Middle Class in Turmoil

Economic Risks Up Sharply for Most Families Since 2001

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Middle class families are struggling to pay for a home, health insurance, transportation and their children’s college education due to a weak labor market and sharply higher prices, despite an economic recovery well into its fifth year. To pay for these necessary expenditures, middle class families are borrowing record amounts of money, leaving them unable to put away hardly any cash for a rainy day.

The upshot: More families are more vulnerable today to unexpected events such as a layoff or a medical emergency. A few stark indicators of the precarious financial position of America’s middle class provide a much-needed reality check, highlighting why so many families feel economically insecure today. Over the past five years, the number of families with enough resources to weather a layoff or a medical emergency has declined dramatically, wiping out the gains in financial security that many families experienced in the 1990s. Specifically:

  • Families are increasingly unable to save for a rainy day. Five years into an economic recovery, average job growth is one-fifth that of previous business cycles and wages are flat when inflation is factored into the equation. At the same time, the cost of families’ top five expenditures—medical care, housing, food, household operations and cars—have risen more than twice as fast as the cost of the bottom five items. To maintain their day-to-day consumption, families took on a record amount of debt equivalent to 126.4 percent of disposable income in the first quarter of 2006.
  • Families capable of weathering this financial crunch are diminishing. Less than a third of families boast accumulated financial wealth equal to three months’ income (counting all financial assets, including retirement savings accounts minus debt), a decline of 6.3 percentage points to 32.5 percent in 2004, the last year in which this data was available, from 38.8 percent in 2001. This trend is particularly pronounced among typical middle class families—dual income couples between the ages of 36 and 54 who earn between $18,500 and $88,030 a year. Families in this middle 60 percent of income distribution who have three months’ income stowed away in liquid financial wealth declined 10.5 percentage points over the same period: to 18.3 percent from 28.8 percent.
  • Declining wealth and savings pose significant risks to middle class families facing a spell of unemployment. The weakest job growth since the Great Depression means that people who lose their jobs today face a much harder time finding new employment. Long-term unemployment in this business cycle is on average the highest for any business cycle, with 17.6 weeks as the average period of unemployment. As a result, a spell of unemployment can be quite costly for families. Less than half of all families (48.2%) could weather a bout of unemployment in 2004—the last year data was available—down from 53.6 percent in 2001. Again, the trend is particularly pronounced for typical middle-income families, only 28.8 percent of which could sustain themselves through a spell of unemployment in 2004 compared to 39.2 percent in 2001.
  • A medical emergency is an even bigger risk for families’ financial security. Ever rising health care costs consistently outpace overall inflation, leading more employers to shift more and more of those costs to their employees through higher premiums, co-pays and deductibles, or eliminating their health care coverage altogether. As a result, the cost of a typical medical emergency jumped to $3,313 in 2004, according to our analysis of the most recent figures, from $2,832 in 2001 (in 2004 dollars). That’s less than $500 dollars over four years, yet families financially capable of weathering such an increase declined to 36 percent in 2004 compared to 43.7 percent in 2001. And once again, the decline is most pronounced among typical middle class families. Less than a quarter of these families (22.5 percent) could cope financially with a medical emergency in 2004, down from 34.8 percent in 2001, a decline of 12.6 percentage points. America’s middle class families are clearly caught in an unprecedented financial crunch. As our analysis will detail, after five years of strong economic growth, most middle class families are either worse off today or just a short step away from financial disaster should they encounter layoffs or medical emergencies. No wonder middle class families are so insecure.

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