How to Get That Affluent Feeling
People have strong opinions about what constitutes affluence. Last week I ventured that U.S. households with six-figure incomes generally make the cut, given that they make up the top quarter of the income distribution. I heard back from lots of readers who disagreed, and lots who agreed. It seems like a topic worthy of further consideration.
Obviously, where you live -- and how much housing costs there -- makes a huge difference in whether $100,000 a year feels like affluence or not. So do other factors such as your debt load, your assets, the size of your family and your age. Household income is a broad measure that misses a lot.
Still, it’s better than any other easily available measure I can think of. And the division between affluent and not affluent matters a lot -- for tax rates, for government policies, for college financial aid, as well as for how we perceive our duties as citizens. The fact that we'll never all agree on a single number is no reason not to talk about the numbers.
Here, to start us out, is what the distribution of household incomes looked like in 2014, the most recent year for which data is available (the 2015 numbers will come out in September):
As already noted, about a quarter of American households (24.7 percent) made $100,000 or more in 2014. Things really start to thin out above that: 11.3 percent made $150,000 or more, 5.6 percent made $200,000 or more, 3 percent made $250,000 or more.
Now, I would guess that the vast majority of people in the $150,000 to $250,000 range would say they are "middle class." In the sense that they share middle-class concerns about making their mortgage payments, getting their kids into good schools and saving enough for retirement, then yeah, they're sorta middle classish. But in the sense of "middle" as a word that actually means something, in comparison with "lower" and "upper," it's pretty weird. These people are -- again, with caveats about where they live, how many kids they have and what their net worth is -- in the top 11.3 percent of American households. That's not the middle!
It is true that a one-year income snapshot can be misleading. A 2015 study of U.S. income data from 1968 through 2011 by sociologists Thomas Hirschl and Mark Rank found that 53.1 percent of Americans made it into the top 10 percent of incomes for at least one year of their lives, while only 7.8 percent stayed there for 10 consecutive years. But I think we're talking mainly about that 7.8 percent here -- people with good reason to believe that their high incomes will continue to be high.
Another issue has been the explosion in incomes at the tippy-top of the distribution that economists Thomas Piketty and Emmanuel Saez documented in 2001. Incomes among the top 0.1 percent of taxpayers rose 116 percent from 1993 through 2014, they reported in their latest update. For those in the bottom half of the top 10 percent, incomes rose just 22.8 percent.
If you live in New York or San Francisco or Los Angeles and make $150,000 or $250,000 a year, you are well aware that there are people who (1) are much better off than you and (2) seem to keep pulling farther away from you. They are the 1 Percent, the 0.1 Percent or even the 0.01 Percent.
So $250,000 a year makes you ... what exactly? A decade ago, pundit Matt Miller offered up "lower upper class" as a label; in 2008, Fortune's Shawn Tully coined "HENRY," for high earner, not rich yet. Neither term has really caught on -- despite my best efforts -- and the "middle-class" delusion lives on.
The Pew Research Center, in its much-discussed December report on the shrinking middle class, defined the middle as "adults whose annual size-adjusted household income is two-thirds to double the national median size-adjusted household income." Anything above that was "upper income" -- for a family of three, that meant an income of $124,609 put you into the top group.
Pew later built an income calculator that lets you figure out your status by family size and metropolitan area: in the high-cost San Jose, California, metro area, according to the calculator, it takes $152,000 a year to put a family of three into the upper income group; in low-cost McAllen, Texas it takes $107,000.
There are all sorts of income cutoffs built into the federal tax code that work as de facto delineations between high incomes and not-so-high ones, and they generally skew much higher than Pew's middle/upper cutoff. The highest tax bracket of 39.6 percent kicks in at $466,950 of taxable income for a married couple filing jointly in 2016. The Pease limitation on itemized deductions and the personal exemption phase-out both start to bite at $311,300 for a married couple. Whether you're hit by the Alternative Minimum Tax, another limitation on deductions and exemptions, is to some extent dependent on how many kids you have and how high your state and local taxes are, but the burden of the AMT falls almost entirely on taxpayers making $200,000 or more and mostly on those making $500,000 to $1 million. Whenever Democratic politicians talk about taxing the rich and sparing the middle class, meanwhile, their cutoff line is usually $250,000.
Another key set of delineations between middle income and upper income are those made by college financial aid officers. Here's what Harvard College's "net price calculator" churns out for a family of three from New York state with no assets apart from their home:
A real-life financial aid decision will often take things like debts and housing costs into account; Harvard's calculator asks for your state merely to figure out travel costs, which it includes as part of the total cost. But it's interesting that, once again, $250,000 pops up as the threshhold for family income -- make more than that and Harvard deems you too affluent to help.
That's Harvard's choice, and Harvard has lots of money. Go, Harvard! I kind of doubt, though, that letting all but the most affluent three percent of Americans think of themselves as something other than affluent is really a healthy development.
There were a couple of people who told me I had it all wrong because affluence is about wealth, not income. Again, yes, somebody with $1 million in the bank who makes $100,000 a year is generally better off than somebody with nothing in the bank who makes $100,000 a year. But not always: if the first person is 65 years old and about to retire, while the second is 24 and just starting out, I'd say the second is much better off. In economic terms, wealth and income are two sides of the same coin. Assets generate income, while the prospect of earning an income for years to come is a quantifiable asset.
Nielsen defines "mass affluent consumers" as people in households with $250,000 to $1 million in liquid assets, excluding real estate but including retirement accounts -- which covers about 12 percent of the population. This is a problematic measure, though, because it excludes younger high earners who haven't had time to build up big retirement accounts.
To download it, go to Saez's website and click on "Updated to 2014" under the title "Income Inequality in the United States, 1913-1998."
Disclosure: I have a kid who will be applying to college next year.
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