, each time the world has replaced some obsolete jobs with new ones requiring a higher level of education and skill. See Siemens factory in Charlotte as one example.
Those who aren’t that bright will probably find there way into politics. Joking! kinda…
I’m not sure if I agree about the middle class. Upward mobility is easier now because you can invest, but that’s very difficult without good income. The upper class will always stay ahead because they have a bigger stash. The middle and lower classes have less money to invest and less education. I don’t see a big push upward for the regular people. The lack of personal finance knowledge will keep most of them spinning the wheel and spending every dollars they make. I guess I’m pessimistic about people in general.
This is the uncomfortable part of the transition I’m referring to. Investing isn’t optional.
The bulk of the middle class will never develop the mindset to save hard early and convert that to risk assets (because the risk makes them irrationally nervous and because they like to live for the day). Some individuals, like many of us here on this blog, WILL make that transition though.
Regardless, for everyone, life will continue to improve due to technological and medical breakthroughs. (When your poor people are super fat, you aren’t really all that poor.)
Jeremy, I enjoy reading your thoughts on the big issues. What are your thoughts on the sovereign debt bomb brewing around the world (in frontier, emerging, and developed markets!). The crisis point is decades off in the U.S., but it is coming nonetheless.
My thoughts are here: https://mightyinvestor.com/stock-market-risk/
The short of it is that I think stocks are the best place to hide when that adjustment comes.
But I’d love to get your take. Your are a smart dude, and this question matters bigly for those living off of stocks for the long-term. Cheers!
I’m more optimistic. There is nothing more powerful than an idea whose time has come.
I haven’t really thought about sovereign debt issues.
Glad you are optimistic about the middle class, my friend.
Mighty Investor I urge you to please reconsider your view on fat poor people. I believe there’s more at work here than you realize.
American food companies took military preservation techniques postwar and repurposed them for non perishable food. Now those processed, unhealthy, convenience foods are ubiquitous (see any grocery store). Poor people make low wages and often work many hours while trying to raise kids. Convenience foods are quick and unhealthy foods tend to deliver many cheap calories. Remember, these products are relentlessly advertised and easier to obtain than fresh produce in many poor communities. Honestly the sweep of this problem stretches far beyond poor and well into middle class families.
Ugh, also, the food subsidies in this country are completely misaligned with a healthy diet. If you look at the foods that get subsidized, green vegetables are waaaaay down on the list, even though they are just about the healthiest thing you can eat.
Well done navigating a highly-charged and political topic. It’s tough to apply any sort of pronouncements or predictions to so many millions of people at once, but I agree that for those willing and able to transition into ownership through the user of their capital- the future looks bright. Putting money to work so that I don’t have to is such a fundamental component of building a better life that I hope more people can follow suit.
In the meantime, we’ll all just need to keep striving for the balance box driven changes that you mention and doing our best to teach (often by example) how it’s possible to rise up from the middle class.
Thanks Andy, I figured I would catch some flak for this one but I enjoyed researching and writing it.
Changing the world for the better one person at a time is ultimately a big part of personal finance education. Cheers to making the world a better place.
Awesome Wonder Years clip. Wow, if that’s what we’re losing, great! I totally agree that now, people like us can own the means of production via index funds in our IRAs. Unfortunately, many people are failing to understand that their 401Ks are their pension. For instance, a friend of mine lost his job last year and he took all of his 401K for a year sabbatical. He is just now facing the taxes we warned him about and then later won’t have it for retirement (early or late). I believe that is one of our biggest missions in spreading ideas on personal finance. We are all much more in the driver’s seat, for good or bad!
The Wonder Years was an amazing show, one of my all time favs. I remember crying like a baby at the end of the final episode.
Indeed, with autonomy comes responsibility. People can make big mistakes that weren’t possible when the company was managing everything behind the scenes. Ideally the system will improve to prevent some of the more tragic examples.
I concur with the general sentiment from DoneAt53 – you have such great experience with travel, spending, early retirement, etc, that you’d probably do best to stick to your strengths. Delve too much into partisan opinions, you’ll begin to alienate your loyal followers.
While it’s easy to mock the idealized 1950s, that generation had just ended a global conflict where multiple sides were literally gassing millions of *their own people* after first stealing their gold fillings. The idea of stability rightly appealed to many. Sure, by the 1960s the dream perhaps no longer felt so ideal…but judging that period so harshly from rose-colored glasses almost 70 years later seems a bit off the mark. Had you lived through the 1930s or 40s, chances are slim to farcical that you’d have even considered marrying an Asian woman.
I’m all for celebrating the progress we’ve made in the intervening decades – and it surely is progress. No need to denigrate those that came before in the process.
Nobody mocked the 1950s or judged the period harshly. You are overthinking it.
I am however judging your comment harshly. Reading GCC is optional.
You seem to be sensitive today. I was born after the 50s so no real dog in that fight, but it seems to me that you are passing a negative judgment on that era. And both posts that point this out seemed to do so respectfully (I’m new to the blog so perhaps there is some history here I’m unaware of?). Yet both posters were treated to a ‘if you don’t like it, go away’ reply. Like personal finance and accruing ‘gfy’ money, you must be at a point with your blog where you have a gfy # of subscribers. And as you note, it’s your blog and you can do what you want. I didn’t agree with several of your observations but not to the extent I would have commented on it. That said, after reading the comments I’d like to offer some general advice given with nothing but good intentions. If you write an article, don’t expect only plaudits. And when you do get some reasonable and/or well-intentioned criticism, even if you disagree, try to respond more reasonably. I believe most are here for the discourse and shared ideas, and it’s nice to have that vs the nonsense seen in other media.
Thanks for the feedback Mr. Sloan.
“You seem sensitive today” and “stick to your strengths” don’t seem particularly well intentioned. It must just be me.
It’s quite possible I am overthinking it, though reading “Which is all I’m going to say about the overtly sexist, patriarchal, classist, racist aspects of the idealized 1950s.” didn’t seem that ambiguous.
“Stick to your strengths” wasn’t meant to be harsh – to the contrary, I was trying to pay you a compliment. You have readily identifiable strengths and this blog generally provides an excellent forum for their expression. I enjoy reading it.
Nostalgia has a way of overemphasizing the positive and ignoring the negative. I happen to believe that some truths are self-evident, such as all people being created equal. I’d also rather not live in times when slavery was cool, women couldn’t vote, or religion was more influential than science. Those were common characteristics of long periods of world history. That isn’t harsh or judgmental.
I also didn’t mean “reading GCC is optional” so harshly. My apologies. Genuinely, there is a lot of content on the Internet and if somebody doesn’t enjoy reading my site that is OK. Since you didn’t like this post, you probably won’t enjoy several others I am thinking about. If you feel alienated because of it, that is unfortunate. I hope you find what you are looking for though.
Reading GCC is no an option to me anymore.. It is clear you are a racist against a whole generation. OUT! permaanently.
Have a great day
“Chances are slim that you’d have even considered marrying an Asian woman”.
What a thought provoking statement. Do you think that because we were at war with Japan? Or because there were almost no Asians in the US during that time period? Or because Asians were simply discriminated against during that time period regardless of their country of origin or beliefs?
If the former, it reflects the thinking at that time that all Asians are the same, when in fact Chinese and Japanese were the most bitter of enemies. Japanese killed and oppressed millions of Chinese during WWII and to this day many Chinese have not forgiven Japan for their war crimes. As for Taiwan, it was ceded by China to Japan well before WWII but many considered it to have been occupied by Japan all those years.
I interpreted it as “don’t be judgmental of people who were racist, because if you were in that era you would have been racist too.”
I was a new immigrant to the US from Singapore in the 70s… I was only 7 or 8 yrs old when people would come up to me randomly in the street telling me to go back to Japan. At 7 or 8, I didn’t even know what that meant. It would have been worse in the 50s, so that’s probably true!
I like your take on the pensions going away. I hear people complaining about how they just don’t have pensions like they used to. But who would want to be stuck with some company just because they’re beholden to them for their retirement? The 401k was put in place to help workers stay mobile, save more, and retire earlier. The problem seems to be that most people didn’t get the message about being accountable for your own future.
Like with a lot of issues we have today, I think education is the solution. Things will change when instead of complaining about the magical pensions disappearing, parents are excited to tell their kids about how they can achieve financial freedom if they just max out their 401k’s :)
I think 401ks were put in place to reduce corporate expenses, but the worker mobility was highlighted to make it sound more loving :)
Systemically I think we need improvements to make the educational barrier less burdensome – auto enrollment in a company 401k plan, legal requirements that low cost ETFs be an option, automatic increases in future contributions based on salary growth, and required retirement plan training at least upon enrollment if not more often. I know high school level personal finance classes have mixed reviews… I know I certainly ignored most of the stuff taught in high school, but that seems to be something that needs more investment as well.
Pensions are just about the best retirement plans that exist…once you vest. Until that time, they are golden handcuffs. I think about this every time my wife tells me “the state is hiring,” knowing that I likely do not have to work for another 10 years and would not want to be “stuck” there trying to vest!
Vested pensions can be nice, but I would still rather have the cash value. I can buy my own annuity if that is what is best.
For the purpose of intergenerational upward mobility, pensions are terrible. I want my kid(s) to start higher up the ladder.
This made me think about the friends I have who work for startups who have to stick around an extra year or two to get their stock options. They complain a lot about having to stay that extra year. Imagine if it was 40 like you said!
The internet has also enabled and will continue to enable a lot more personal responsibility for finances. When I first started investing I had to read about it in books and read the newspaper to get information about companies and the market. Now everything is at your fingertips and is much more accessible to anyone with internet access. There isn’t really an excuse not to learn about something.
My husband started a business in his late forties. My husband works in IT and kept getting “let go” every five years or so even though performing well (I have been a sahm because of his success) but IT companies go in different directions, sometimes want to hire younger or cheaper or whatever. Luckily, due to our frugal ways in the past, we were able to live through the last few very lean years even with 3 school age children. We took a hit short term living off savings for hopefully a bigger and better long term. Agree with Olivia, you have to be learning new things or have some good savings or you could find yourself a shakey ground if your job situation changes. It does depend on some luck, skill set and job security, unions etc. too but that union/seniority work environment is becoming less the norm.
YOU MEAN I WON’T GET MY PENSION?! (Just kidding. I’m from Illinois. It’s practically a given that they are mismanaging my money.)
I guess, for me at least, my fear is who we are leaving behind. I would say that I teach increasingly few middle class kids. My city has mostly become multi-million dollar homes and subsidized housing (it really took off when some of the housing projects in Chicago proper were permanently shut down). Also, I lived a solidly middle class life, and if I have my way, my husband and I will pull in an upper class income in the next handful of years. But while I make my upward climb, I can’t help but wonder whose backs I’m stepping on as I do so.
Thanks for giving me a lot to think about this Monday. Now excuse me while I go work toward my pension ;)
I hope you do get your pension, you’ve earned it.
What are some examples you are thinking of, re: stepping on others’ backs?
I assume the backs she is stepping on are the lower and middle class that work for private employers and pay taxes to fund her unsustainable pension. That is why pensions for public employees makes absolutely no sense, yet somehow they feel like they earned it.
I imagine Penny meant something much less confrontational and abusive, such that it invited more dialogue rather than shut it down.
You can look at the issue from a personal view or a society view (and yes they are not exclusive).
A nice follow up would be how different countries are handling this transition. How they handle healthcare, pensions, job/economic security…., Some countries take a laissez-faire approach which “in my view” moves them more to a bi-polar economy.
As someone born in the 1950s I gotta say that it was ideal…if you were white, male and straight. If you were female, non-white, gay or just didn’t want to live in a stereotyped family today is much better.
As a straight, white male, that doesn’t sound ideal to me. I’d much rather live in a world with freedom for all people.
I’m right there with you Chris. Equality for all. Just because the system may benefit me personally doesn’t make it a good system.
The loyalty for life to get a pension tradeoff is also less than ideal for basically everyone, imho.
I like the optimism here. Investing can provide a way out of the “labor class”, but the employment situation has become much tougher than in the 1950’s.
Rather than having a stable job for 30 years, many now have to contend with finding a new job every 5 or so years. The job situation is far less stable, and investments/savings are often needed to “fill the gap” as well as social systems like unemployment compensation.
In a way, I think it’s harder to be middle class now… but you’re also right there’s a path to escape and become part of the “Owner” class. The financial skills and financial intelligence of the individual are more important now than ever.
Yeah, financial skills and intelligence are required more so than when somebody else takes care of it all. At some point in history reading skills became mandatory. Then math skills. Now a bit more.
Thanks for the article Jeremy- I enjoy the perspective. I assume you mean “middle 3 quintiles”? Not quartiles? or did you mean middle 2 quartiles?
Probably, yeah. Those middle ones.
I would like to propose that middle class is 2/3 to double the median income. Up to 3X median income is upper middle class. Beyond that, you are upper class. Today, that is about 40k-120k middle, 120-180k upper middle, and > 180k upper. The top 5% is at about 160-180k. Surely, the top 5% are upper class. You could slice this by family composition. Medians are 38k female headed household, 55k male headed, and 85k couples. Those are Census Bureau figures for 2015.
You might be able to convince me that it should be adjusted for cost of living, but I think, if you can afford Manhattan, you are wealthy. Otherwise, you live in Queens.
I’m agnostic to the actual definition used in dollar terms.
If you spend less than you earn from investments, you are rich. If you spend more than you earn from your investments, you are poor. In between is a matter of degrees.
On the one hand I have always been optimistic about Americans moving onward and upward from the prior generations. I suppose that was part of my personal history where my wife and I succeeded well beyond our parents. That is no disrespect to them since they succeeded beyond their parents. I just felt that was the way it should be, and have instilled that same message in our daughter. That side of me remains optimistic for the chances of the succeeding generations.
On the other hand I see headwinds for those generations behind us Boomers. International competition is much more pronounced than it was during our era. The push for compensation in many large companies to be disproportionately pushed in the direction of upper management at the expense of the worker bees has caused a hiccup in wages that hopefully will be addressed in the not too distant future. The consumption habits of Americans, where things are prized above all else, will be the death of the finances of many coming up. And lastly, I worry a great deal about the drug epidemic in this country, especially with opioids, where you have great numbers of people (and increasing daily) who will be contributing absolutely zero to their own economic welfare while oftentimes impoverishing those around them and society overall.
What can help in this regard? Financial literacy for one. Schooling needs to emphasize the basics of finance and get away from some of the nonsense they are currently teaching, including the love of socialism that many Millennials seem to be embracing per recent polls. Expansion of the IRA and 401k programs will help with retirement savings, particularly in the small business area where the need is greatest. I believe our President will help with the expansion of jobs in this country, but worry that the progress he is making with our trading partners will be shelved as soon as Americans put in an administration promising them more free stuff. I was going to say a bit of financial austerity on government’s part at all levels in this country would help, but realize that is a lost cause regardless of which party is in power. I will end it here and look forward to seeing the ongoing comments from others, in addition to those already posted. Thanks for a great topic!
Technology-wise, quality of things in our lives, better by leaps and bounds for sure. I am on the 401k side of the fence too. I’d have preferred the social aspects of the 50s though.
At first glance the 50s seem like they would be better, but I’ve worked in a job that I was on autopilot and decided to move on for be challenges. If however I was laid off and unwilling to learn new skills then the 50s sound great.
I definitely see how missing the good job boat can be a huge set back and as international competition grows I forsee wages going down.
We could use a lifestyle check as well.
My first job out of college came with a pension. If I was still working there I would be dead inside (but also, that company was bought out, sold again, gutted, and won’t exist in any form within 2 years.)
There were definitely good things about the 1950s (or any era, really.) I particularly enjoyed the 1950s scenes in Back to the Future 2.
I have been a loyal and interested reader since the early days of your blog. While I generally enjoy reading what you post, I think you miss the big picture of why the 1950s- and the stability that came with it for middle class whites (the majority of Americans at that time)- are looked at with nostalgia. Most people are inherently wage slaves- they lack the gumption, risk tolerance, resources, opportunity, innate talent, or in some cases, the luck to make the leap from wage slave to breaking out of the doldrums. Most Americans would gladly trade some- perhaps nearly all- freedoms in exchange for guaranteed three hots and a cot, along with the obligatory annual two week vacation in the station wagon. In many ways you and I, and everyone else who has found their way to this blog, are already elites in a general sense. We are likely educated, risk takers, talented, opportunistic and yes, born into some semblance of luck. For the rest of America- the two hundred fifty million plus- asking them to code, build robots, serve a as professional doctors, lawyers, web developers, et al., is beyond their grasp for all the aforementioned reasons. So, while today’s playing field has made it easier for smart, timely, talented, educated and lucky people to self direct more interesting lives, most average joes and janes find themselves in a place in time where wage slavery does not even provide three hots, a cot and a two week vacation, let alone decent affordable healthcare. We as a nation have to come up with a fiscally responsible manner to serve the masses, and asking them to be seasoned investors when many of them do not have enough food to eat or basic health insurance, comes off as asking them to eat cake when they don’t have bread. Peace!
Hi Bee Gee, thank you, this is a fantastic comment!
We probably agree on more than you think. There are enormous systemic issues that need improvement (education, health insurance, more…) I’ll vote for those improvements, and contribute more in taxes and donations to do so.
For the 250 million, it would be absurd to expect all of them to be doctors/lawyers/coders. It would also be absurd to expect them to be seasoned investors. Fortunately neither of those are necessary. Saving 10% of income in a 401k in index funds for the duration of a working life earning middle level incomes is enough.
But…many people are earning 23k a year and not able to put 10% into a 401k. The people earning middle level incomes (nursed, police officers, doctors etc) are not the ones in trouble. What about the teacher in Oklahoma earning 28k a year and not getting a pension? The folks flipping burgers? This model just won’t work for them.
Come on now. 10% of $23,000 is only $2,300, they still have over $20,000 to work with. I’ve spent less than $20,000 in 4 out of the 5 last years (I bought a car one year, still under $23k though), tons of other people do too. Even if the only job someone is capable/willing to do is work in fast food, they can still save money as long as they don’t catastrophically screw up (taking out massive student loans for a job that pays minimum wage, having kids you can’t afford, etc).
Oklahoma teachers have a pension, no? $28k sounds like worst case starting salary and moves up from there? Plus summers off?
It also won’t work for the switchboard operators, pin makers, milk delivery people, and other jobs that no longer exist. There are systemic issues around education and job retraining that need improvement. Still, some people can’t be helped (because they refuse to be helped.)
A married couple making $28k each is making more than the median level of income in the US. However, any job with no prospects towards an income of $40-$50k per year or more should be thought of as a stepping stone to something else.
So, I think we are overestimating the intelligence and ability of the average worker. I work in an ER and see ALL kinds of people all day. There are millions of Americans who just fail at adulting, whether it’s from nature or nurture I do not know. Mental illness, drugs, sheer stupidity, too many kids too young, whatever. They just can’t get it together. They probably would have been fine in an era where someone told them to put screw A into hole B, but they just can’t function at a higher level. This is a large portion of the population, and is the portion that is really suffering. I don’t think these people refuse to be helped so much as this is the level at which they function. They just don’t have it in them to do more, no matter how much job training you give them.
Back when jobs were low-skilled but paid well and healthcare and housing were cheaper, they did OK. But they just can’t function at the high level required in the current economy. What happens to them? They are a large portion of the population.
Just speaking for myself, I wasn’t making ANY evaluation of the workers, just the system. As far as I know, ANYONE who’s saved up some money can open a Vanguard account. If they choose to buy an ATV instead of VTI, they can. Equality of opportunity, not of outcome.
I have a very different experience with the average human, which would consist of most of my extended family, everyone I grew up with, and everyone I worked with until about age 25 (factory work and manual labor jobs during summers, etc…)
Most people are really quite intelligent. The incentives to showcase that in a work environment are not that great though. I worked with one guy at a pump factory who was a pretty savvy investor who showed no initiative at all at work, in part because he’d been promoted several times when he was younger with no pay increases but more stress and responsibility. Obviously he stopped showing initiative. If you wanted anything fixed in a house or on a car though, he could do it with the scrap found in the lot next door.
I imagine if I were to arrive at the ER, say at 3 am, worrying about a medical condition and if my insurance would cover it, waiting 4 hours to see a Doctor for 2 minutes, thinking that I might have to skip a mortgage payment or 2 to pay the ambulance… I might not show my best self either.
Sure, repeat ER patients aren’t the majority of the population (some people come every day- this is not you in the ER at 3 am). But they are probably a larger sample than your family, everyone you grew up with, and everyone you worked with. I agree most people who work factory jobs are fairly bright and definitely have a work ethic. But there are millions out there with mental health and drug issues who can’t handle any job. At all. What do we do for them? Denying their existence makes believing in a meritocracy easier, but it doesn’t solve the issue.
I ask again, what do we do with the intellectual bottom 10%? The mentally ill? The violent? Released offenders? The deeply traumatized with PTSD? The drug addicted?
My hunch is you have never held a job where you work with the deeply, generationally dysfunctional. I don’t mean the poor, the uneducated, or the hard-working laborer. I mean the third generation drug addicted. The fourth generation mentally ill. That is not going to be solved by a 401k or a TSA for everyone.
I agree with all of those points. That’s why this post isn’t called The End of Poverty.
“I ask again, what do we do with the intellectual bottom 10%? The mentally ill? The violent? Released offenders? The deeply traumatized with PTSD? The drug addicted?”: Stop ‘poisoning’ them with bad food and bad medicine.
The OK state pension system is extremely underfunded…
The Aus ‘Superannuation Guarantee’ is 9.5% of gross income 2017 / 2018. Scheduled to increase to 12% 2025 / 2026.
I found the comments to be almost as interesting as the blog post itself. I love (cue the sarcasm) how people can find the time (and audacity) to tell someone what to post on their own blog!
Keep up the good work sharing your thought process about all things big or small…financial or not. It’s entirely your prerogative!
Ha, thanks TMP. The only blog that will ever focus 100% on the things you personally care about is the one you write yourself. I thought this post was great :)
Great post on a charged topic. I think there’s more opportunity than every in today’s economy. But that opportunity often requires a STEM education that, statistically, the US isn’t doing very well at. As you stated in another comment, I also think so much more financial hard times come from medical bills nowadays that it cancels out lots of the progress we’ve made.
I just googled STEM as a percentage of US workforce, and it is about 6% according to BLS.
Saving 10% of income to be FI around age 60 should do doable for at least the upper 50-75% of the workforce.
Saving 50%+ should be possible for upper 40% or more. Seems like STEM is optional, although a large percentage of FI blogger types have STEM degrees.
Medical issues can derail this at all income levels, although ACA in current form can help.
Thanks! Your blog inspires me alot on planning for early retirement. I feel late to only consider retirement in my 30s, but better late then never.
In this current situation, is investing in index funds still profitable for retirement or should we invest in bonds now?
Did you day trade before to create income when you are cuilding up your retirement fund?
Hi Etalo. Maybe the best place to start is with this book (try to find it for free at your local library.)
I never day traded and never will.
Great post. Really enjoyed it and all the great comments from all sides. I think this article spiced up your blog and would like to see more like it. You really write well.
I am the same age as “Kevin Arnold” born in 56. Had a great growing up with very solid “lower middle” class family. But Dad with his sole income, with no college, put all three of us through college with no debt. He was a depression kid and debt wasn’t a thing you did.
Mom was home everyday to run the house and be there for us kids. My dad got home pretty much everyday by 5 and I don’t remember him having any emails and crap to check.
50 and early 60’s were pretty great for my family. And BTW the 60’s and 70’s hands down had the best music!
60s and 70s were definitely the best music. I still listen to it daily, along with a bit of mid 90s grunge from my high school / college days.
While you barely touched on the issues of the 1950s (racism, sexism, etc) you completely ignored those of today. Where is this democratization you speak of? Last I read it was something along the line of 50% of American workers do not have access to a 401K/403. Yes, they can open an IRA but that is capped way below a useful amount.
401K plans are still tied to your employer. The choices within are also tied to your employer. And trust me when I say, not all employers are created equal.
When they do something along the lines of opening up the Federal Govt 401K plan or even Vanguard/Fidelity/etc to all, independent of employer, we can at least say some “real” progress has been made.
I’d like to see the TSP made available to all as well. I’d vote for that.
The median household income in the US is about $50k. A married couple could contribute 20% of income to IRAs at Vanguard/Fidelity independent of employer. Access is not the biggest factor; 80% of our net worth is in taxable accounts (not in 401k/IRA.) Democratized.
Aus Superannuation is independent of employers.
Wow – one of your best blog entries yet! Thank you.
Thank you! :)
Jeremy, Agreed that the shift from defined benefit to defined contribution plans is a positive. I would never want to be tied to one organization during my working years and then have to worry it might become insolvent at some time after I retired. I prefer a little more diversification in my investments. If you haven’t read it already, you may enjoy Robert Reich’s book, Saving Capitalism. Reich offers some practical ideas on things we could do to save the “middle class”. His number one suggestion is to get the SCOTUS to rehear and overturn Citizens United. Until that happens, economic inequality is just going to keep on getting worse and worse, according to Reich…
I always enjoy your perspective. A couple of points of my own. In this age, if someone is lucky enough to have a 40 hour a week job with two weeks of paid leave, the company really only commands 20% to 25% of their time. Based on an 8 hour work day, weekends off, two weeks of leave and 11 federal holidays. Granted, an increasingly large portion of this country is moving in the direction of not having that job. On the other hand, an increasing portion of the world population is moving into what they would consider middle class. There has been tremendous wage growth in Asia (particularly China) as well as in other SE Asian countries. The “taking” of jobs that were once done by Americans has led to a nice increase in the lifestyle of many in other countries that, in the 1950s were considered poverty level or below.
Just like the the concept of “middle class” is a relatively new invention (really post WWII), there will be a redefining of what it means to “do well” in the United States. I think there will always be the super wealthy, and the fairly poor, but the middle group will define itself as we come to terms with changing technologies and what that means to the work force. I think we’ll hear more about Universal Basic Income, or some version of it, in the future. Perhaps that will help us define where the middle is going to be.
i work in a manufacturing plant in the rust belt. i am educated in science but am in a union and the work really is good paying technician work and have worked on the factory floor as an operator during some layoffs. we are a dying breed. it’s not that we are paid so much that we’re living large but that so many others are paid so little our wages look crazy high in that comparison. we just got a new contract with the 1st 2 tier system in which the incoming employees will make quite a bit less than the rest of us for the same work. i see benefits getting worse and taken away completely in my short 14 years here. i judge that age record profits every year and c-level compensation gone apeshit and will only do exactly what i am paid to do. i’ll perform the task competently and that is all you get. any ideas or real science will remain in my head. i won’t give the skills away. it’s your field, your ball, and your rules. when i get to participate in the upside of the business (never) we can revisit.
The ‘Median Class’ is alive and kicking in Australia. Wages have grown in proportion to GDP, remaining around 50-55% of GDP since the 1950’s. Aus median income purchasing power is ~40% greater than that of USA. Reduction of progressivity of taxation in USA has resulted in a richer upper class and poorer middle class. Not sure that it has increased the ‘size of the pie’.
I think the way it is reported in the US makes it look more dismal than reality. See this data point from The Economist: Americans are richer than they were in the 1970s. (on an after-tax per capita basis.)
https://www.economist.com/blogs/graphicdetail/2018/03/daily-chart-19
=1.51 ^(1/(2014-1979))-1
=1.2%
Real median incomes in Aus: http://abs.gov.au/household-income
=(1600 / 1050) ^ (1 / (2016 – 1995)) – 1
=2.0%
Income numbers are rather rubbery. Aus is counter cyclical to USA.
Thanks for this. It triggered me to think more about the idea of middle class in a new way. I generally think that the growth model is our problem. The charts you posted show this growth, unevenly distributed, of course, but ultimately I don’t think ever increasing GDP and productivity is sustainable. There was a fantastic lecture published by the Long Now Foundation that talks about climate change and lifestyle with sustainability on a global scale. You can find it at http://longnow.org/seminars/02009/jan/16/climate-change-recalculated/. We also need to transition to a smaller (or at least maintain) global population, and this will require higher resource users to mitigate consumption, and not just for their own FI saving, but for all of us.
$100 a week into VTI for 35 years gets you 1.35M plus SS to retire on. 1.35M RMD’s at $50K per year plus SS or about 6.5K per month Oh woe is me.
Am a long time follower. And this is my new favorite of all your posts! I retired last year- many thanks for all the inspiration!
I think one of the biggest problems for the middle class are high tax burdens. This is visible especially in Europe where I live. Smaller business and individuals have to give a very high part of their money to the government. This money is mostly wasted or badly managed. On the other hand bigger companies can benefit from all kinds of tax schemes and they end up paying no taxes at all. This leads to impoverishment of the middle class and concentration of capital in the hands of big companies owners. I think this is one of the main reason the middle class is disappearing.
Why not become a company owner?
Curious, is there a data point that supports the notion that European middle class is worse off than in the past?