Pity the Poor Couple Who Make $250,000 Per Year (Haven't We Been Through This Before?)

The Fiscal Times, a propaganda arm for Pete Peterson (although how one could tell the difference between The Fiscal Times and the ostensibly non-partisan Washington Post), has an article that purports to describe how difficult it is for the 'average' family that makes $250,000 per year.

If we spot The Fiscal Times most of the expenses (I'll return to that in a bit), the article really shows the effect of hidden assumptions. Two big expenses are saving for college ($8,000) and retirement ($33,000), as well as healthcare (~$13,0000--in a nation where the median household income in $50,000. Since college and retirement are important, The Fiscal Times implies these aren't frivolous expenses. Since this well-off family is barely breaking even, tax cuts! (Or at least, no hikes).

But from a policy perspective, there are other remedies:

1) Healthcare expenses. With real healthcare reform, we could have lowered costs for everyone. Instead, we got Romneycare.

2) College tuition. As I've discussed many times, colleges and universities charge what they can get away with. That's one reason why prices have risen faster than inflation.

3) Retirement savings. I'm going to sound old school here, but many people, not just government employees, used to receive defined benefit pensions as part of their compensation (especially the upper strata). 401(k) plans are a faint comparison (by the way, they predate the new, highly mobile economy. They were, like many things stemming from the Reagan era, a way to provide tax subsidies to wealthy people for stuff they were doing anyway). Better pensions--that is, more compensation--not lower taxes is the issue here.

But like I said at the beginning, Pete Peterson and his minions don't want to do any of these things. And the tell is the list of expenses, as Brad DeLong points out (italics mine):

At an income level of $250K/year in America today, a family owes about $65/year in all taxes--federal, state, and local; income, sales, property, and social insurance. Subtract off $1.5K/year for a gold-plated dog and $8.5K/year in "necessary" eating-out and bringing-in and you are down to $175K/year. Take off another $75K/year in savings (paydown of real mortgage principal and student loans, 401(k)s, and a college fund) and you are down to living on $25K/year per capita in consumption expenditures.

Only rich families in America today live in detached houses with spare bedrooms in high-tax high-cost areas (and get the services and amenities those buy), spend $36K/year on mortgage payments, $4K/year on clothes and dry cleaning, $8.5K/year on eating-out and bringing-in, $3K/year on gifts and holidays, $20K/year on daycare, babysitting, and summer camps--and still save $75K/year. That is what rich families in America do: that is how they spend their money. The fact that after they have spent their money and paid their taxes there is only $75K/year left for savings is not a sign that they are not rich.

Next, I'm sure, The Fiscal Times will run an article about how difficult it is for a family that makes $450,000 per year.

But that would never happen.


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I still see (just looking at the blatantly obvious examples of the car and airline industries, and state governments) that the pension idea simply will never work anymore. The idea of a corporation paying for your retirement is a sign of "loyalty" that simply does not exist anymore, either for the worker to the company or the company to the worker. It is predicated on the idea that a company will only ever get bigger and continue to grow its profits, something the industrial world has shown is simply no longer the case. Finally, it puts retired workers directly at odds with a corporations REAL "customers", the stockholders, over who actually gets the lions share of the profits even if that ever-increasing growth actually takes place. Given how the law benefits stockholder value when it comes to the legal responsibilities of a board and a CEO, the pension fund will always go before stockholder dividends do.

Now, the obvious "out" for all of that is to replace pension funds with retirement stock grants (my last company did something similar, replacing 401K matches with ESOP grants), but that just makes matters worse: not only is your retirement all dependent on a single company's performance far in the future beyond your time working for them, but unlike a pension fund, there is no government protection when that stock value drops down to a penny a share because the market forces simply left them behind or the CEOs screwed the pooch royally. Enron is a textbook example for that.

401K and IRA may suck, and benefit the wealthy (or at least the upper middle class) more than most others, but outside of actually increasing social security benefits, it really is all we have left.

Faith in in the success of a single company after you're no longer working for them is faith in a failed system, based on assumptions of future growth, or even future existence, that could never hold out forever...or even into next week.

By Joe Shelby (not verified) on 27 Dec 2010 #permalink

First, I don't make $250K a year, but it would be nice. Also, I do not begrudge the people who do as they've earned it. In the U.S. the opportunity exists for everyone to excel. The sad fact is most choose not to then complain about those who do. I'm not sure where the total of $65 "in all taxes--federal, state, and local; income, sales, property, and social insurance" came from but it is just plain wrong. On a federal level the AMT makes sure of that; sales tax varies by State, but is the same for everyone and property tax is based on the value of the property. I also not that if these high earners eat out more or utilize dry cleaner, day care centers and purchase gifts they are in fact supporting those industries and the associated workers along the supply chain.

Maybe I'm missing something obvious, but no matter how much money you make, you are either going to save it, spend it, or invest it right?

So is it somehow a surprise that the total of those things "eats up" the whole paycheck, no matter how big it is?

401(k) plans .... They were, like many things stemming from the Reagan era, a way to provide tax subsidies to wealthy people

Indeed, the 401k plan provides very little help to people below the median income level, while being a huge boon to people in upper tax brackets. When you consider that it's a lot harder to save 10% of your income if you're making 50k a year than it is if you're making 250k, you have to wonder why the better off people need that tax break at all.

Wouldn't it make more sense to tax all income at the same rate, and eliminate retirement savings deductions entirely?

Why don't the "tax simplification" people start with that - one tax code, applied to all income equally. The tax rates can still be progressive - that's nowhere near as complex as treating different kinds of income differently.

"In the U.S. the opportunity exists for everyone to excel. The sad fact is most choose not to then complain about those who do."

Got any evidence for this Republican talking point, or are we just to assume through your bad grammar and spelling that you know what you're talking about? You know, I really don't think most people choose to not excel in lieu of not excelling and getting to complain about those who do. Wanna know why I don't think that? Cause it's fucking stupid, that's why. Especially when in this age of statistics and the internet, you can find out that the average person who wants to make a living wage (not necessarily be rich) can't really do it any more. You find out that companies used to have loyalty for their employees, now they have outsourcing. You find out that back in the day, CEOs wanted to leave their companies strong and doing better than when they took over. Now they want 5 years of employment and a golden parachute, even if the stock takes a dump. The fact of the matter is that mobility in this country has ground to a complete halt, and those at the top are just sucking away what they can while it's possible. Sticking your head in the sand and pretending that these problems are all due to lazy and envious workers who just don't want to try is easy I suppose, but then nobody said being wrong was hard.

By Rob Monkey (not verified) on 27 Dec 2010 #permalink

First, I don't make $250K a year, but it would be nice. Also, I do not begrudge the people who do as they've earned it.

I will not grant blanket acceptance of that any more. I have seen too many examples of rich people who got rich by gaming the system. Did the executives at Enron "earn" their riches? How about the fat cat Wall Street bankers?

By Freetham Choade (not verified) on 27 Dec 2010 #permalink

Just to point out that 401ks are really a tax deferral mechanism, you get to pay the taxes for sure once you reach 70.5 years old (required minimum distributions). I could see not resetting the life expectancy upon death, but requiring the beneficiary to take the balance out on the original earners rmd schedule.

Supratall@7: needless to say, I agree.... actually, I did say.

Lyle@8: 401(k)s are more than a tax deferral mechanism. The owner of the plan gets to earn money on the part that he/she would otherwise have had to pay taxes on. The wealthy 401(k) investor likely will be in lower tax brackets when they retire. So the 401(k) allows you to defer taxes now, when you're making more than 250,000/y, until you retire, when you presumably will be making less and owing a lower percentage.

So, how does that affect the worker making 50,000/y? Well, the drop in his/her tax rates from those in effect while working to rates in effect in retirement will be much less. The value of deferral is negligible for the middle- and lower middle-class, but that value is huge for the well-off.

Also, Lyle, you made a comment relating to inheritance of tax-deferred retirement plans. That is a provision of the tax law that I regard as one of the worst and least-justified gifts to the wealthy. Unless the deceased is worth a lot (over $1M effective Jan2011), there's no benefit to the survivors in not taxing these accounts immediately. Only the wealthy derive even a scrap of benefit from this.

Sorry, Joe, but I couldn't disagree more.

Not everyone gets the same opportunities or chances. Period. So this is either a talking point or you have so much unchecked privilege that you actually believe the talking point.

I begrudge no one what they earn, but frankly, I'm not boo hooing for less than 1/2 of 1% of Americans. 55% of Americans earn 30K a year or less. Are they slackers? Or do they just fail "to excel?"

Mike, say what you will about retirement; the fact remains that college is and will always be important.

Any source, left-wing or right-wing, that says otherwise is fucking stupid.

The median earners in this country are probably not living very well.

By Katharine (not verified) on 27 Dec 2010 #permalink

I'm beginning to get the increasing notion from certain segments of the left wing, which thankfully ain't my segment, that as long as it's at the median or above it's a-okay.

By Katharine (not verified) on 27 Dec 2010 #permalink

Here's an idea:

Pity the person who is limited in their opportunities by anything other than their intellect, drive, and self-discipline.

By Katharine (not verified) on 27 Dec 2010 #permalink

Yes, before you misread that second comment, I am a liberal.

This does not mean that I have ridiculously low standards for human beings.

By Katharine (not verified) on 27 Dec 2010 #permalink