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Living paycheck to paycheck: It’s not just for the poor

When you hear the term "paycheck to paycheck" you probably think of low-income households struggling to make ends meet. That's even the title of a new HBO documentary highlighting the plight of America's working poor. But a new paper released at the Brookings Institution's BPEA conference Friday finds that a sizeable number of wealthy households are living paycheck to paycheck, too.

"The Wealthy Hand-to-Mouth," by economists at Princeton and New York University, finds that roughly one-third of American households -- 38 million of them -- are living a paycheck-to-paycheck existence. These are families who hold little to no liquid wealth from cash, savings or checking accounts. But a staggering two-thirds of these households are not actually poor; while they resemble poor families in their lack of liquid wealth, they own substantial holdings ($50,000, on average) in illiquid assets. Because this money is locked up in things like their houses, cars and retirement accounts, they can't easily dip into it when times get tough.

Demographically speaking, the wealthy hand-to-mouth are older, more educated and have substantially higher incomes than their poor counterparts. Perhaps the most striking difference is that while the poor hand-to-mouth tend to stay that way for long periods of time, wealthy-hand-to-mouth status is transient, lasting an average of only 2½ years.

There's an important policy consideration here. Economic stimulus programs are typically targeted toward the poor, since they are the most likely to immediately spend cash windfalls on necessities that they'd otherwise be constrained against buying. But this study implies that wealthier hand-to-mouth households, because they face similar monthly constraints on their spending, would also respond positively to economic stimulus. The paper concludes that "in order to maximize the aggregate consumption response to fiscal stimulus payments, the payments should feature more moderate phasing out with household income."