Middle Class Crunch, who's to blame

Middle class crunch: Who's to blame?
You're not imagining it: It's harder than ever to get into the middle class and stay there. Here's how you’ll succeed . . . and why many others will fail.

Write about poverty, affluence, whether the middle class is disappearing and if so, whose fault it is . . . and people go berserk.

Reader reaction to stories MSN Money has posted on these topics, including "Surviving (and thriving) on $12,000 a year," "I make $6.50 an hour. Am I poor?" and "Middle class living on the edge," has been overwhelming and mostly positive.

But each story has touched off vociferous debates on message boards and in e-mails about who's to blame for financial failure.

In one camp are the folks who are convinced that American workers are being squashed by the economy, the government, big corporations, lenders, the system in general. They see many, if not most, people as helpless pawns in a game that's rigged against them.

In another are those equally sure that there's no excuse for failing. If you've fallen down the economic ladder, or never figured out how to climb it in the first place, in their view it is solely and entirely Your Own Damned Fault.

The truth is somewhere in between. A decent job is no longer an easy ticket to a middle-class life. It's not just that things like health care and pensions are disappearing; it's that they're disappearing at the same time as our expectations about our lives have risen.

It's not your imagination, there is a squeeze on the middle class. MSN Money's Liz Pulliam Weston explains how it's possible for anyone to get in the middle class -- and stay there.

I believe a middle-class life is still possible for most people. But you have to be smarter, more cautious and faster on your feet than ever before. You have to obey some deceptively simple rules. And one thing is certain: Wherever you currently stand on the economic ladder, the surest way to rise is to pull yourself up.

What's middle class, anyway?
"Middle class" is a squishy concept if ever there was one.

If we define it solely by income, then according to the U.S. Census Bureau, a household income of $36,000 to $57,657 in 2005 landed you squarely in the middle class. If you want to expand the definition to include "lower" and "upper" middle class, the range widens considerably, from $19,178 to $91,704. Here's the breakdown, with each "quintile" representing 20% of U.S. households:

Population group Lower limit Upper limit

1st quintile
$0
$19,177
Poor/working poor

2nd quintile
$19,178
$35,999
Lower middle class

3rd quintile
$36,000
$57,657
Middle class

4th quintile
$57,658
$91,704
Upper middle class

5th quintile
$91,705
Bill Gates?
Upper class



Of course, there are plenty of problems with using income figures, most notably because income alone doesn't reflect the huge variation in living costs across the U.S. Simply put, $50,000 might buy you a comfortable life in Iowa or Kentucky but keep you scrambling in San Francisco or Manhattan. And there are plenty of folks living in high-cost areas with nominally "upper middle class" or even "upper class" incomes who would adamantly reject those labels.


A more flexible definition for middle class would be having the resources to cover all your needs and some of your wants, plus the ability to save for the future.

That definition:

Doesn't necessarily mean homeownership, although it probably will; homeownership is still an achievable goal in most of the U.S., where close to 70% of all households own their own dwellings.
Certainly doesn't mean two new cars in the garage, or even one, although it probably means at least one reliable vehicle.
Doesn't mean being able to retire at 50, but it does mean being able to save for a retirement in which cat food is not a factor (unless you actually have a cat).

Sometimes, a middle-class life is out of reach
Am I setting the bar too low? Some of you may think so. But inflated expectations about what constitutes a middle-class life lead many people into the kind of spending decisions that endanger their long-term financial security.

Those who are too eager to buy the trappings -- the "wants" -- are the ones who wind up with credit card debt and who overspend on homes ("The 3 worst money moves"), educations ("How much college debt is too much?") and cars ("The real reason you're broke").

In other words, trying to look like you're middle class may well doom your prospects to actually be middle class.

And then there are those for whom the bar will remain too high. When I talk about most people being able to attain middle-class status, I have to carve out some exceptions. For example:

People not blessed with good, or at least decent, physical and mental health. It's hard to achieve much if you can't work. Illness, disability, addiction, depression and other afflictions can stop your economic progress in its tracks.
People who wait too long to start saving. If you hit your 50s, have never saved a dime and get bucked off the economic horse -- by a layoff, illness, disability, whatever -- your chances of being able to recover sufficiently may be dim.
People who can't or won't change. The alterations you need to make might be small, such as eating out less so you can put more into your 401(k). Or the adjustments might be big, like moving to another area or heading back to school to update your skills. Folks who are willing to consider their options, and then act, are going to be better off than those who insist it's the world that needs to change, not them.
Even if you're young enough and capable enough and willing to adapt, you've got powerful trends standing in your way. Don't expect them to be solved by politicians or to disappear in a puff of smoke.

Yes, the system is against you
There are fewer good jobs for those who don't have college educations. A decline in manufacturing, waning union power and increased globalization mean it's tougher than ever to get into the middle class without a college education. But globalization and outsourcing are sniping away at white-collar jobs as well, and a fast-evolving economy mean few can be content to end their educations after four years.

The price tag for education is rising. Education was, and still is, the ticket to a more affluent life. Eight million vets grabbed this ticket in the wake of World War II, which helped fuel a huge expansion in America's middle class. Education is even more vital today, but the cost of a college education has skyrocketed and financial aid hasn't kept up, even as the comparative worth of a degree has shrunk. Loans have replaced grants as the primary source of financial aid, and too many students graduate with crippling debt.



Health care and health insurance costs are soaring. We have 47 million uninsured, and health care costs eat a big chunk out of the budgets of many who do have coverage. Two of five adults (43%) who buy individual polices, and one in four whose employers help pay for their coverage, spend more than 10% of their incomes on premiums and out-of-pocket medical expenses, according to the Commonwealth Fund.

Lenders don't care who can afford to borrow. Lenders were simply more conservative before the advent of credit scoring and securitization (the process in which most loans are bundled up and sold to investors). As lenders discovered more ways to manage risk, their willingness to extend credit soared, especially in the past 15 years. As a result:

Credit card debt exploded. The amount of money owed to credit card lenders at year end more than quadrupled, according to CardWeb.com, from $172.6 billion in 1990 to $710.9 billion in 2005.
Payday lending skyrocketed. The number of payday loan outlets zoomed, according to the Federal Reserve, from about 300 nationwide in 1992 to more than 22,000 last year. Payday lending is now a $40 billion industry.
Mortgages and other lending got riskier. That 70% homeownership statistic has been achieved, in part, by riskier loans, with lower down payments, adjustable rates and in some cases terms that allow your mortgage balance to balloon over time. Car loans, which used to average two or three years, now average five or more.
In short, it's never been easier to hang yourself.

There is a plan, and it's deceptively simple
As complicated as the world has become, the middle class awaits anyone with an income and the strength to observe five vital steps:

Spend less than you make. The key to making any financial progress is to live within your means. Think it's impossible on your income? You're almost certainly wrong. And in the end, you really don't have a choice.

Limit your debt. It's costing you unnecessary interest and leaves you vulnerable to the slightest economic setback. The more you owe, the fewer choices you have.

It's not your imagination, there is a squeeze on the middle class. MSN Money's Liz Pulliam Weston explains how it's possible for anyone to get in the middle class -- and stay there.

Save for a rainy day. Even $500 in the bank could allow you to weather day-to-day crises like a car repair that could otherwise push you over the edge.

Plan for retirement. Start early, keep your mitts off the money and don't stop for any reason. Even a small amount, scraped together and invested over a lifetime, offers a much more comfortable retirement, if only psychologically, than Social Security alone.