Even the Well-Heeled Feel the Pinch
By Amey Stone
The economy is improving, inflation remains almost nonexistent, and the latest employment figures showed a pickup of 57,000 new jobs in September. You would think the good times should be rolling once again for Americans lucky enough to have kept high-paying jobs during the downturn.
For many of the nation's highest earners, however, that hasn't been the case. A combination of falling incomes, rising interest rates, and higher prices for luxury goods and services have walloped the wealthy and upper-middle class. Soon, even people who make plenty of money could feel more strapped.
Data released on Sept. 26 from the Census Bureau's annual Current Population Survey confirmed that in 2002, the highest-earning segments of the population suffered the greatest declines in income. For the top 5% of earners (who make $150,000 or more) income fell 5.1%, while the median household income dropped 1.1%.
Much of the dip is due to setbacks in the stock market and declines in stock-related compensation, says Lee Price, research director at the Economic Policy Institute. While corporate profits are bouncing back, companies aren't sharing the wealth with top executives as much as they used to.
A survey released Oct. 2 by management consulting firm Watson Wyatt Worldwide found that 4 out of 10 companies have decreased eligibility for participation in long-term incentives. At the same time, more than half (56%) of companies surveyed asked employees to pay a greater share of benefit costs in the last 12 months, according to Watson Wyatt.
While incomes are dropping, many of the hallmarks of the "good life" are getting more expensive. Think the American Dream guarantees you should be able to pay your children's way through an Ivy League school? Tuition and fees at a private four-year college jumped more than $2,000, to $18,273, in the three academic years ended last May. Include room, board, and other expenses, and the cost of a year at a private school was $27,677 in 2002, according to the College Board.
"NEW LUXURY" NECESSITIES.
Want a large home with all the amenities in the best neighborhood? If one seemed within reach a year ago, it might not anymore. A jump in interest rates over the summer instantly changed the calculation for how big a mortgage a family can afford. Even worse, it set off a buying frenzy among families who feared rates would keep rising (they have fallen a bit since then) that resulted in a spike in average home prices around the country. Further reducing affordability, property-tax rates are climbing in many areas, and new, higher assessments won't be far behind.
Also on the rise: the price for many of the luxuries that high earners have come to see as their reward for the hard work and stress of their jobs. There's a whole category of goods and services that Michael Silverstein, senior vice-president and head of the consumer and retail practice at Boston Consulting Group, calls "new luxury." These are premium, but still relatively affordable, products that savvy companies have unveiled in the last 10 years or so to serve the hard-working affluent. Think of a $3,000 set of Callaway golf clubs, a $4 cup of coffee at Starbucks, a $4,400 Viking kitchen range, or a $200 day-spa package.
Premium products with such a dramatic markup over midrange counterparts didn't even exist in categories like coffee or stoves 30 years ago, says Silverstein, who describes these trends in his new book Trading Up: The New American Luxury (October, 2003). The reason behind their absence? Not enough people could afford them. But in the last 30 years, the highest-earning two-thirds of the population has enjoyed a 100% increase in real disposable income.
Silverstein says data he collected while researching his book show people are more stressed and tired. In many cases, both spouses are working longer hours. "They don't have time for their friends. They feel like the world is a very unsafe place, and they're worried about their physical and financial security," he says. "The pressure is high, and the relief valve is consumption."
Silverstein says in order to trade up to the "new luxury" items, families are trading down in other areas, spending less on food and clothing, shopping at Wal-Mart (WMT ), and buying generic brands where they don't perceive any gain in quality with premium-price products. He doesn't believe the upper two-fifths of the population who are engaging in this behavior are suffering from a sense of deprivation, however. His research finds that most Americans are happy to trade down in some areas -- if they can trade up in a few others, and they take pride in being savvy consumers.
And even if the savvy consumers have seen their incomes decline in the past couple of years, "they have a big shock absorber called assets," Silverstein notes. Also, the Bush tax cuts of the last few years have benefited the upper and upper-middle classes. EPI's Lee points out that the recession has taken a much harder toll on people in both the middle- and bottom-income strata.
"I don't shed any tears for the top tier of people," he says. "Even if wealth hasn't grown in the last three years, it's still a lot higher than it was 20 years ago."
True enough. But as wealth has risen, so have expectations -- and prices. The people who earn the most money may not be able to maintain the luxurious lifestyles to which they've become accustomed. They may not deserve much sympathy, but the high earners get pinched all the same.
Senior Writer Stone covers economics for BusinessWeek Online