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The middle class is even worse off than the numbers show

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The "average" American worker earns about $44,000 per year and saves around 4% of his income. And the "average" household has a net worth of approximately $710,000, including the value of homes, investments, bank accounts and so on. But many Americans, needless to say, fall well below those benchmarks, which fail to capture widespread financial distress.

The gargantuan fortunes of the rich have become a cause célèbre scrutinized by, among others, French economist Thomas Piketty in his surprise bestseller, Capital in the 21st Century. Now, the growing gap between the rich and the rest may be distorting numbers long used to gauge the health of the middle class.

The rich have always skewed wealth and income data to some extent, since they pull up averages and make ordinary people seem a bit better off than they really are. But the outsized gains of the super-rich during the past 25 years have become so disproportionate that some measures of prosperity may be losing their relevance. “When wealth and income are as concentrated as they are, examining the ‘average’ consumer or ‘average’ investor makes little sense,” economists at Bank of America Merrill Lynch wrote in a recent report.

Americans falling behind

This may help explain why the economy seems to be gaining strength — on paper — yet millions of ordinary people feel like they’re falling behind. Americans’ total net worth, for instance, recently hit a new high of $81.8 trillion, thanks to a five-year stock market rally and the gradual restoration of home equity lost during a six-year housing bust. Yet consumer spending remains tepid, home buyers seem to be hibernating and an alarming portion of adults aren’t even looking for work. Polls show widespread pessimism that’s out of sync with an economy supposedly heading into its fifth year of expansion.

That could be because Americans are struggling more than the numbers show. The average savings rate, for instance, is about 4%, yet it varies widely by income group. Here’s a breakdown calculated by economists Emmanuel Saez and Gabriel Zucman:

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Source: Emmanuel Saez and Gabriel Zucman, The Distribution of U.S. Wealth, Capital Income and Returns since 1913

Source: Emmanuel Saez and Gabriel Zucman, The Distribution of U.S. Wealth, Capital Income and Returns since 19 …

The bottom 90% of earners — most Americans — save only about 3% of their income these days. And for a decade prior to the 2007 recession, the savings rate for this group was negative, meaning most Americans borrowed on an ongoing basis to supplement their income. That debt binge created a financial hole many families are still digging themselves out of — one reason many people feel like they’re falling behind.

Wealthy Americans save about 12% of their income, by contrast, and the richest 1% save 38% of their income. Saving money is obviously important, because that’s how people create wealth, finance a home purchase, put their kids through college and improve their living standards. The huge and growing gap in the ability to save among different income groups explains why the rich get richer and the rest don’t.

It’s harder to categorize household wealth by income group, but the two big categories of wealth — home equity and financial holdings — are assets held by a shrinking pool of wealthy Americans. That explains how the "average" household can have a whopping $710,000 worth of assets, an unimaginable sum for many families. (If that number seems like a typo, here's the math: The total household wealth in the United States is $81.8 trillion, according to the Federal Reserve. And there are 115,226,802 U.S. households, according to the Census Bureau. Divide the first number by the second and you get an average of approximately $710,000.)

The homeownership rate has been declining since 2004 and now stands at 65%; some economists expect it to keep falling. The percentage of Americans who own stocks has been falling, too, and is close to a record low. So fewer people have been taking advantage of a housing recovery and a long bull market in stocks, which is how a growing amount of wealth is being concentrated among fewer people.

Average income has been increasing, dragged upward by the mushrooming paydays of the 1%. But median income, which represents the midpoint in the distribution of income, has been falling. Median household income, adjusted for inflation, is now about $53,000, according to Sentier Research. That’s about 7% lower than it was in 2000 — one sure sign middle class living standards have declined.

Piketty and others predict wealth will become even more concentrated among a select few rather than shared broadly, which could lead to an even murkier picture of how ordinary people are faring. The rich seem likely to thrive no matter what happens to the middle class.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.



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