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There used to be more Americans in the middle class. In fact, according to recent data from Pew Research, 61% of Americans lived in middle-class households in 1971, while just 51% were in the middle class in 2023.
The fact that there are so many fewer middle-class people in the U.S. may seem like a dire catastrophe, especially as a middle-class lifestyle is often considered the dream of people who want a financially stable life with the necessities covered and some money in a savings account .
In reality, though, the data shows that there's both good news and bad news associated with the decline in people living in middle-class households.
Here's the good news about the shrinking middle class
The reason that the middle class is shrinking is because more people have moved into the upper class. In 1971, just 11% of people in the U.S. lived in upper-income households. By 2023, however, 19% of people lived in upper-income homes.
By contrast, while 27% of people lived in lower-income households in 1971, 30% of people had lower incomes in 2023. So, there was a bigger increase in the share of people who are upper income compared with the share of people who are lower income.
As Pew points out, having more high earners is a sign of economic progress. We have more people who are doing better and who are out-earning the typical American because of it.
Here's the bad news about the shrinking middle class
Unfortunately, even though it's great that more people have now become high earners, there are some very big downsides to the shrinking middle class. Those in the middle class now have a far lower share of total household income in the United States. Higher earners control more of the money. And this has contributed significantly to income inequality.
The median income of upper class households increased 78% from 1970 to 2022, while the median income of middle class households increased just 60% and the median income of lower-income households went up by only 55%.
As Pew points out, this has contributed to a huge gap between how much upper-income households make relative to those in the middle and lower classes. That, of course, is not good for people in the middle and lower classes who have seen their relative buying power decrease and who may struggle to cover the costs of necessities while also saving for a more secure future.
What should we do about income inequality?
Having such a large share of the income gains concentrated among a smaller group of upper-income earners has put everyone else in a more precarious financial position, struggling to compete and often without the funds to put into a brokerage account for retirement.
There's a lot of controversy surrounding how to handle income inequality politically. Unfortunately, this is not a problem any one individual can tackle. Absent a major reshaping of the U.S. economy, those who find themselves outside of the upper class will need to be careful about committing to fixed expenses that eat up too high a share of their declining income. Ideally, those fixed expenses should be kept below 50% of income to leave funds for saving and discretionary spending.
It isn't fair to put this burden on those who aren't at fault for increasing inequality. However, lower and middle-class individuals who find themselves facing this reality and who respond by keeping their fixed costs low are more likely to be able to slowly build wealth over time -- despite the systemic disadvantages they face.
For those who have moved into the upper-income bracket, on the other hand, it's best to recognize that your larger share of income is a privilege and to make sure you're investing it and using it wisely to make the most of your good fortune.
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