The middle class may be the foundation upon which the United States was built, but a number of recent studies suggest the working class is being left in the dust.
A study from the Pew Research Center in December showed that middle-class Americans are no longer in the majority. Whereas in 1971 middle-class Americans totaled 80 million, and lower- and upper-income classes combined equated to 51.6 million, the 2015 data looks far different. As of last year, 120.8 million adults were in the middle class, but this figure now takes a back seat to the 121.3 million combined lower- and upper-income households. Aggregate wealth for middle-class households is also shrinking, according to Pew's research, from 62% of all wealth in 1970 to just 43% as of 2014.
A number of other publications also concurred with the idea that the middle class is in decline, including publications from Brookings, Fortune, and The New York Times.
However, one report released last year highlighted a middle-class statistic so shocking that you'll probably do a double-take.
One chart every middle class American needs to see
The 2015 Credit Suisse (NYSE:CS) Global Wealth Report is now in its sixth year of examining and analyzing wealth across the world in order to get a better understanding of wealth creation, consumption, saving and asset allocation. Every year Credit Suisse picks a specific wealth topic to focus on, and in 2015 it was the middle class.
Having the largest GDP of any other country, it's not surprising to find that the middle class in the U.S. also has the highest total wealth in U.S. dollars at $16.85 trillion. The next-closest are Japan, China and the U.K. at $9.72 trillion, $7.34 trillion and $6.19 trillion, respectively.
Now here's where things get interesting...
Credit Suisse also looked at what percentage of wealth the middle class made up within a country. Of the 21 countries individually examined, here were the results:
No, your eyes aren't deceiving you. As a percentage of total country wealth, the U.S. middle class accounted for the lowest share of wealth among developed countries, such as Germany and France, as well as emerging markets like China, India and Brazil.
Why middle-class wealth is withering away
Why do U.S. households have so little net wealth relative to the total wealth of the country as a whole? It looks to be a number of factors at play.
First, the housing bubble from late last decade really sapped the net worth out of middle-class households. Although home prices have recovered from their lows, some areas have recovered slower than others. The housing price collapse is still fresh in many Americans' minds, and many fear overreaching on home prices even in today's growing economy.
Second, access to credit is arguably easier in the U.S. than in many other regions of the world. During the housing boom in the mid-2000s, this was a great way for middle-class families to grow their wealth. However, the housing bubble, combined with high debt levels, have chipped away at middle-class household wealth.
A third issue? Stagnant wage growth. According to data from the U.S. Census Bureau, median household income has actually dropped by roughly $5,000 since 1999 to a median of $51,017 as of 2012. Pew Research pointed out that in spite of nominal wage growth of 727% between 1964 and 2014, in constant 2014 dollars (meaning when taking inflation into account) real wage growth has totaled just 7.8% over 50 years. College tuition, medical care and even fuel costs have risen at a faster pace, thus diminishing the buying power of the middle class.
Fourth, there's quite an income gap between the richest Americans and the middle class in the United States. According to CNN, the U.S. has 42% of the world's millionaires, and basically half (49%) of all people with $50 million or more in assets. These super-rich Americans certainly skew the results.
Finally, near record-low lending rates aren't helping. The middle class, which was hammered by the stock market decline during the Great Recession, has few avenues of safety to turn to with CD and money market rates losing to an already reduced inflation rate.
In short, our working class isn't in great shape — but not all hope is lost.
How the middle class can take back its lost wealth
Middle-class individuals and families looking to get back on track should have four main focuses: improving their savings rate, reducing debt, minimizing taxes paid, and investing more.
The easiest way to boost your savings rate is by first understanding where your money is going. Ask working Americans how much they make and you're liable to get a precise answer. However, ask them where their money went once it was deposited into their bank accounts, and the shoulder shrugging begins. Formulating, and sticking to, a budget can help middle-class Americans and their families live within their means. By apportioning funds to specific spending categories you'll have a much better idea of what your cash flow actually looks like. This should allow you to set aside money that can be used to pay down existing debts or to invest for your future. Best of all, a budget can be adjusted as needed, since ultimately you're in control.
Next up is reducing debt. Having a good grasp of your cash flow should allow you to set aside more money to pay down debt, as well as reduce what you're adding to debt on a monthly basis. Other keys include being responsible with the existing debt you have. Other than making payments in a timely manner, and attempting to pay more than the minimum, consider consolidating your debt to a low-interest or 0% APR credit card in order to really work down the principal. It also never hurts to consider asking your creditors for a lower interest rate, especially if you've been an exemplary customer who pays on time.
Middle-class Americans can also improve their wealth by minimizing what they give back to Uncle Sam. Ensuring that you're getting all applicable tax deductions is a must for middle-class families. For example, refinancing a home with points allows the homeowner to amortize those points over the life of the loan. Another oft-overlooked tax deduction can be taken when caring for a parent. The Dependent Care Credit allows for a deduction of up to $3,000 per person, and is dependent on how much you spend on care, as well as your income. Middle-class families may even qualify for Earned Income Tax Credits. A married couple with three or more qualifying children can earn up to $53,505 in adjusted gross income in 2016 and still receive a credit. The EITC remains one of the most overlooked tax credits out there.
Finally, the middle class needs to invest, invest, invest! As we preach at The Motley Fool, buying high-quality stocks and holding them over the long-term is often a good strategy to build inflation-topping weath. However, there are additional strategies that can boost your income. For instance, opening and contributing to a Roth IRA allows your money to grow completely tax-free for life as long as you make no unqualified withdrawals. A Roth IRA could wind up saving you hundreds of thousands of dollars in taxes come retirement. Employer-sponsored 401(k)s are smart plans as well, especially if you're receiving a partial match from your employer. Money invested in a 401(k) grows on a tax-deferred basis.
The middle class may be in flux, but with careful planning it can thrive once more.
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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