Thursday, September 27, 2012

The Middle Class is a Meaningless Term

Recently I was reading a forum thread in which a person rails against the reset of the estate (death) tax* as another way that the government is screwing over the middle class. It occurred to me that this particular person has no clue what the middle class is. And I can't really blame him. There is no concrete socioeconomic definition of the "middle class".

But even if the death tax resets to 55% on any amount over 1 million dollars within an estate, it still doesn't hit the middle class. Unless you define the middle class to include the top 10% of households by income. Take a look at the distribution of household income in the United States:

Source: Federal Reserve Survey of Consumer Finances, 2010
 As you can see, there's a pretty big disparity between the richest households and the poorest households in terms of annual income. But there's an even bigger disparity when you measure the richest and poorest households by wealth:

Source: Federal Reserve Survey of Consumer Finances, 2010
I've blogged multiple times about the importance of saving and why there's a huge wealth disparity. Put simply, most households don't save nearly as much money as they should. And most of their savings is in the form of home equity, which has low liquidity.

But let's not pretend that a household in the top 90 to 93% of society is in the middle class. They are far from it. And yet if you polled members in that household, they'd undoubtedly say they are middle class. Our image of the upper class is that of people who don't work, make millions off of passive income from their gigantic portfolio of securities, and own multiple homes in multiple countries. But there's a better term for those people than just "upper class": phenomenally wealthy.

It's time to get rid of the term "middle class" and get more accurate socioeconomic grouping terminology. Here's what I propose**:

1. The Unwell: This group is comprised of people who have no wealth and very little income of their own. They also do not have any meaningful support network (family and friends who can help them out). Because of their plight, it is virtually impossible for them to engage in society in any socially or economically productive way. Most people in this group find themselves here due to mental or physical illness that render them unable to function in society. They make up approximately one half of one percent of the population.

2. The Disenfranchised: This group is comprised of people who, by the unhappy circumstance of luck, find themselves living in extremely poor areas. Unemployment in this group is extremely high and the lack of good public infrastructure (good schools, good roads, safe housing and public spaces, etc) leaves them on the fringes of society without little or no access to the more prosperous areas of society. Most people in this group are in an ethnic minority. They make up approximately 15% of society.

3. The Working Poor: This group is comprised of people who have low paying jobs, low levels of education, and have very little saved up in terms of liquid wealth. Their wages allow them minimal disposable income and they cannot afford to take extended periods of time off work and have marginal access to anything other than core public infrastructure. They make up approximately 20% of society.

4. The Working Class (aka: the "middle" class): This group is comprised of people who have jobs that pay a wage where there is room for a "normal" amount of disposable income, most of which is promptly spent and not saved. They may or may not have gone to college, although most have not. They have access to just about every part of society and access to credit, which they will use to purchase real estate.

The vast majority of their wealth is their home equity. Most members in this group will retire with just enough to scrape by with a semi-comfortable retirement possible only because of their real estate wealth and the Federal transfer programs of Social Security and Medicare. Members in this class can quickly find themselves as members of the working poor should unfortunate events occur (such as a catastrophic physical accident, unplanned pregnancy, debilitating illness, etc). They make up approximately 40% of society.

5. The In Crowd (aka: the upper middle class): This group is comprised of people who enjoy the full benefits of modern society. Access to good schools, good communities and good parents allow them to attend and graduate college. Once they enter working life, they will quickly find career-track jobs (where their incomes will outpace inflation for many years and then level off at a high percentile bracket). They have large amounts of disposable income. Depending on their personal finances, they easily move one bracket up or down. They make up approximately 18% of society.

6. The Working Rich: This group is an extension of the In Crowd. After deciding to save a lot of their money, many people in this group can actually afford to take long periods of time off work or retire early. They just choose not to. Depending on where they are in their career, they may or may not derive most of their income from passive sources (as opposed to wages). They comprise about 5% of society.

7. The Leisure Class: This group is comprised of people who are often the direct descendants of the working rich. They are well educated but the jobs (if they choose to work) they obtain are often only possible to acquire due to their extraordinary connections and (inherited) wealth. They are spoiled, nasty people who have never worked a real day in their life. I hate these people. Sadly, they make up the rest of society.

There it is. Your new major socioeconomic groups. I'm glad we finally got rid of that politically correct catch-all "middle class" and substituted a hierarchy that makes sense and is depressingly accurate.

* I'm staunchly opposed to the estate tax. But I'm not going to pretend like it doesn't solely affect rich households. 

** This stuff may or may not be directly inspired if not outright copied from Paul Fussell's work

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