Happiness Revisited: A Household Income of $75K?
Note from dshort: I've updated this commentary in the wake of the Census Bureau's release last week of the 2013 annual household income data from the Current Population Survey.
One of my favorite discussions on APViewpoint, which addressed "The Sad State of Happiness" included an indirect reference to a popular 2010 academic study by psychologist Daniel Kahneman and economist Angus Deaton. Their topic was the correlation between annual household income and day-to-day contentment. They analyzed more than 450,000 total responses to a Gallup weekly survey of households across the 50 states and DC. The survey was conducted in 2009.
A report in the WSJ summarized their findings:
"It turns out there is a specific dollar number, or income plateau, after which more money has no measurable effect on day-to-day contentment.
The magic income: $75,000 a year. As people earn more money, their day-to-day happiness rises. Until you hit $75,000. After that, it is just more stuff, with no gain in happiness."
Kahneman and Deaton distinguish between two concepts of happiness.
- Emotional Well-Being: the day-to-day experiences that make life pleasant or unpleasant
- Evaluation of Life: one's overall life satisfaction
The $75K number is the benchmark for the first of the two. As Deaton explained, "Giving people more income beyond $75K is not going to do much for their daily mood ... but it is going to make them feel they have a better life."
Incidentally, according to the Census Bureau, the mean (average) household income in 2009 was $67,976. That's 9.4% below the happiness threshold. The median (middle) household income was a much smaller $49,777. That's 33.6% shy of the magic number.
Not surprisingly, the Kahneman-Deaton findings have been controversial. For openers, the size of the household can be a destabilizing variable. The Census Bureau's 2010 survey counted 116.7 million households and put the average size at 2.58 persons. So that $75K benchmark would be quite a stretch for a couple with several additional dependents. The latest Census Bureau annual data, three years later, puts the number of households at 123.0 million with an average of 2.55 persons per household.
Does Debt Spoil Happiness?
Certainly a massive ratio of debt service (mortgage, credit cards, college loans, etc.) could wipe the smile off the face of an otherwise happy household. That said, Federal Reserve data shows that debt service payments as a percent of disposable personal income peaked at 13% in 2007. It had dropped to 12.2% in 2009, the year that the Gallup survey was conducted. As of Q1 2014 debt service payments had fallen further to 9.9%.
Does the Cost of Living Make a Difference?
A more compelling wildcard is the cost of living. Let's assume that the benchmark of $75K in 2009 remains the same today, five years later. Here is a quick look at the equivalent Happiness Threshold for the 50 states and the District of Columbia using the 2013 cost-of-living indexes per state and DC from the Council for Community & Economic Research.
In this 2013 snapshot, 34 states have an average cost of living below the national average; 16 states and DC come in above the average. The range across the states is substantial: The spread from Mississippi to New York is $39,600. If we look at the granularity by city, it's even wider. Based on the 2010 data for selected cities posted on the InfoPlease website, the equivalent of $75K for Manhattan soars to the pricey neighborhood of $162,500.
Is $75,000 Still a Valid Mainstream Happiness Benchmark?
The Kahneman-Deaton study appeared in 2010 but was based on 2009 survey data. The latest Consumer Price Index for Urban Consumers (CPI) shows a 10.4% increase from the 2009 average. The equivalent index for Wage Earners and Clerical Workers (CPI-W) is up 11.2%.
Is the Happiness Threshold of $75K still valid if today's equivalent purchasing power requires about $83K?
I believe the answer is ... probably ... "Yes".
Why so? Take a look at the monthly Census Bureau's data for real median household incomes since 2000 (the blue line below), courtesy of Sentier Research.
The average of the monthly data points for 2009, adjusted to today's dollar, was about 3.3% higher than the 2014 monthly average thus far. Yes, the cost of living has risen since 2009. But day-to-day contentment is greatly influenced by how we see ourselves in relation to others. In recent years household incomes have been on a treadmill -- nominally in motion, but in real terms essentially running in place.
For more on median household incomes, see this monthly update.
I'll close this commentary with a snapshot of the Michigan Consumer Sentiment Index and its 12-month moving average.
If we view this popular confidence indicator as a crude gauge of day-to-day contentment, today's mood is definitely happier than the one that prevailed in 2009.
Note from dshort: The Kahneman-Deaton study mentioned here is entitled "High Income Improves Evaluation of Life but Not Emotional Well-Being." It appeared in the Proceedings of the National Academy of Sciences, 107, no. 38 (August 2010). The full text can be read on the PNAS website here or downloaded as a PDF file.
Check out our online community for financial advisors at www.apviewpoint.com.