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Seven Charts to Challenge the Popular Middle Class Money Narrative

The concentration of wealth is a societal problem that society as a whole cannot afford to ignore, and it is not getting better. It recently emerged that the eight richest persons in the world possess as much wealth as the poorest half of the world’s population. Eight men hold as much of the world’s resources as 3.6 billion people.

Unfortunately, traditional media tend to conflate this increase of wealth among the very few at the very top with the demise of the western world’s middle class. The middle class, as the consumer, and product, of traditional media, generally tend to accept such tales of their demise. Doomsday prophecies, particularly those that affect your very own readership, are simply good business.

Here, I will present seven charts based on income, savings and consumption data from the United States over the past thirty years. My hope is that these charts will make you think twice before unconditionally accepting the narrative that the richest few are stealing the wealth of the majority, the middle class. Or at the very least, show you that you have a choice in whether or not you want to give your money to those at the very top.

Americans Save Less Money Than Before

Chart displaying average saving as a percentage of income from 1984 to 2015
Data source: Bureau of Economic Analysis

The average rate of saving as a percentage of income in the United States has dropped from around 11% in 1984 to around 6% in 2015, after bottoming out at less than 3% in 2005. Surely this should be used as an argument for a grand scale deprivation of the middle class, as declining saving rates can only be a result of decreasing real wages for the general population?

Chart showing US Real Median Income from 1984 to 2015
Data source: United States Census Bureau

Average income, as measured by the median, adjusted for inflation dropped since peaking at around $58,000 in 1999. The trend has however reversed in recent years, and for the period measured, from 1984 to 2015, it has increased by around 16%. The average American is, in other words, earning more and saving less.

Servicing Loans Is Not The Problem

One reason often cited for the reduction in saving rates is the increase in housing prices, supposedly far outpacing real wage growth (it is, in some areas, but not by much for the whole country on average) resulting in higher mortgage payments that in turn reduce the average American’s ability to save.

Mortgage debt service as a percentage of average income
Data source: The Federal Reserve Board

That claim does not have a base in reality. As the chart above shows, the average mortgage debt service payments as a percentage of disposable personal income were lower in 2015 than it was in 1984. Unsurprisingly, it did peak at just above 7% in 2006, but the trend for the whole period is more or less flat.

If mortgage payments aren’t to blame for the reduced rates of saving, then surely the increase in student debt and the cost of servicing those debts are the reason? At least, that what you would believe if you drew your conclusions from looking at headlines. The actual numbers, however, tell a different story.

Consumer debt service as a percentage of household income
Data source: The Federal Reserve Board

The trend for consumer debt service payments, which includes student loans, as a percentage of disposable income, is near identical to the one we saw for mortgages. In fact, over the observed thirty year period, the rate has indeed decreased.

The Real Reason Why Americans Save Less

I promised you seven charts. From the first five, we have established that average real income has increased over the past thirty years. We have seen the decrease of average saving rates, but the cost of servicing debt does not offer an explanation. The final two charts make it abundantly clear what is the actual cause behind the average American’s reduced rates of saving is.

Personal Consumption as a Percentage of Income
Data source: Bureau of Economic Analysis

Increased personal consumption is the reason why the average American saves less money than they did 30 years back. And before you jump in with “well, of course, that is because everything is much more expensive than it was back then” remember that we saw above that the average person has more money to spend today than back then. In real terms, after inflation. Logically, the conclusion that follows is that the average American is consuming more than they did 30 years back.

Chart showing Real Median Income development vs Personal Consumption
Data source: Bureau of Economic Analysis

I want you to study the above chart carefully, and observe and take in the point it conveys. It shows two graphs we’ve seen before plotted against each other: The development of the real median wage against the ratio of consumption as a percentage of income, and the trend of these two graphs are nearly identical over the observed period.

What this means is that every increase in real income is being spent entirely on consumption, thus increasing consumption ratio. While saving some of that extra income might sound like a good idea, in principle, the data shows that the average American ends up spending it on personal consumption instead. Thus, the average rate of saving decreases.

Chart comparing Saving Rates vs Personal Consumption Rates
Data source: Bureau of Economic Analysis

Our seventh and final chart shows that the saving rate and the personal consumption rate are near perfectly inversely correlated. And, as we saw above, consumption increases with increases real wages. If the middle class is being robbed, it is of their own accord. Or rather, they are, consciously or subconsciously, willingly spending their increased purchasing power.

Are you looking for a different way? Start with reading How I Learned to Stop Worrying and Love Saving Money because it all begins with taking charge of your personal finances.

Header photo by Tim Pierce.