Last article I discussed some of the weasel words politicians use with regard to the budget. This time I decided to a look at the phrase “the rich are getting richer and the poor are getting poorer.” I hear it all the time, but is it really true?
I have been hearing that constant drumbeat from the left for as long as I can remember. I’m not sure exactly when I first became conscious of it, but it has been at least 30 years; back when I first entered the workforce as an adult.
So who are the rich?
Many years ago, I went with my grandfather to visit my uncle Henry. Actually, he was my grandfather’s Uncle Henry; one of his father’s several brothers. Of them all, Uncle Henry was my grandfather’s favorite. I am glad I got to visit him, because he died a short time later and I would never have known him otherwise besides through my grandfather’s stories.
We spent a pleasant afternoon while he and my grandfather reminisced about the past, and I maintained a respectful silence. After we left, my grandfather casually mentioned that Uncle Henry was a millionaire. I was shocked. No fancy clothes, no fancy car, and his house, though big, didn’t look much like a mansion. While I had never actually met a millionaire before, he certainly didn’t even remotely resemble my mental picture of what a millionaire should look or act like.
My grandfather explained to me that Uncle Henry was what he called a “paper millionaire.” Uncle Henry was a farmer. I don’t know how many acres he owned, but between his land, the value of his house (which wasn’t all that much), and the equipment he needed to farm the land, his “net worth” was over a million dollars. He didn’t live like a millionaire because he wasn’t, not in the real sense. If he sold everything he might be able to raise a million dollars. But if he sold everything, what would he do for a living?
This was my first real-world experience with the concept of net worth, and the notion that just because you might be able to lay your hands on a million dollars, it did not necessarily follow that you were “rich.” Was my uncle Henry rich? He may have lived a rich and happy life, but I saw no evidence that he was “rich” in the sense that most think of when they think of a millionaire.
So for this discussion of “rich” we will exclude net worth. While there are those who have a net worth in the millions who truly qualify for the title “rich”, there are many who have such a net worth simply by virtue of the way they make their living. Were they to sell their business they might monetarily qualify as rich, but then, like my Uncle Henry, what would they do for a living? Many such make quite a modest income out of their businesses, well below the standard of “rich” as perceived by many.
Once again this begs the question, what is meant by “rich?” Like pornography, it is, as one judge once put it, “hard to define but I know it when I see it.”
We can probably agree that if one receives income in excess of $1 million in a given year, that, at least for that year, one is rich. Depending on what you do with the million dollars, you may not be rich next year, but for that year you are a millionaire. Congratulations! And you will be happy to know that your Uncle Sam is standing by, eagerly ready to relieve you of some of the burden of handling that money wisely.
How much Uncle will relieve you of depends on how you came to acquire it; if long term capital gains, Uncle will take 15% of what you made. If short term gains, or ordinary income, Uncle will help himself to 35% of the take. Not to worry though; you still get to keep 65% to 85% (not including state, county, and city income taxes if you have those where you live, and Medicare/Medicaid tax, if it was a payroll amount), and that means you still get between $650K and $850K to spend or invest as you please. Ain’t it great to be rich?
Most people don’t make a million dollars in income though. Is anyone who makes less considered “rich?” Well, yes, at least according to Al Gore.
Several years back, Al Gore made the astonishing statement that if you make $250,000 a year for four years, then you are a millionaire. And of course, we have already said that a millionaire (excluding the “net worth” millionaires) is rich. So now the threshold for being “rich” is someone making over $250K per year. Hmmm. I know they make quite a bit more than I do, but has anyone asked someone making $250K per year if they consider themselves rich? Well-to-do certainly; but rich?
President Obama thinks so; he has been talking quite a bit about “taxing the rich” to pay for his excessive spending, and the threshold he consistently sets is $250K per year.
Let’s extend this millionaire-who-doesn’t-make-a-million-dollars paradigm a bit further. If we can claim that someone who makes $250K four years in a row is a millionaire (and therefore “rich), what about someone who makes $100K per year for ten years; are they rich too? What about $50K for 20 years? How about $25K for 40 years? Does this have to be individual income or does household income qualify as well?
According to the 2011 HHS Poverty Guidelines, the poverty level for a family of four in the 48 contiguous states (including D.C.) was $22,350. So, using the same logic, a family of four, living right around the poverty line, could be considered both “rich” and poor, if they earn this amount for forty years. Now granted, this example is absurd. But so is the idea that someone making $250K four years in a row is a millionaire.
Let’s back up to the $100K for ten years model. Probably the majority of the population would say that someone making $100K or more a year is “rich.” $100K is a lot of money. Recently, a lot of angst has been expended by the press and others against federal employees who make over $100K per year. How common is that really? What sort of job would you expect that one needed to have in order to earn over $100K from the federal government? Something important, I would presume. Something like an SES perhaps (equivalent to a general officer in the military)? Actually, no. Quite a few people in the federal government are making $100K or more each year. And the number will increase every year.
For the most part, federal civil service pay is based on something called the General Schedule, or GS. Salaried federal employees are assigned a grade, ranging from 1-15. Within each grade there are 10 steps. Employees in certain high cost areas have their own individual pay charts, while everyone else uses a pay chart called “Rest of U.S.” (RUS). This pay chart is a matter of public record; the 2011 RUS pay chart is located here.
A quick look at the chart reveals that one first hits the $100K mark at grade GS-13 step 8; at a 2% increase per year that mark will move down one step per year. At a two percent per year growth rate, in six years, a GS-12 step 10 will be making $100K per year. It would take a while, but in 15 years, at this rate, a GS-11 step 10 will be making $100K as well.
As with many things, whether or not a GS-13 has god-like powers, or is just another worker bee depends on what they do and where they work. In some places, a GS-13 may be the boss. In others, a GS-13 may be a high-powered analyst, engineer, computer scientist, or technical specialist with a many years of experience. In some places, GS-13s or higher may be fairly rare. In other places, like headquarters, intelligence agencies, or research laboratories, they may be fairly common.
I know federal workers who fit the above category. They do not consider themselves rich. Well-paid? For the most part, yes. Rich? Definitely not. So should a person be able to make $100K in federal service? Does that seem like you the taxpayer are forking out too much dough? Does it seem that way even if that person has been working for 25 years and has a master’s degree (or even a PhD) in a technical field?
How about a family where both husband and wife work and bring in a combined household income of $100K; are they rich? What if both are GS-9 step 3s and are making $50,611 each. Are two people whose combined federal income is over 100K “better” than a single individual making the same amount? Are they rich? My theory is that even though they are making the same combined income as the individual, they probably feel even less “rich” than the person making the 100K all by his or her self.
And then there is inflation. You know, that thing that the government says we don’t have, but which you encounter every time you go to the grocery store, gas pump, or pay your utility bill? The fact that folks get a “cost of living adjustment” each year is an indicator that indeed, inflation exists.
So let’s get back to those that we have already decided are rich and look at them one more time. There are more millionaires in the United States than ever before. Is this a tangible indicator that “the rich are getting richer?” Perhaps. Perhaps not.
For one thing, there are more people in the United States than ever before. So if the percentage of millionaires remained constant, you would expect that in actual numbers, there would be more millionaires than ever before, simply based on population statistics. But the number has been growing faster than the population. One reason for this is inflation.
A million dollars just ain’t what it used to be. In fact, the buying power of 1 million 1959 dollars is equivalent to the buying power of 7.3 million 2009 dollars. Or put another way, 1 million dollars in 2009 had the same buying power as $136,986 in 1959; being a “millionaire” in 2009 would make one only 14% as “rich” as being a millionaire in 1959.
This also means that it is easier to make or amass a million dollars than it used to be. In fact, with a little discipline, almost anyone can do it over time. Of course, there remains the question of what those million dollars will be worth years down the road. Take the hypothetical person who started in 1959, and achieved their million dollars in 2009, only to find that it only had the purchasing power of $137,000. In order for that person to “actually” have a million dollars at their disposal (as defined when they began their quest to “make a million”), they would have had to have $7.3 million in their account in 2009.
So if the rich are getting “richer” but the money is becoming worth less, are they really getting richer? Back when I was a kid, my parents thought $100,000 was a lot of money. And back in the mid 60’s, it was. Is it a lot of money today? Well, I wouldn’t throw it in the trash can, as a friend of mine does with pennies, but I wouldn’t call it a lot of money either; not in the same sense that my parents meant it anyway. They were talking about an amount of money they could retire on. To me, it’s a bit more than my annual income.
So who is “rich?” The best definition I can come up with at this time is “anyone who makes more than I do.” And most of them wouldn’t consider themselves “rich.” I read once that there is really no difference between someone who is “rich” and someone who is not; both are just as broke. They are just broke at different levels.
How true. The guy making $50K with a $70K mortgage and a $350/month car payment looks at the guy making $100K and thinks he’s rich. The guy making $100K has a $200K mortgage, and $450/month in car payments and laughs. He knows he isn’t rich. But he thinks the guy making $250K with the $500K house and $750/month car payments, why he must be rich. And on it goes. All are living one paycheck away from fiscal disaster. The ones making more have nicer toys, but in the final analysis, none are truly rich. Even the guy making $200K has no more disposable income than the guy making $50K, and, unless he makes drastic changes to his style of living, can no more afford a tax increase than the guy making less.
So who are the rich? I don’t know; you tell me.