- Everyone except the US’ wealthiest are hurting financially, but the upper-middle class is seeing a disproportionate hit.
- That’s because of a perfect storm of inflation, a tanking stock market, credit card debt, and lower savings.
- Upper-middle class people about to retire are especially vulnerable.
Unless you’re rich, the economy isn’t on your side right now.
And even though these hardships aren’t hitting everyone equally, the bar is high to emerge from the current economic climate unscathed — and the upper-middle class is being impacted disproportionately.
That’s because of three primary culprits: the stock market, inflation, and debt.
Lower-income households are also hurt by inflation, but have less money invested in the market, and are therefore relatively unfazed by its rough periods; that’s in addition to low-wage workers seeing the biggest wage increases of the pandemic. The wealthiest families are on the other end of the spectrum — hurt by market losses, but barely registering any hits from inflation. In fact, their borrowing surged in the first half of this year, despite rising inflation rates and damaged stock portfolios.
Upper-middle class households, on the other hand, are at the center of the ailing economy’s venn diagram: they’re seeing more of their net wealth depleted due to the whims of the market, in addition to having their expenses skyrocket due to inflation. Plus, they currently hold more consumer credit debt than other income groups — and the interest rates they pay on that debt are on the rise.
Upper-middle income households have less savings and more debt
Upper-middle class households have saved less than most people who make less than them since the pandemic began, according to data that Moody’s Analytics shared with The Wall Street Journal. The data suggests they have less in excess savings than everyone else, aside from the lowest-income earners, both in aggregate and per household.
Mark Zandi, Moody’s chief economist, told The Wall Street Journal that this might be because upper-middle income individuals weren’t eligible for stimulus payments during the pandemic — or only reduced ones.
Upper-middle class households not only have less excess savings than other income groups, but have high levels of consumer credit debt.
The Fed has raised interest rates with the intention of slowing down inflation, passing its largest one-time rate increase since 1994 in June. But it’s making the cost of debt more expensive — a one-two punch for people also reeling from the toll of inflation in the first place.
As seen in the following chart, households that fall in the upper-middle income range — between the 60th and 80th percentile — had the highest levels of consumer credit debt — $1.24 trillion in total — among income percentiles in the first quarter of this year. The 80% to 99% income percentile fell right behind at $1.23 trillion in the first quarter.
During the pandemic, debt was cheap as the Federal Reserve held its core interest rate near zero and poured money into the financial system. But with the Fed ramping up its fight against inflation, interest paid on debt is rising rapidly. Mortgage rates alone are more than $400 higher per month on a median-price home than they were a year ago.
Upper-middle income people are having trouble dodging inflation costs
The soaring cost of gasoline, groceries, and housing is largely responsible for the upper-middle class’ growing credit card debt.
That’s because middle-income Americans are getting hit harder by inflation than other income groups, according to a recent report by Bank of America, which cited the historic gas hikes as the primary culprit. Upper-middle income people tend to live in suburbs or rural areas and commute to cities for work, and therefore spend more of their money on driving costs.
Data from the Atlanta Fed’s Wage Growth Tracker can give a glimpse into how wage growth by income group over a year compares to skyrocketing inflation. The following chart shows the 12-month moving averages of median wage growth by group and year-over-year percent changes in the Consumer Price Index:
Wage growth isn’t keeping up with inflation for any income level. In particular, those in the top half are seeing less wage growth than the bottom half. Those in the highest wage quartile have been seeing the lowest 12-month moving averages of wage growth when looking at data since 2021. For instance, this was 3.7% in June 2022.
Tanking markets are putting retirement funds in danger
The stock market is currently in a bear market, when an index like the S&P 500 falls by 20% or more. It’s the most severe slump since March 2020.
During the first few months of 2022, upper-middle class households lost more of their stock portfolios than people who earn more money than them as the stock market plummeted, according to the Federal Reserve.
People with more money tend to have more exposure to the market than lower-income groups; the wealthiest have the most expansive stock portfolios, middle-class households have a smaller number, and low-income ones have the least investment, if any. According to a 2020 Pew Research Center study, 66% of households that make between $53,000 and $99,000 are invested in the stock market, while only 19% of people making below $35,000 are.
The downturn this year has already taken a major chunk out of US retirement accounts — nearly $3 trillion in total, Alicia Munnell, director of the Center for Retirement Research at Boston College, told CBS News’ Irina Ivanova in June. By her calculations, 401(k) plan participants have lost roughly $1.4 trillion since the end of last year, and people with IRAs have lost $2 trillion.
As is the case with a stock market downturn like this, new retirees are in the worst position. And upper-middle class ones are directly in the crosshairs.
“Younger people, you can kind of wait it out — these things have come back time and time again,” Munnell said. “But people who use their retirement money to support themselves really suffer in this kind of event.”