(The Hill) – According to two recent reports, average American income is not enough to live comfortably in 2023.
According to the census, a typical US family makes about $71,000 a year. However, according to a recent Gallup poll, the average American believes a family needs at least $85,000 in annual household income to make ends meet.
This finding aligns with a recent study by SmartAsset, a financial technology company, which found that the average American worker needs an after-tax income of $68,499 to live comfortably. (That equates to about $85,000 in total income, assuming a 20 percent tax burden.)
The two publications point to the same conclusion: in 2023, many Americans will be underearned to maintain a decent standard of living in their communities.
American households are feeling the effects of the crisis after three years of unrelenting economic headwinds.
Inflation, a negligible factor in recent years, rose to 5 percent in 2021 and 8 percent in 2022. According to federal data for the first quarters of 2022 and 2023, it is now 6 percent.
Rising prices prompted an unprecedented series of rate hikes by the Federal Reserve, raising the federal funds rate from effectively zero to around 5 percent in just over a year.
All of this happened amid the COVID-19 pandemic, which pushed the country’s unemployment rate to nearly 15 percent at the height of the nationwide lockdown in 2020.
“We’re just emerging from this really unusual period where we’ve had pandemic-related shortages and job losses. And I think it’s kind of a distorted perception of the cost of living,” said Peter C. Earle, an economist at the American Institute for Economic Research. “Lockdowns have been a kind of existential experience for a lot of people.”
The Gallup poll, conducted in April, found that 30 percent of Americans believe a family needs a six-figure income to “get by in their community.” Only 14 percent of respondents said a household could survive on less than $50,000, and even that is $20,000 above the state poverty line for a family of $30,000 for a family of four.
“I think the real crux of this problem is: what does it mean to get by with and without quotes?” said Douglas Holtz-Eakin, an economist and president of the American Action Forum, a conservative think tank.
Lower-income families earning less than $40,000 a year told Gallup pollsters that, on average, a household needs $66,310 a year to make ends meet. Higher-income households earning $100,000 or more said anything less than $100,000 would suffice.
“There’s a lot of other data that says people with relatively high incomes are living paycheck to paycheck,” Holtz-Eakin said.
Ten years ago, in a previous Gallup poll, the average American believed a household could get by on $58,000 a year. That figure exceeded the median household income of $52,250 at the time.
The gap between what Americans earn and what they consider sufficient income seems to be widening. The 2013 Gallup figure was $58,000, about 10 percent above the median household income for that year. The Gallup value for 2023 is $85,000, which is about 20 percent higher than the current average income.
A lot has changed in a decade. In 2023, the average American family can reasonably expect the price of groceries and gas to rise at 5 to 10 percent per year forever. The average homeowner might expect mortgage rates to remain in the 5 to 7 percent range for the foreseeable future after a decade of historically low interest rates.
Therefore, according to economists, American families have good reason to raise their expectations of what it takes to live comfortably.
Salaries have not kept pace with inflation. Rising interest rates have pushed up housing costs. The SmartAsset report found that between 2022 and 2023, the average income for maintaining a “comfortable lifestyle” rose 20 percent in the 25 largest metropolitan areas, from $57,013 to $68,499 in net income.
Based on MIT’s Living Wage Calculator, this report assumes that an average family spends half of its after-tax income on living expenses, 30 percent on discretionary spending, and 20 percent on savings and debt.
Using this formula, a resident of San Francisco would need to raise $84,000 a year to live comfortably, $78,500 in New York and $76,000 in Washington, DC, the study said.
Looking at the real salaries in these cities, it seems that many residents do not live comfortably. According to the census, the median per capita income is about $124,000 in San Francisco, $85,000 in New York, and $81,000 in DC. These are pre-tax figures: the net wages are significantly lower.
A key factor behind the rising cost of living is the rising cost of housing. Monthly rents exceeded inflation. According to Redfin, the average monthly asking rent surpassed $2,000 for the first time last spring.
Meanwhile, federal data showed house prices rose more than 40 percent in two years, from an average of $383,000 in early 2020 to $553,000 by the end of 2022. That year, the figure fell to $516,500 as higher mortgage rates sapped purchasing power .
Cars are also becoming luxury goods. According to the Kelley Blue Book, the median price for a new vehicle at the end of 2022 was $49,500, up from $38,948 three years earlier.
Vehicle prices rose in part due to supply chain bottlenecks and pandemic-related shutdowns. Another factor was the discerning American consumer. Buyers drove up prices, consistently opting for more expensive SUVs and polished trucks over budget sedans.
“There’s a lot of debate about the extent to which our expectations fuel inflation,” said Lisa Gennetian, applied economist at Duke University.
Homebuyers are always looking for bigger homes. According to an analysis by the American Enterprise Institute, the average new home grew by 1,000 square feet between the mid-1970s and mid-2010s.
The same principle applies to other areas of family life, Gennetian said. An affluent household might consider a private school part of its basic annual budget, while a less affluent household might struggle to meet fall supplies at a public school.
“For some people, tutoring my kids could be part of my standard of living,” Gennetian said. “Other people might think about having a moving car.”
