As the world eyes, in the horizon, some version of a post-pandemic life, it’s strikingly clear that things won’t ever be exactly as they were before Covid. Though the economy may be largely rebounding, its comeback is lopsided, with wealth scattered unevenly around the world. The income gap has grown in the U.S., and questions around social and monetary status arise — among them, “Who will be considered middle class now?”
Before we leap into attempting answers, we should first define what we even mean when we say “middle class.” We might think of the term as having two definitions: a financial one and a social one. The financial aspect looks at median income alone.
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Being Middle Class Isn’t Just About How Much You Make
“The traditional definition of two thirds of median income is the floor and 2x the median income is more of the ceiling,” said Rhett Roberts, economist and CEO of Loan Pro. “For example, $48,000 is a floor somewhere in that range roughly rounded at 50 grand, up to roughly $150,000 at the ceiling.”
But determining what makes one middle class has never been about income alone. It’s always also been about what you possess and what you can afford.
“We prefer a second way to look at [defining the middle class] based on consumer experience,” Roberts said. “Are you buying a home? Where are your kids going to school? Are you shopping comfortably and getting the things that you’re wanting to acquire?”
We should also look at trends such as car ownership and benefit packages among the middle class to better identify who makes up the cohort. In other words, the middle class is partly defined by what their peers do/have.
“In some ways it’s less about what you own than what is considered normative for your middle class peers,” said Chris Motola, financial analyst at Merchant Maverick. “For example, if urban living is in vogue, renting could take on more middle class connotations than owning a house on a remote mountainside. Owning a smartphone wasn’t on anyone’s radar in2000, but by 2015 you’d be getting crazy looks for showing up to a ‘middle class event’ with a flip phone.”
As it’s defined, the middle class hasn’t altered because of the pandemic. We still assess it according to median income and social factors. But the challenges this group faces have grown since Covid struck. The biggest threat to the middle class is inflation.
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Inflation Was Kept At Bay During The Height Of The Pandemic
“During normal times, the purpose of the Federal Reserves is to keep inflation around 2% and growth in nominal wages between 3.5 to 4% (1.5 to 2% is accounted for productivity growth),” said Mina Mahmoudi, a lecturer of economics at Rensselaer Polytechnic Institute.
“During the pandemic however, inflation decreased to as low as 0.1% (May 2020) and then averaged around 1.3% while growth in nominal wages [peaked] as high as 8.2% (April 2020) and then averaged around 5%.”
By keeping inflation low, the Fed was able to help the middle class to maintain their status amid the chaos of the pandemic. The middle class also benefited from the boom of lower interest rates that sparked many to refinance their home or buy a new one.
But things are different now.
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Inflation Has Since Skyrocketed
“As we are recovering from the pandemic, the situation has totally changed,” Mahmoudi said. “Inflation has increased significantly to 5.4% as businesses have opened up and aggregate demand for goods and services has increased. This is while the growth in nominal wages has been far below the target in the recovery (as low as 0.3% in April 2021 and back to 4.6% in September 2021).”
Inflation is a threat to the middle class because a rise in prices leads to less purchasing power. So things that the middle class would have been able to afford before they no longer can. This pushes the lower rungs of the middle class out of the picture, thereby shrinking the demographic.
Who Will Be Middle Class Remains To Be Seen
It’s still shaking out as to who — and how many — will be considered middle class in the wake of the pandemic. Going back to the concept of social trends, we are seeing more people participate in the Great Resignation — meaning they have enough financial security to leave their jobs.
“The middle class has realized, ‘Hey, maybe I don’t like my job and my safety net has been increased,'” Roberts said. “‘I should go try something else. Maybe I want to spend more time with my family.’ Everything is not about work. And so just like before the definitions of needs and wants have changed.”
Will that sense of financial security enabling the middle class to embark on bold career changes remain in place once the pandemic is over?
“It depends upon what the support mechanisms that remain long term,” Roberts said. “If the government says no more support structure, then the bottom is going to fall out and it’s going to be really painful because people are getting used to these monthly checks supporting their lifestyle. This is unlikely because once you give something to somebody, it’s very difficult politically to take it away.”
Roberts added that, however, at some point those hefty bills have to be paid.
“The government’s borrowing the money to support the safety net; the individuals are borrowing the money to support their lifestyle,” Roberts said. “I don’t know if it’s next year or in a decade, but at some point it becomes difficult to rob Peter to pay Paul.”
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Last updated: Nov. 3, 2021