The income gap that threatens the retirement of millions of people

Monique Louvigny, an event coordinator in the San Francisco Bay Area, cuts corners where she can. She drives a 10-year-old Prius, takes a thermos of coffee to work instead of patronizing a restaurant with baristas, and uses a drive-through food bank once a month.

Fired at age 57, “I kind of reinvented myself,” she said. She rebuilt her career as a freelancer, overseeing receptions and conferences for many companies and institutions, including local art museums de Young and Legion of Honor.

But her income fell to less than $30,000 last year. “It’s irregular,” she said. “I have twelve days of work in January.” In the summer she may only have three or four.

Ms. Louvigny, 64, feels happy on two fronts. For health insurance, she has qualified for Medi-Cal, California’s Medicaid program. And two years ago she paid off the mortgage on her apartment in relatively affordable Vallejo. A roommate pays rent, which covers maintenance costs and rising apartment costs.

“I think I can keep it up work-wise for another two years,” she said, after which she plans to start collecting Social Security benefits at her full retirement age of 66.

Ms. Louvigny’s income places her in a category defined under a recent study in the journal Health Affairs as a lower middle class for Americans nearing retirement. It is a group that has lost ground financially over the past two decades, with stagnant incomes and fewer economic resources than in the early 1990s.

Such losses not only portend an uncertain retirement, but they also have troubling consequences for both health and life expectancy, the study and others have found.

The upper middle class, on the other hand, has clearly done better.

“A lot of attention is paid to the inequality between the bottom and the top of the income distribution,” said Jack Chapel, lead author of the study, an economist and doctoral candidate at the University of Southern California. “We wanted to look at the middle class, where people are struggling.”

Using data from the national Health and Retirement Study between 1994 and 2018, the researchers found “a split” among Americans in their mid-50s, he said.

In fact, they are now dividing into two middle classes: the more secure upper tier (which averaged more than $90,000 per person in annual resources in 2018, including income and the annualized value of home equity, retirement savings, and pensions); and the increasingly insecure lower middle class. In 2018, people in that group had a median annual income of less than $32,000.

In the early 1990s, by contrast, “our lower-middle-class group had quite similar outcomes as the upper-middle class” in terms of health and economic well-being, Chapel said.

Not anymore. In twenty years the gap between them widened. For example, homeownership fell by 5 percent in the upper middle class, but fell by 31 percent in the lower middle class, of whom only 54 percent owned a home in 2018.

For those still working, earnings for upper-middle class workers rose 27 percent and fell 5 percent for lower-middle-class workers, adjusted for inflation. “They earn less because they work fewer hours or at lower wages, or both,” Mr Chapel said. They were also much less likely to have employer-sponsored health insurance.

Total financial resources projected over their lifetime after age 60 – including income, savings, pensions, housing wealth and public benefits such as Social Security – stagnated for lower-middle class people, increasing by just 2 percent over 24 years to approximately $406,000.

But total resources reached about $975,000 for the upper middle class, an increase of 26 percent. (For the richest group, the comparable figure was almost $3 million.)

Teresa Ghilarducci, an economist at the New School for Social Research, whose studies have shown this similar results among middle-income Americans, pointed to one reason for the growing inequality. “The house has become a reservoir of debt,” she said. “Financial institutions have figured out how to extract wealth from homes through refinancing and second mortgages, and they have become increasingly sophisticated.”

For most middle-income people approaching retirement, she says, the primary source of wealth is not home equity or retirement savings. They are social security benefits.

One subgroup under particular pressure: older workers in physically demanding jobs. A report from the Older Worker Pension Security Task Force, recently convened by the National Academy of Social Insurance estimates that at least 10 million workers older than 50 years belong to that category.

Those jobs include “a lot of service-related work that requires you to be on your feet all day,” said Joel Eskovitz, a task force member and policy director for AARP. “People in retail, home care workers, janitors. And a lot of jobs related to Amazon and other tech companies – warehouse work, deliveries.” The workers in these jobs are disproportionately black, Hispanic and Asian.

Because “these are not jobs you can keep going well into your 60s,” Mr. Eskovitz said, such workers often claim their retirement benefits early, at age 62. This leads to “a significant reduction in monthly benefits”. and lifetime income” compared to waiting until full retirement age, now 67 for most beneficiaries.

The gap between the two middle classes is also reflected in health measurements. Among the lower middle class, “there has been virtually no decline in smoking,” Mr. Chapel said. “But the upper center has cut smoking by about half.”

Those with lower incomes have more chronic health problems and are much more likely to describe their health as fair or poor. (One exception: Obesity has risen dramatically for both income groups.)

This also translates into differences in life expectancy. “Everyone is living longer, but the upper middle class benefits much more, and a greater share of their remaining years are quality years” without serious health problems, Chapel said.

Between 1994 and 2018, life expectancy at age 60 increased twice as much for upper-middle-class men and women as for lower-middle-class men and women.

Even those whose slightly higher incomes technically put them in the upper middle class may feel insecure. “I just pray that I can keep my job until I’m 65,” Patricia Thompson, who is 62, wrote in a Facebook post.

She and her husband live in Hickory, NC, where she earns $53,000 a year as an acquisitions editor for a small press and where her husband, 71 and retired, receives a $1,500 Social Security benefit and takes $500 out of retirement savings each month. That’s above the 45th percentile of total household income for a married couple.

But they are still paying off a mortgage and a car loan, and “I have no pension,” Ms. Thompson wrote. “I hardly have any savings due to student loans later in life. Where is the safety net for people like me?”

“It really is a huge policy challenge to figure out how to ensure that different groups can live with dignity in retirement,” Mr. Eskovitz said.

At a time of debate, policymakers and advocates have proposed raising the Social Security retirement age a number of measures to strengthen financial stability for lower earners and those prematurely pushed out of the labor force.

The Older Workers Retirement Security Task Force has generated a long list of suggestions, including a “bridge benefit” for workers in physically demanding jobs, which would allow them to receive partial Social Security benefits early without being locked into lower benefits for the rest of their lives.

Raising the limit on income subject to payroll taxes could improve Social Security solvency for everyone.

Mr. Chapel pointed to a new program from the Labor Department RETAINthat helps sick or injured workers return to their jobs and includes on-the-job housing, rehabilitation and retraining.

Ms. Louvigny thinks she will be fine as long as she can continue working for a few more years and remains careful with her spending. “I try not to worry,” she said. “I don’t allow those thoughts.”