Why reaching and staying middle class is a lifetime challenge | Fin24

Why reaching and staying middle class is a lifetime challenge

Jan 27 2016 07:00
Jannie Rossouw and Carina Rossouw

Many people are born into the middle class, but for those born in poverty the lifetime challenge is reaching middle-class status.

The definition of middle-class status is a challenge in itself. People in poverty are often described as those surviving on less than $1.25 (some R20.00) per day (2005-values; $1.90 or R30.40 in 2016-values). But that doesn’t imply that middle class simply starts just above this threshold.

The wealthy are easy to describe. Wealthy people have lots of money and lots of things. Naturally the wealthy will have their own ranking among and between themselves.

Likewise there are different categories of “middle class”. In the US an annual household income ranging from $25 309 (R400 000) to $144 996 ?(R2.3 million) will probably place people in the lower to upper middle-class range.

Using 2008 data, economist Justin Visagie describes the SA middle class as a household of four persons with a total household income of between R5 600 and R40 000 per month after direct income tax. The corresponding values for 2016 are ?R8 950 and R64 000. This covers the range from lower to upper middle-class as in the US.

A general definition for a middle-class existence in SA is discretionary expenditure. Middle-class families can typically buy the things they need and will have money to spend as they please after they have purchased all necessities.

If this description is accepted, it is clear why people in poverty surviving on R30.40 per day (R3 648 per month for a family of four) desperately aspire to reach the middle class, albeit then the lower middle class.?But with reaching middle-class status come new challenges. Middle-class status results in a particular lifestyle. A household equipped with gadgets and equipment using electricity (fridges, TV and the like). A motor vehicle. A better house and better schools.

Simply put: in a middle-class existence, expenditure follows income. More middle-class trimmings follow a middle-class existence. What was good enough before is no longer good enough. And definitely not good forever.

And with what is good enough, often comes debt. Middle-class people borrow money to purchase things associated with middle-class existence.

The first challenge to stay middle class is therefore to retain a middle-class job. It is unfortunately true that the average middle-class South African is only two pay cheques away from financial hardship.

There are many examples of middle-class people living above their means. ?One is buying expensive and flashy cars.? The neighbours must see that middle class has arrived.

Another is neglecting to budget annually for house maintenance. The cost of maintaining a house inevitably amounts to 1% per annum of the replacement value of that house. A simple calculation shows that a family living in a house worth R1.2m should annually budget R1 000 per month for the upkeep of its property.

But the middle-class challenge goes beyond keeping a middle-class job. It also entails sufficient provision for retirement that will continue to support a middle-class lifestyle.

Transnet pensioners who get a pension from the Transnet Second Defined Benefit Fund are the best example in SA of people who have slipped out of the middle class.

In brief, this Transnet fund stipulates that pensioners get an annual pension increase of 2% per annum. In a period where inflation averages nearly 6% per annum (5.8% per annum since 2002), these pensioners get poorer every year.

A simple example illustrates this point: the real income of a person who retired in 2002 and received increases of only 2% per year since would have decreased by 40% over the ensuing period.

Inflation is therefore a clear and present danger for people who want to protect a middle-class lifestyle, particularly after retirement.

The sustained protection of a middle-class lifestyle therefore not only entails the discipline of living within your means, but also requires diligent saving over a lifetime. People who attained middle-class status often live above their means in their enjoyment of this newly attained status. Avoidance of this pitfall will help to ensure a sustained middle-class lifestyle.

The challenge of our time is therefore twofold. The first is reaching a middle-class lifestyle. This is a challenge in itself that many people can only dream of.

The second is to retain middle-class status over a lifetime and into retirement. With households facing financial pressure from all directions, retaining middle-class status should not be taken for granted. It will increasingly require careful planning, hard work and diligent saving.

This is an edited version of a paper written for The Conversation by Jannie Rossouw, head of the School of Economic & Business Sciences at the University of the Witwatersrand and Carina Rossouw, a BAcc LLB student at Stellenbosch University.