One of President Barack Obama’s main goals this year, as laid out in both his 2015 budget and State of the Union address, is to provide relief to the middle class. The divergent responses to two of his proposals – one involving paying for mortgages and the other saving for college – reveal a lot about the “middle class” in this country and illustrate why it has become so hard to really help that group.
Under the mortgage plan, the Federal Housing Administration agreed to reduce its mortgage insurance premiums by 0.5%. The plan, which is already in place, has been hailed as a way to help middle-class households buy homes more cheaply.
The other plan, in contrast, was abandoned barely days after it was floated due to stiff opposition from all sides. It would have ended the tax break for 529 college savings plans and plowed that money into tax credits more squarely aimed at the middle class. Intense and sustained opposition from Republicans, Democratic congressional leaders and upper-income families led the Obama administration to abruptly drop it.
Doomed to fail
Republicans lawmakers lambasted the 529 proposal, even though it eliminated tax breaks rather than increased spending. State governments and financial entities who operate 529 plans attacked it largely because they worried that eliminating the break would effectively end the plans. And Democratic leaders and parents who invest in them also opposed the very idea, viewing it as an assault on, rather than relief for, the middle class.
While both of these proposals ostensibly targeted the middle class, the mortgage plan was lauded because its financial relief applies to all homeowners, regardless of how much they earned. The 529 proposal, by contrast, was doomed because of a fatal flaw: it actually tried to provide relief for just the middle class, carving it out by income.
The success of one and not the other was actually quite predictable. The mortgage proposal, though modest, was welcomed because it was designed to make it easier and cheaper for families to buy homes. Republicans, Democrats, Americans and the financial entities that benefit all agree that any plan that increases homeownership rates is good, even if most of the benefits go to higher-income households and barely reach the middle class.
Homeowners are richer than most, and the data show most taxpayers don’t benefit from the deductions that target them. Still, homeownership is touted as a way to help middle-class households accumulate wealth.
Ditto for 529s
The same is true with 529 plans. College-savings tax breaks, like those supporting homeownership, disproportionately benefit higher-income households.
Fewer than 3% of families save for college using 529 plans, according to Federal Reserve data, and a 2012 Government Accountability Office report shows that most families who own such accounts are not lower- or middle-income. The average income for families with the plan is three times that of those without them, according to the GAO report. Only 20% of account holders earn less than $75,000.
Since it’s the richest who have the largest accounts, most of the benefits of the tax break go to them. While the average account has about $20,000 in it, the accounts of the top 5% average more than $106,000. Those for the next 5% average more than $30,000. Meanwhile, accounts of middle-income Americans have balances of about $8,000 and those of the poorest have only $3,000.
But neither Republicans nor Democrats seem to care whether 529 plans or the mortgage proposal helps middle-income households. Their willingness to disconnect income from class is probably because Americans generally do the same, identifying themselves in the middle regardless of how much they earn.
The not poor, not rich class
The “middle class” is an oft-used but poorly understood category that seems to be defined by who is not included rather than who should be. Indeed, the only people who clearly don’t belong in the middle class are the very poor and the really rich.
When Americans think of “class,” they seem to divide people into three groups: the poor (lower-class), the really rich (upper-class) and everybody else (middle-class). Given these groupings, the middle class includes both the “near poor” and the “not exactly rich,” like the higher-income families who invest in 529 plans.
The middle-class (as broadly defined) panicked when the 529 proposal was announced because of the risks it posed to their children’s futures. While the top 1% does not fret about how they will pay for their children’s college education, even parents who earn $150,000 worry because tuition rates have been surging for years, rising faster than incomes and financial aid.
Anxious parents who earn too much for their children to receive Pell grants and other aid, yet not enough to make lump sum payments, are painfully aware that their progeny must go to college to succeed. They also know that saddling them with several hundred-thousand dollars of debt to do so could cloud their futures.
A college degree is now a prerequisite to joining the middle class, and college-educated workers earn about twice as much as high-school graduates. And, as Obama noted in his State of the Union, by the end of this decade two-thirds of new job openings in the next five years will require at least some college education, and virtually all jobs will require some type of post-secondary training.
Soon we’ll all be ‘middle class’
The Obama Administration appears to have been blindsided by the vociferous opposition to the 529 proposal, which is somewhat understandable since the president was clearly correct in stating that few lower- or middle-income families would be harmed by it. The upper-income parents who objected felt they were being attacked, because they self-identify as being middle-class, not upper-class. And, compared with the top 1% of Americans who earn more than $663,000, they may just be right.
The success of the mortgage plan together with the failure of the 529 proposal reveal a lot about who is part of the middle-class in this country – and who thinks they are. Ever widening income inequality caused by the highest earners getting richer will mean more upper-income Americans likely will claim membership in the middle-class.
An expansive definition of the middle class will make it even harder to find politically palatable ways to target its true members, who are increasingly struggling just to make ends meet. So even as more people think they’re in the middle class, its actual membership will continue to shrink as long as the income and wealth gaps keep growing. And the amount of money the government is willing to spend on the true middle class will continue to shrink as well.