97.4

Massachusetts’s score on MassINC’s middle-class index shows only a slight drop since the start of the decade, but some of the data are ominous

the bay state economy expanded by more than 10 percent last decade—8 percent growth on a per capita basis after accounting for inflation. It’s not the Massachusetts Miracle, but given that we were nearing the peak of the tech boom in 2000, and in 2010 we were barely emerging from an even bigger bust, these aren’t horrendous growth figures.

The problem is they don’t say anything about how well the state’s residents fared. Production is the standard measure for economic performance, yet trying to figure out how changes in output affect the well-being of individuals is like guessing where the Red Sox will finish in the American League East based only on their number of runs scored.

 Click the image for a larger view of MassINC’s Middle Class Index

Fans can draw from a heap of indicators to debate the play of individual players and teams. Unfortunately, there’s nothing like the Baseball Almanac when it comes to economic life in Massa­chusetts. The only true estimate of well-being is the federal poverty rate, which tells us if families earn just enough money to scrape by, large regional variations in the cost of living notwithstanding.

Without meaningful statistics, it’s difficult to measure how economic change affects families. Equally important, it’s hard to judge the accomplishments of our elected leaders and the economic policies they advocate. Lack of standard, commonly reported metrics explains much of the futility in the current dialogue around the state of the middle class.

We must have a more productive debate if we’re going to make the tough decisions needed to get our economic policies in order at both the state and federal level. Indicators that record and illuminate how our choices translate into wins and losses for the middle class should be at the center of this discourse.

MassINC has been combing through available data to come up with just such a meaningful set of measures. While this effort is still a work in progress, the Middle-Class Index we’ve developed begins to provide a fuller picture of how Massa­chusetts residents are faring, and how their experiences differ from those of middle-class citizens in other states.

To get a feel for this index, it’s important first to understand its construction. Surveys suggest about 60 percent of Americans consider themselves to be middle class. We use this ratio, assembling data for residents in the state’s middle three income quintiles. For families, this range spans from about $32,000 to a little more than $141,000 in total income annually from all sources.

In looking at how residents are managing on these earnings, we wanted to see whether they were achieving the American Dream, which survey research helps define as, first and foremost, financial security. Other pillars in­clude a comfortable retirement; good health and access to quality and affordable health care services to maintain it; homeownership; strong families; and educational opportunity.

Building an index is partly about what measures you include, but equally important is how you combine them. Since the 26 indicators that make up our index all come in different units, we look at how each has moved in percentage terms since the beginning of the last decade. We give more weight to indicators that are fairly stable over time, so that a small but significant movement in a key indicator, such as the homeownership rate, which has risen slowly, isn’t overshadowed completely by large fluctuations in a measure like student debt, which has grown dramatically.

We’re interested in knowing how families have fared since 2000, a time when the state’s economy was roaring, so we set our benchmark figure for the Middle-Class Index at 100 for that year. Using our 26 indicators, today’s Middle-Class Index is 97.4. While this is just a slight drop from the benchmark 100 figure at the beginning of the last decade, dramatically divergent trends in the four subindexes we use suggest that conditions are, in fact, significantly more challenging today for the state’s middle-income residents.

The middle class is holding on to many pillars of the American Dream. The Achieving the Dream subindex, which tracks whether traditional middle-class attributes are within reach for middle-income families, actually climbed to 105.2. The Working Conditions subindex is virtually unchanged, indicating residents aren’t laboring harder to attain their standard of living, at least compared with the beginning of the decade. Despite a large increase in income inequality and very low scores relative to the nation, Massachusetts made some progress over the last decade on our Equal Opportunity subindex, mostly by increasing the homeownership rate for nonwhite residents.

But our numbers reveal a precipitous decline in the nine measures that form the final subindex, Financial Security. Since they relate to overall wealth and income —the bedrock upon which middle-class status is built—these measures should be thought of as leading indicators. They show weak income growth and increasing volatility in earnings in a time of rising costs in education, health care, and housing. Savings rates are falling and personal bankruptcies are rising. Middle-class residents in Massa­chusetts are clinging to the American Dream, but these data confirm what many have observed: Their grasp is increasingly tenuous.

Often, the patterns that emerge when you look at a large set of numbers make little sense. But in this case, the indicators fit together like pieces of a puzzle. They tell a neat story about the state’s middle class during a difficult decade. Economic forces pushed hard against family income, slowing growth to a crawl. Government policy pushed back with efforts to expand access to health care and higher education, and make housing more affordable. Here’s our telling of this story through the middle-class index data.

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over the last decade, the median family’s income grew only by about 6 percent. These earning gains were more than offset by increased costs. And income has be­come more and more unstable. Our figures show income volatility in Massa­chu­setts increasing by nearly a third since the early 1990s, rising at about the same pace as volatility nationally. Volatility is not merely a symptom of recession. In Massa­chusetts it actually peaked in 2006, while the economy was still growing at a decent clip.

For those who experience an unanticipated decline in earnings, the only option may be to draw down on savings or tap a 401(k) account, especially since the lifelines that middle-class families often relied on in the past—credit cards and home equity loans—are less accessible. Ideally, we’d be preparing for an era of greater uncertainty by increasing our savings, but exactly the opposite has occurred. In 1993, only 22 percent of the state’s middle-class households had no interest income. Today, 37 percent of households report having no income from interest.

Homes are the only financial asset middle-class families gained during the last decade. After declining slightly in the 1990s, homeownership rates for middle-income families rose in the 2000s to 70 percent at the end of the decade. But families borrowed heavily to become homeowners, many taking second mortgages to cover their down payment, and extending the terms out as far as 30 years. For the average middle-income household in Massa­chusetts, both renters and homeowners, housing costs as a share of income grew from less than 14 percent in 1990 to 22 percent in 2010.

Increasing housing costs have been accompanied by rising health care costs. In 2000, the average employee contribution for a family health care policy amounted to 2.6 percent of median family income in Massachusetts. In 2010, health premiums absorbed 4.5 percent of family income. And this increase doesn’t include the cost of de­ductibles and prescription drugs, which can be substantial, especially for families who have members with chronic conditions that require ongoing treatment.

The rising cost of living will inevitably impact the number of middle-class families that are able to achieve the American Dream in Massachusetts, but so far we’ve managed to forestall such a trend. The number of families with health insurance has risen dramatically over the last two decades, due in large part to the state’s 2006 health care reform law and significant public subsidy. Access to higher education has also grown steadily. Only 58 percent of high school graduates went on to college in the early-1990s. Now more than three-quarters continue their schooling uninterrupted. The share of bachelor’s degree candidates who complete their studies has also ticked up slightly over the last decade. Nearly 70 percent of students earn a degree within six years.

But these figures have a significant time lag. The most recent 2009 college completion rate covers students who began in the fall of 2003. The economic challenges families faced later in the decade may have a dramatic effect on college access, particularly given the run-up in costs. Tuition, room and board, and fees at the state’s public universities have more than doubled since the early 1990s.

With families making greater financial sacrifices to get kids through school, saving for retirement has become more difficult. Over the last two decades, only about half of full-time middle-class workers have participated in employer-sponsored retirement plans. Given the uncertain long-term outlook for Social Security, this forebodes challenging times ahead for many middle-class residents.

The statistics compiled in our index also tell an important story about how Massachusetts families compare to their middle-income counterparts in other states. Nation­ally, the middle-class index fell to 94.2.

Both the nation and Massachusetts saw a precipitous decline in the Financial Security subindex. We did a little bit better on the Financial Security subindex because Massa­chusetts households and families saw slight income growth during a decade when median earnings fell nationally. The components of this subindex look very different for the state versus the country. While we often hear that Massachusetts has some of the highest health care costs in the US, Bay State employees shoulder a relatively smaller share of those costs than do workers nationally, and families in Massachusetts earn more. So as a percentage of the state’s median family income, the employee contribution for a family health insurance policy is among the lowest in the nation. But this health care cost advantage is more than offset by our housing cost disadvantage. Middle-class families in Massachusetts have some of the highest housing cost burdens in the nation.

Massachusetts did better on the overall index largely due to growth in the Equal Opportunity subindex that measures the extent to which all groups have a fair shake at the American Dream. But this superior performance is no cause for celebration. On many of these indicators, we rank among the worst in absolute terms. In 2010, the Com­monwealth finished second only to New York on income inequality; only New York and Rhode Island have lower nonwhite homeownership rates; and only about 10 states have lower associate degree completion rates, an indicator we use as a measure of family economic mobility.

These statistics that track the health and vitality of the middle class give a fuller picture of how residents are faring, and provide good benchmarks to monitor as economic change continues to shape the lives of Bay State families. But this set of figures is far from complete. There are no reliable figures at the state level to understand what families have for assets, which means we don’t really know how much families have stashed away to weather an economic downturn, and it’s impossible to say if residents in different age groups are on track to make retirement savings milestones.

Our Working Conditions subindex suffers because we don’t know enough about how families spend their time, and how these allocations are changing. The American Time Use Survey provides good detail nationally, but for Massachusetts we don’t know how much paid vacation middle-class families get. From the data we do have, it seems as if middle-income workers haven’t lengthened their work week considerably, but how much time is spent in the evening at home answering work-related emails and performing other tasks not accounted for in these figures?

While there are probably many other useful ways to measure how the middle class is faring, we have had a hard time finding good models. After months of searching, we found no state with an index tracking the well-being of middle-class families. Even for the nation, middle-class indexes are scarce. The few that exist focus narrowly on financial security. In this data-driven age, it’s remarkable that more effort hasn’t been made to do this. The White House’s Task Force on the Middle Class, established in 2009 and headed by Vice President Joe Biden, could take on this important work. The nation’s Federal Reserve banks are also well-positioned to compile these indicators. More so than federal agencies, their regional focus means they often provide state-level data.

Meet the Author

Ben Forman

Research Director, MassINC

About Ben Forman

Benjamin Forman is MassINC’s research director. He coordinates the development of the organization’s research agenda and oversees production of research reports. Ben has authored a number of MassINC publications and he speaks frequently to organizations and media across Massachusetts.

About Ben Forman

Benjamin Forman is MassINC’s research director. He coordinates the development of the organization’s research agenda and oversees production of research reports. Ben has authored a number of MassINC publications and he speaks frequently to organizations and media across Massachusetts.

Meet the Author
Our effort to craft a Middle Class Index is certainly an imperfect endeavor, but we believe it’s important to have a yardstick with which to take stock of where families stand in their pursuit of the American Dream. We encourage anyone who sees an opportunity to improve or build upon on our approach to visit our website and download the data. You can add your own measures and reweight ours according to your own reckoning of the relative importance of these variables to the health and vitality of the state’s middle class. Please share with us what you find.

Ben Forman is the research director at MassINC and Caroline Koch is a MassINC research assistant.