The Game Has Changed

In the past one was taught to go to school get an education and get a job. One would work at the job for years. During that time one would receive a pension. A pension was money that one’s employer would set aside for them. The pension would provide the worker with income and healthcare for life. The pension was a supplement to social security. The employee was forced to save through his or her employer’s pension.  A worker would work at the same job for years and increase in wealth.

However the game has changed.  One of the reasons the game has changed is globalization. The world is bigger than the United States. The main driver for any corporation is profit. At the cornerstone of profit is cost. One of the highest costs for a corporation is employees. Therefore corporations began to ship the cost of employment to other countries where cost is cheaper. The corporations took their manufacturing jobs to China and call centers jobs to India. The result was products for sell in the United States but jobs created internationally.

U. S. jobs for lower skilled workers have been on the decline.  Manufacturing now accounts for about 12% of United States jobs. The middleclass in the past was forced to save through pensions. However, pensions were replaced with defined benefit plans such as a 401(k) and a 403(b). The rise of the 401k was also a business decision.

Pensions are expensive to a corporation. In order to maximize profit it is in a corporation’s best interest to get rid of the pension plan. The 401(k) and 403(b) are a less expensive alternative with major consequences. The consequence is that you are now responsible for your retirement planning not the corporation.

In addition you get what you put in or what is matched by the firm. If you do not put any money in your 401(k) plan you will not be matched by your company. The raise of 401(k) plans did something else. It also made your retirement planning more risky. Anytime you invest in stocks, bonds or mutual funds there is an element of risk. In 2009 many retirees saw their retirement account reduced. The risk is that you can make or lose money when investing.

In addition to globalization and a change in retirement plans another game changer happened called productivity. The Great Recession lost about 15 million jobs. The truth of the matter is that many of those jobs are not coming back! An interesting event happened during the Great Recession, corporations figured out how to make more money with less people. Many people used the recession as an excuse to reduce unwanted headcount.  Corporations were making billions in profits with fewer workers. Combine all these factors together and you have a troubled middle class.

Another game changer is high debt and no assets.  According to Charles Hugh Smith’s article Dear “Middle Class” Americans: Most Of You Are Debt Serfs With Zero Assets Mr. Smith reveals some disturbing facts about wealth in the United States. The article reveals that

• The top 20% of the American holds roughly 93% of the country’s financial wealth,
• The top 1% of the country holds approximately 43% of the money in the U.S.
• The middle 20% of the population (the middle class) holds only 6% of the country’s total
• The bottom 40% of the country control less than 1%.

Many middle class Americans underestimate the concentration of wealth in the United States.

“The first chart depicts total wealth, which includes depreciating assets that are illiquid (SUVs, boats, furniture, etc.) and typically overvalued. In terms of financial wealth, the top 20% own fully 93% of all assets.

If we characterize the top 20% as “wealthy,” then the next 20% would be the “upper middle class” (60% -80%) and the third quintile (60% – 40%) would be “middle class.” In terms of financial wealth, the Great Middle Class owns a mere 6% of total assets.

The bottom 40% (the “working class” and “the poor”) owns less than 1%.

Clearly, Americans are holding a fantasy-view of their piece of the American Dream/middle-class membership. A number of people I know consider themselves middle-class based on their substantial income–but they own very few financial/liquid assets, and if they lose their jobs then their health coverage vanishes.

The net value of their vehicle(s) and other possessions is also near-zero in terms of net (value minus outstanding loan balance) worth on the open market.

Their “membership” in the middle class is tenuously based on perceived membership gained by consumer activities such as shopping at Whole Paycheck (Whole Foods), the brand of car they drive (net value, near-zero) and other status symbols they feel reflect their “values” and “membership” in the middle class.

Sadly, it’s all delusory. Debt-serfdom and zero assets does not equate to middle class. When “membership” in the middle class ceases to mean owning meaningful wealth, it is no longer a middle class. It is instead a superficial consumption pattern of “aspirants” to what was once a true middle class.

When the average “middle class” American looks at this chart, they probably reckon this enormous rise in net wealth includes them. But as we have seen above, it doesn’t; their “ownership” of this vastly increased wealth is a meager 6%. In other words, the vast majority of this increase flowed to the top 20%.”

Mr. Smith makes a point that the middle class are delusory. Because they “own” highly depreciating “assets” they think they have wealth. However one’s true wealth is only based on net assets. Having high debt to fund one’s lifestyle is an illusion of wealth and is “debt-serfdom”.  

The Solution

There are serious times ahead of the middle class. The new proposed a spending plan has in it deep cuts to various entitlement programs for the working class. The next few years are going to be painful for the middle class.

What is the solution? The solution is to start taking your economic life into your own hands. The middle class is getting smaller. Some people are going to the upper class while many more are becoming lower. The question you must ask yourself, where do you want to be? If the answer is upper class you will need to make painful changes now.

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