Inflation Is Stretching Household Finances

Saturday, July 9th, 2022 -- 7:20 AM

Heightened inflation over the last year is stretching many households’ finances.

The U.S. Bureau of Labor Statistics figures from April 2022 suggested that inflation may have peaked, but showed that prices have increased by 8.3% year-over-year. A dollar does not go as far as it did at the beginning of 2021, and households are doing what they can to keep up with rapid price increases. In the labor market, workers are taking advantage of a tight labor market to negotiate better terms for compensation and working conditions. Workers in recent months have been quitting in record numbers, a phenomenon that has come to be known as the Great Resignation, and frequently seeking out better-paying positions when they do. And with employers struggling to recruit and retain employees, workers who elect to stay in their current positions have greater leverage to negotiate salary increases or other benefits. But inflation poses a unique challenge for the nearly 60% of American households that rely on income other than wages and salaries, like social security, stock dividends, self employment, or public assistance. Unlike wages and salaries, these alternative income streams are unlikely to be negotiable. Instead, households with income from such sources may be at the mercy of rapid changes in stock market performance or the slow pace of inflation adjustments for government benefits programs. According to data from the U.S. Census Bureau, wages and salaries are the most common form of income for Americans. More than 75% of households report receiving wages and salaries. But alternative income streams are common in a large number of households as well. Nearly one in three Americans receive Social Security, 21.4% rely on other forms of retirement income, and 19.9% report income from interest, dividends, and rentals. Most alternative income streams are considered to be “fixed,” which means that they pay out a set amount on a regular basis. Social Security, Supplemental Security Income (SSI), and public assistance programs are all government-administered income support for populations in need.

While some of these programs do receive an annual inflation adjustment, payments are not adjusted month-to-month, and the annual adjustment may fall short of the overall level of inflation. For example, Social Security and SSI applied a 5.9% cost of living adjustment in 2022, a number that lags the current rate of inflation. Meanwhile, income sources like retirement income from a 401k or interest and dividend payments may yield less of an overall return when the market is underperforming. And because all of these alternative income streams typically provide a lower amount of income per household than wages and salaries, losses to inflation or market underperformance can have adverse effects for people who rely on them to meet basic needs. The data used in this analysis is from the U.S. Census Bureau’s 2020 ACS PUMS 5-Year Estimates. To determine the locations where residents earn the most from alternative income streams, researchers at Self Financial calculated the median alternative household income among households with positive alternative income. In the event of a tie, the location with the greater percentage of households with alternative income was ranked higher. Alternative income for the purpose of this analysis is defined as any income not earned as wages or salary.

The analysis found that 59.6% of households in Wisconsin earn income from alternative sources, which yield a median $20,400 annually. Here is a summary of the data for Wisconsin: Median household total income: $61,200. For reference, here are the statistics for the entire United States: Median alternative household income: $20,900; Median household total income: $63,000; Percentage of households with alternative income: 59.9%. For more information, a detailed methodology, and complete results, you can find the original report on Self Financial’s website: https://www.self.inc/blog/cities-alternative-income-streams.

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