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Reuters/Dylan Martinez
There might be a top 5% earner among these guys—at least briefly.
LIVING THE DREAM

Actually, you can make $250,000 and be middle class in America

Allison Schrager
By Allison Schrager

Reporter

The question of who falls into the ranks of the US middle class was raised this week in a New York Times op-ed as a challenge to presidential hopeful Hillary Clinton’s promise not to raise taxes on that coveted group, which she defines, like other Democrats before her, as anyone who earns less than $250,000 a year. The complaint: annual household income in the $250,000 neighborhood places you in the top 5% of earners in the US, by definition far from the middle class.

It does sound ridiculous. The top 5% are the economy’s elite earners who rarely get much sympathy—especially when they come looking for it. Economist Justin Wolfers tweeted, ”When you remind people how much money they have, it’s amazing how quickly they respond: Not after all the expensive things I buy.”

Arguments of whether they should shoulder a heavier tax burden aside, most Americans earning $250,000 aren’t necessarily who you think they are. They aren’t just Wall Street and Silicon Valley types. They tend to be older, have larger households to support, and, over time, have included a wider range of people in their ranks than the 5% figure suggests.

A single year’s earnings don’t tell you much about where a person really sits on the wealth spectrum because income varies during most people’s lifetimes. Sociologists Thomas Hirschel and Mark Rank estimate that about 36% of Americans will take home a top 5% income at some point in their lives. Few people maintain high income for long: only 8% of American workers earn in the top 5% for five or more consecutive years; only 3% earn in the top 5% for 10 consecutive years. This is because most people don’t earn high incomes until well into middle age. High earners are also subject to bigger swings in income because many are self-employed or paid commissions or bonuses. They might earn $250,000 one year and $80,000 the next. When you average income over several years, many of these people aren’t as wealthy as you’d expect, possibly falling within a range you’d consider middle class.

And higher earners do really have more expenses, sometimes due to where they live. As a result, employers often offer greater compensation in areas with higher costs of living. Data from the Survey of Consumer Finances reveals that median income is 30% higher in urban areas than relatively cheaper non-urban. In the Northeast, median income is 40% higher compared to the low-cost South.

And because they tend to be older, they are also more likely to have families to support. The figure below compares some statistics between average earners (between $40k and $60k a year) to the 5% ($240-260k a year) from the Federal Reserve’s 2013 Survey of Consumer Finance.

As you can see, high earners are older, married, have more kids, and are more likely to be self-employed. This is certainly an enviable situation compared to many others. But if you care about standard of living, income alone is not an adequate measure of financial well-being. A single, 25 year old earning a $40,000 salary might feel less financial stress than a 55-year-old business owner (who happened to have a good year) with two children in college.

While it’s difficult to worry about the finances of the country’s top 5% earnings, this group is not as elite as it might appear. There’s more than a one-in-three chance you’ll be among them one day. You’ll probably complain about your taxes then, too.