Sunday, March 29, 2015

Middle Class? How about Middle Quintile?

Middle Class? How about Middle Quintile?
The great thing about America is that just about all of us are middle class. We all make enough money, send our children off each morning to learn in good school districts, and have appropriately attractive significant others. We are a nation living on the shores of Lake Wobegone. It's true: you can ask anyone. 85% of people in a recent Pew Research Center poll claimed they were "lower middle class", "middle class", or "upper middle class". When five out of six of us are in a middle class, that, folks, is economic prosperity.

The best things about these designations is that there are five of them: lower class, lower middle class, middle class, upper middle class, and upper class. Quintile opportunity!

The good folks at the Census Bureau have broken down household income into five quintiles. (And they've further broken it down by race, but I'm not brave or stupid enough to touch that one.) Instead of relying on existing definitions of the middle class, which are usually vague, what if we simply equated Pew Center's five class designations with the five income quintiles? The bottom 20% of households by income are lower class, highest 20% are upper class, and so on.

If your household earned between $0 and $20,900 in 2013, congratulations, you were in the lowest quintile. But you're not alone: a full 20% of all U.S. households were right there with you. Here is how American household income breaks down, for 2013:
  • 1st Quintile ("Lower Class"): $0 -$20,900
  • 2nd Quintile (or what I'd call "Lower Middle Class"): $20,901 - $40,187
  • 3rd Quintile (the true middle "Middle Class"): $40,188 - $65,501
  • 4th Quintile ("Upper Middle Class"): $65,502 - $105,910
  • 5th Quintile (the "Upper Class"): $105,911 or more
These quintiles provide a clear definition and designation for each group. Every American household fits into one of the fifths. Each fifth has an income cut-off. And while incomes and fortunes change, the true 'middle class' is always 20% of the households. If you want to include the upper middle and lower middle classes, they are always 60%. Using quintiles to correlate with classes removes a good deal of ambiguity, and reduces class designations to what they really are: a relative comparison of finances, not an absolute. To be in the middle, you need something on either side.

The biggest problem with the prevailing ideas about the middle class is that they're loosely defined, if they're defined at all. Can your inclusion to the middle class be validated simply by a list of the things middle class families can afford? Paying the mortgage and utilities, and maybe an emergency room visit? Maybe Robert Reich is correct, and that anyone making within 50% of the median income is middle class. Or maybe the Pew Center has it right: let everyone self-designate, as we do with race or gender.

I'm a fan of the clear-cut income quintiles. I like that they create a static percentage of households in the middle class. Since there are always 60% of households in the middle class(es), it changes the kinds of questions we, or policy makers, have to ask. Instead of asking whether the ill-defined middle class is growing or shrinking (with quintiles, they are a static percentage), we might ask whether the middle class is earning more or less income than they were a decade ago, or saving more or less of that income. What kinds of people and households are making up the middle class? Are they getting younger, older, or more diverse? With clearly defined boundaries, we can get in to the weeds.

For example, the income earned by the middle class quintile has decreased over the past decade. In 2003, if your household made between $43,063 and $68,968 (in 2013, CPI-U-RS-adjusted dollars), then you were in the middle fifth. In 2013, that range shifted down to $40,188 - $65,501: roughly a three thousand dollar drop. So it's true: the middle class is making less today.

Yet, taking the long view, the middle class quintile was making more in 2013 than in 1968. Back then, the middle fifth was only earning between $35,674 and $50,632 in inflation-adjusted dollars. Each of the other quintiles tells a similar story. So, at least as far as income is concerned, we are probably doing a little better than our parents and grandparents.

But as long as we choose to define the middle class with vague anecdotes (My father was middle class and he paid for college painting fences over the summer!) then the conversation will remain a battle of opinions, and inclusion to the middle class is open to anyone who cares to invite themselves. Want to join the ranks of the average? Just raise your head and proudly say, "Yes, I am middle class." Your membership card will arrive in six to eight weeks.

Of course, income is only a part of the story. Like the old saw goes, it's not what you earn that matters, but what you keep. How does net worth distribute among our household quintiles? We'll tackle that next week.

For now, let's take a poll of the readers here. Which of the income quintiles does your household fit into?

Update: here is a breakdown of income quintiles by state, but it is slightly older (2011 data).
*Photo is from DPChristian at Flickr Creative Commons.

52 comments:

  1. OK... I don't mean to nitpick here, but I never know how to answer these questions. Does "income" mean pre-tax income? Take-home pay? Adjusted Gross Income? What about investment and interest income?

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    1. Good question: to keep it simple, let's assume gross, pre-tax income.

      Here's the blurb on income from the Census site (where the quintile data came from):

      "Census money income is defined as income received on a regular basis (exclusive of certain money receipts such as capital gains) before payments for personal income taxes, social security, union dues, medicare deductions, etc. Therefore, money income does not reflect the fact that some families receive part of their income in the form of noncash benefits, such as food stamps, health benefits, subsidized housing, and goods produced and consumed on the farm. In addition, money income does not reflect the fact that noncash benefits are also received by some nonfarm residents which may take the form of the use of business transportation and facilities, full or partial payments by business for retirement programs, medical and educational expenses, etc. Data users should consider these elements when comparing income levels. Moreover, users should be aware that for many different reasons there is a tendency in household surveys for respondents to underreport their income. Based on an analysis of independently derived income estimates, the Census Bureau determined that respondents report income earned from wages or salaries much better than other sources of income and that the reported wage and salary income is nearly equal to independent estimates of aggregate income."

      http://www.census.gov/hhes/www/income/about/index.html

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    2. Okey Dokey! It will be interesting to see the comparison between how your readers stack up in terms of income vs. net worth.

      And now that you've reminded me, I think I'll go file my state taxes! :-)

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    3. I'm intrigued about how that will stack up, too. Though I wonder if all the votes are really from readers. Some may be from Toluna (the place that makes the poll widget), who may have never read the article.

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    4. Hmmm... well that's certainly a confounding factor, isn't it. Harumph!

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    5. It's cool, either way. I figure the majority are probably people actually reading the post, even if they came from that other site.

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  2. I think when one talk about household income in this kind of surveys it's usually gross income (i.e. pre-tax income). But maybe some clarification would be nice.

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    1. You got it: gross income. Luckily, you only have to be accurate enough to fall into one of the five buckets.

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  3. Income-wise, we're in the top quintile. But the other part I always I think about with regards to "middle class" is spending. Given the modest size of the average savings and tax rates that would allow backing into what the middle quintile spends (assuming they are not deficit spending), then our spending puts us solidly in the middle of the middle quintile. So we earn top quintile, but spend middle quintile - so neighbors and acquaintances would be far more likely to peg us as middle quintile than where our income actually is.

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    1. That's a great point, Mrs. Pop. I also fall into the trap of judging someone's wealth by poor proxies: the kind of car they drive, vacations they take, how the dress.

      A la Millionaire Next Door, I get the feeling there's a lot of "class deception" going on, in both directions.

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    2. Yes, Mrs. PoP, going by what people spend can be a real eye-opener. In my case, my passive income would place me in the "middle class" quintile, but my spending would place me in the "lower class" quintile.

      AND, I am sure that there are people for whom the situation is the reverse. (Because, of course, they are spending more than they earn and borrowing to make up the difference.)

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    3. Hi there, Alex. Thanks for stopping by. I wish there were spending quintiles but I'm not finding good data yet. Maybe another poll is in order!

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  4. I like these clear cut definitions too. We're in the 4th quintile, but just by a hair. IMHO, spending shouldn't be taken into consideration. We each have a choice as to what to do with our income, whether to our betterment, or to our detriment. :-)

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    1. Hey Laurie! Nice work being in the 4th quintile. For me, those quintile figures really put things in perspective, and made us feel grateful for our income.

      I think the main problem with trying to collect spending data is that most US households likely have no idea what that is. They couldn't accurately report it, like they could with income.

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  5. I feel like looking at income slights the conversation about middle class as a couple have mentioned. I would love for the census to include, current monthly payments(debt payments), while I don't see this happening I think this tells more of the picture.

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    1. Yeah, debt is a big part of the picture that will probably be missing, Even Steven. I'm going to write about net worth/wealth in quintiles next week, and we can probably draw some conclusions about debt from that.

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  6. This surprises me I guess. We seem to be smack dab in the middle, yet maybe due to HCOL here and our debts, feel like lower middle. Incomes in our area are higher though but need to be due to HCOL. Moving to FL where my mom is would cut living costs but also our paycheck! Due to this I guess I only look at our state's Median income, which according to MA we are lower middle.
    I too am interested to see how income class vs net worth looks.

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    1. Hi Dawn. These figures will mean very different things to people based on locale, though I have sometimes been able to find income quintiles by state, too.

      Page 6 of this report may have what you're looking for:

      http://www.massbenchmarks.org/publications/bulletin/09_bulletin_071411/currents.pdf

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  7. Interesting study! I realize that many other factors come into play in terms of how one is able to get by, or not, on the same income. One family making $50,000 could have no student loan or credit card debt and feel like they're doing ok; another family making $50,000 could feel they're barely getting by if they have loans, health issues, or kids, etc..

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    1. Having you comment on this post is like hitting the lottery: Middle Class Revolution, is a great blog title, too.

      I'll look around for debt by income quintiles, and see if I can find anything.

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    2. Thanks. I really enjoy your blog!

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  8. I think most all of these posts are proving Mr. DbF's main point - get your head around a fact, and then pull the weeds. If we can all agree to these quintiles, then we can parse out other data like debt, "feelings", or even spending - both above and below one's means. We can see more patterns. Possibly those in the upper quintile have more debt overall. Possibly we find an evenly distributed debt burden for all classes. Maybe we find that even though someone is solidly in the "middle class" quintile, they "feel" like "lower middle". That can be helpful and meaningful information! However, if we're still sitting around arguing about what the hell middle class even means, and who it includes, it's a hell of a lot harder to have these other discussions.

    Bravo, Mr. DbF. I can't wait to see next weeks post. Sounds like it'll be bloody brilliant as well.

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    1. You know how to make a guy blush.

      The thing I really got out of the quintiles was perspective on income. Households earn less than I'd thought they would. I feel a lot of gratitude for what we make now.

      It's changing some of my views on frugality, too. It's harder to say that frugality is the best way to wealth when 60% of households are earning less than $66k.

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    2. Wow... Yeah. I never thought about it like that. Flipping brilliant. My household is solidly in the "upper middle" quintile, but will easily move into the "upper" in the next 3-5 years.

      I'm literally sitting here still processing that point. I can't put together a good response because that reality just blew my mind a little, but it makes such perfect sense...

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    3. We've got it good.

      I should probably give away more than I do, too.

      I'm still diving into the data, but the relationship of income quintiles and net worth is probably more shocking than the income quintiles themselves. People aren't investing in assets very much, and/or they are taking on too much debt, and/or they put too much of their net worth in homes.

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  9. Is there a cost of living adjustment to these quintiles? =)

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    1. Hi Andrew! At the very bottom of the post, there's a different link that gives state by state breakdowns.That probably doesn't really account for NYC.

      However, I did a little google search, and found some 2010 data on Manhattan income quintiles:

      http://furmancenter.org/files/sotc/Manhattan_2010.pdf

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  10. I also find the definition of a "household" to be a little vague and not easy to compare :) If we define the 3 is plenty household of two working adults, we're in the top quintile. It's hard to compare when you don't know the makeup of the other "households" in the study/survey - because it's logical that a single person will make "less" than married dual incomes.

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    1. I hear you, Three is Plenty. I think it's simply a definition used by the Census. But I think the first link still has the info you are looking for:

      http://www.census.gov/hhes/www/income/data/historical/household/

      Table H-12 has the data broken down by number of earners in a household. H-11 may also be helpful to you, as it looks at the size of household.

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    2. Household is kind of vague. You could be a family of four, lower middle class, and still be living below the poverty line.

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    3. Household is actually a defined term of the Census. We may not like the definition, but I don't think it's that vague.

      http://www.census.gov/cps/about/cpsdef.html

      However, I definitely agree that you could have a family of four or more, and be below the poverty line (while I'd still be calling them Lower Middle Class). It's a sticky wicket between the first and second quintiles. For what it's worth, benefits (e.g. - foodstamps) aren't counted in census income.

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    4. Yeah that is pretty cut and dry lol. I guess I just mean the size of it changes things a lot. If I were single or even just the two of us, I'd be pretty happy with my income level. The kiddos get help with health insurance as is, but nothing beyond that in terms of assistance. We're also not below the poverty line though.

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    5. I see what you're saying: the high-level income quintiles don't account for varying family sizes (DINKs vs. family of five, for example). That's true, and it probably matters more in the bottom two (maybe three) quintiles. My assumption is that, after a certain income level, the effect of a couple kids starts to diminish.

      Give table H-11 a look: it breaks down household income by family size, if you scroll down. There's a crazy trend there: median income goes UP when you see family sizes increase, until you hit a family size of four/five, then it plateaus in the $70k+ range, and goes down a bit.

      http://www.census.gov/hhes/www/income/data/historical/household/

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    6. That is actually crazy interesting. I can see how the jump between one and two person households would happen: you've got dual income most likely. Maybe after a certain number of kids someone decides to stay home to take care of them, and the sole income earner has a higher salary than the averages of the households without kids which I'm presuming would be by and large younger.

      Pure speculation. But it's fun.

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    7. I think the small households may have a more diverse mix: 3 people can mean two earners and one kid, or a single parent with two kids. As the family sizes start to grow, my guess is that it may trend towards more and or higher earners.

      Like you said, hard to know without disaggregating the data...but fun to speculate.

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  11. I read a similar article recently (I think it was on Minneapolis-St. Paul City Pages) and I thought the Census bureau also broke out the income brackets by location? After all, middle class in Minneapolis is NOT middle class in Kansas City or Wichita. If this is household income I would imagine a whole bunch of your readers would fall under the "Upper Class." Time to check and see if I'm right.

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    1. Hey DC. I agree that the figures are location dependent. At the very end of the post is a state-specific quintile chart that you might find interesting.

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  12. Interesting. I often wonder what constitutes true wealth--seems like it's usually perceived as the ability to spend money on luxury items. Like you mentioned, I think the factor of how much you keep is perhaps a greater indicator of your true "class" designation than what you make and spend. But maybe I just feel that way because I don't spend much money :). To that end, I'm looking forward to your net worth post!

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    1. Thanks Mrs. Frugalwoods! Wealh/net worth is a better indicator of where you are financially than income, IMO. They're related, potentially, but income's fleeting and temporary, by definition. Wealth can stay.

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  13. It might seem like the data supports someone making 100 grand as middle class, but it is 2 times the average real middle class income. (52K) So I would most likely put those over 100K income level in a different category, and not middle class. Obviously the cost of living in specific markets has to be considered in relation to the income to clearly define where you stand, and how much you keep can help you move up in class. Good Post.

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    1. Hi there EL. There's a link at the end of the post for some location specific quintiles.

      I did a little digging and the per capita income numbers are shockingly low: $28,329 in 2013.

      http://www.census.gov/hhes/www/income/data/historical/people/

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  14. I'm Aussie, so I won't skew your figures, but I'd be upper quartile on my own salary, and my partners matched mine, so... blowing it out of the quartiles there!

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    1. Yes you are! That's a great income, Sarah. I love hearing about people succeeding like that.

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  15. The unfortunate thing is that we are in the top quintile, but because of the debt we have it feels like we have little to nothing. I know that it is not true, but I am always amazed by the power of language and perception on where people truly think they are. My parents never even got close to the upper quintile, but I never felt we went without except Guess Jeans when I was in the 8th grade.

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    1. I hear you, Jason. Income is kind of misleading: often I feel like those who earn above a certain level (maybe $150k) feel like they can just ignore spending completely. There's a sweet spot in the engineer-type salary range that seems to allow for a great balance.

      Back when I was in 8th grade, I wish I had Guess Jeans...instead of my Bugle Boys.

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  16. I love how you've called out this loose definition of 'middle class' and really put some perspective on what it truly means to be around the middle. The analytical part of me loves to tie these things to cold, hard numbers, which provides real context and perspective for these sort of discussions.

    I look forward to reading your post on net worth as well to really round this out. It would provide some great perspective for example if you're in the top quartile for income but still struggling financially with relatively little net worth.

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    1. Thanks, Jason! It's too important a term, and too widely used, to have no accepted/objective definition.

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  17. Interesting post as usual!

    It is really hard to compare how well off we are compared to 50 years ago because things we buy have changed so much. As you mentioned cost of college has gone up loads, yet items such as food and, say, a fridge freezer compared to disposable income has gone down. It would be interesting to see a study that took all of these factors into account. I'm sure there's one out there somewhere!

    FYI we are in the upper class according to the poll but it's pretty meaningless for me to answer as we live in the UK. I just wanted to join in :)

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    1. You're always welcome to join in, FIREstarter!

      Inflation's a very nuanced metric. As you noted, the prices of things often go in different directions, so a blended inflation figure like CPI (which doesn't even account for a lot of basic things) is too aggregated to apply to an individual's situation.

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  18. Very interesting! I find that by the income chart I'm solidly in the middle class, but I don't always feel it. I suppose I might even at the exact same income level if I weren't spending 50% of my income on debt each month. That does make a large difference to me.

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    1. That's really the key, isn't it? Where your money is going to.

      As someone who's paid off his debts, I can tell you that it feels very different to have that money going towards investments rather than to debt. You feel better on the other side, even though your spending might stay the same.

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  19. The interesting thing about these statistics is that while the percentages of each quintile might remain the same, the individuals that make up the statistics can easily change numerous time throughout their lives. Someone in the lowest strata might move into the next higher one, while someone in the highest might sustain a loss that puts them into a lower one. Too many of these studies implicate that once in a given category, that one is in it for life....sort of like the old Indian caste system. This, unfortunately, is something that even the current presidential administration professes to be true, perhaps n an effort to promote the wealth re-distribution agenda.

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