This economic myth needs to go away

Sixty percent of Americans are not struggling to get by

Politicians from the left and the right sometimes like to say that 60 percent of Americans are living paycheck to paycheck.

It’s the type of statistic that can fit a variety of economic narratives. For Bernie Sanders, it’s an obvious sign that the working class has been hollowed out to benefit the wealthy elite. For Nikki Haley, it’s proof that Biden’s inflationary policies have wrecked the country. And for some media outlets, it’s the type of negative story that is guaranteed to generate audience engagement.

It’s also, more importantly, not true.

Despite improved job growth and reduced wage inequality, there’s still room for improvement in the American economy, and advocating for better policies is possible without resorting to dubious financial statistics. And for the sake of better journalism, and better vibes, I think we should dispel this misguided doomerism.

The problem with “paycheck to paycheck”

So where does the statistic come from, and what does it actually mean?

The finding that is most cited by the media and politicians comes from the financial services company LendingClub, which conducts an annual survey called “The Paycheck-to-Paycheck Report” on around 4,000 consumers.

The first red flag is that the survey lacks a standardized definition of “living paycheck to paycheck.” Since the data is entirely self-reported, it relies on personal interpretation rather than objective financial metrics, making it less reliable than concrete measures of financial well-being like the poverty rate.

The urban economist Stephen Hoskins was also skeptical of the survey finding, so he inquired with LendingClub about the exact wording of the question that yielded the result. A LendingClub spokesperson responded, stating that the phrasing of the question was “proprietary information.” However, the person did clarify that the intention of the survey was to assess how many Americans rely on their next paycheck to cover their expenses.

And that’s our second red flag.

Imagine someone earning $150,000 per year, who also has monthly expenses that include a $3,000 mortgage, $2,500 in everyday expenses, and $500 in car payments, with the rest of the money placed into a retirement account. That individual could technically rely on their next paycheck to sustain their lifestyle.

Indeed, LendingClub reports that 4 out of 10 high-income earners (those making over $100,000) live “paycheck to paycheck.” While some of these individuals may be facing genuine financial hardship due to structural issues in our economy, such as high childcare costs, the statistic fails to distinguish between those struggling and those who are financially comfortable, but make lifestyle or investment choices that reduce the amount of money in their checking and savings account.

The Brookings economist Gary Burtless makes a similar argument, saying he is “reasonably confident that a sizable percentage of folks ‘living paycheck to paycheck’ own the home they live in, have accumulated some savings in a retirement plan, and live fairly comfortable lives compared with that of their grandparents’ generation.”

It’s crucial to distinguish between the type of person Burtless is describing and the people who are actually struggling to make ends meet. The LendingClub report actually does include data on this, it’s just never covered by media outlets or used by politicians making this paycheck to paycheck claim. Of the survey respondents, only 18.5 percent of them report having trouble paying their bills.

It’s still self-reported data from a dubious source, but if you want a statistic that actually reflects the percentage of Americans who are in a financially difficult position, 18.5 percent seems much closer to the truth than the 60 percent figure we hear so frequently.

The median financial health of the American household

The people who regularly cite the LendingClub’s report are essentially implying that six out of 10 households in the US are struggling to make ends meet. And if this is true, then the median American household would be in pretty dire financial straights. So let’s take a look at some median household financial data to see if that’s the case.

We can’t go any further without acknowledging the work done by Matt Darling, who in addition to being an economist at the Niskanen Center, is the Chief Debunker of this economic myth on Twitter. Whenever the “paycheck to paycheck” claim pops up on the platform, someone shines the BS Bat Signal and Darling appears with these three statistics from the Federal Reserve:

• The median American household has a net worth of $193k.

• The median American household has $8k in transaction accounts (checking/savings).

• Fifty-four percent of adults have cash savings sufficient for three months of expenses.

This doesn’t just complicate the paycheck to paycheck narrative, it completely disproves the underlying premise. The median household net worth figure is important because it highlights the distinction between assets and liquidity. While it’s certainly true that some Americans can’t easily draw on their assets in place of their paycheck, a median net worth of nearly $200,000 does point to a greater level of economic security than the paycheck to paycheck figure implies.

When it comes to liquid cash reserves, the median American household is not actually entirely reliant on their next paycheck. They do have enough money for groceries, to gas their car, or some other relatively minor unexpected event that would require them to spend a few thousand dollars. According to that same Federal Reserve survey, the number of Americans who can’t afford a sudden $400 expense is 13 percent, which while too high for a wealthy country like the United States, is much lower than we often hear. But it’s also important to think about the American household comparatively. The median American household has an income level that would place them in the top 10 percent of the world. Real median household income has also made tremendous gains over the past decade, rising by around $10,000 after decades of languishing growth.

Simply put, if someone had the opportunity to randomly be a median household anywhere in the world and at any point in human history, contemporary America is a pretty great choice.

Of course, this conversation would be incomplete without acknowledging the rising cost of goods and services over the past few years. When news media outlets highlight the paycheck to paycheck statistic, it’s usually in this context. However, the recent news here is pretty good, too. Wages are now outpacing inflation, consumers are spending more than ever, and household debt is at an all time low. The percentage of adults who could cover a $400 expense completely with cash or its equivalent has actually risen by 10 percent in the past 10 years. So while financial insecurity is a problem, it is a problem that is improving.

The right statistics lead to the right solutions

The biggest problem with perpetuating this economic myth is that it can push people towards some wacky policy ideas, like dismantling capitalism or imposing blanket tariffs to restore some rose colored-vision of manufacturing in mid 20th century America.

Again, this is not an argument for policy stasis. There is a lot of debate among economists over exactly how much the middle-class has eroded over the past half-century, but it is undoubtedly true that problems like housing affordability, the price and necessity of a higher education, and increased health care costs has fractured the middle-class dream for many Americans. We should absolutely pursue policies that will make economic opportunity more equitable and make the cost of major expenses more affordable.

This is just a reminder that the United States is not an economic dystopia, but rather a place where most Americans are still at least middle class and have comfortable living standards along with a social safety net that keeps millions out of poverty.

And if we want to have a conversation about how to improve the lives of the most financially destitute Americans, the poverty rate is still the best metric to use. Specifically, the anchored supplemental poverty measure allows us to assess long-term trends in poverty after accounting for government transfers, such as tax credits and social benefits, while adjusting for changes in the cost of living over time.

Since President Lyndon B. Johnson’s “War on Poverty,” we’ve made some remarkable progress.

Still, that does leave tens of millions of Americans living in poverty, many of whom are children. We can and should do more to address the fact that our poverty rate is higher than our peer countries, and it would probably take a whole other article/book/lifetime of work to determine the best way to do that.

But claiming that 60 percent of Americans are financially destitute doesn’t move us any closer toward that goal. When politicians and major media outlets regurgitate it, our public discourse is polluted, and it only reinforces a needless sense of collective economic doom.