Americans Across Income Groups Navigate Financial Strain
With rising inflation, Omicron and expiration of relief programs, lower income Americans continue to feel financial strain
Analysis led by Nick Karnovsky, Lance Guthrie and Melissa Bearden
Two years into the pandemic, the gap between lower and higher earners continues to widen against new affordability pressures, according to a new analysis from the Capital One Insights Center. Through a four-part installment series, this latest release of the Capital One Marketplace Index analyzes roughly two years of data collected on the financial impact of the COVID-19 pandemic across income groups (i.e. lower earners making less than $25,000 in household income (HHI) annually; middle earners making $25,000-$100,000 HHI; and higher earners making $100,000 or more HHI) on a nationally representative sample of 2K-10K American respondents.
The Marketplace Index is one of the longest-running surveys on COVID-19’s social and economic effects to date by a private sector enterprise. The Center began gathering data in April 2020, soon after the WHO’s formal declaration of the COVID-19 pandemic on March 11, 2020, and has continued every four to eight weeks.
This Index, which shows current trend data, presents a comprehensive look at how Americans’ financial realities and viewpoints have changed over the past two years across a wide array of issues. The study addresses income, financial access, financial health and well-being, inflation, labor market trends and more.
In the first of four installments, this report dives into the disproportionate impact of the pandemic across income groups, against the backdrop of macro-level influences such as rising prices, which are adding to increased financial burden, particularly among lower and middle earners.
Key findings: Understanding COVID-19 Economic Impacts through Year 2
- Two years into the pandemic, the K-shaped recovery continues, with the gap between lower and higher earners continuing to widen against the backdrop of inflation. Since the Marketplace Index’s first release six months ago, Americans have confronted a host of new challenges – from the surge of the Omicron variant, to the expiration of key government relief programs and stimulus, and now rising inflation. This has placed increased pressure on the financial health of millions of Americans, with lower earners facing disproportionately negative impacts. Comparing the early months of the pandemic to February 2022, data shows that:
- Bill payment: Consumers are increasingly struggling to pay all their bills (up from 21% in April 2020 to 26% in February 2022). This increase is driven by higher earners who are struggling to pay all their bills at more than twice the rate they were earlier in the pandemic (10% in April 2020 vs. 22% in February 2022), though lower earners continue to struggle to pay all their bills at the highest rate (36% in April 2020 vs. 37% in February 2022).
- Financial health sentiment: Americans’ sense of their current financial health has fallen back near early pandemic lows across income groups, driven largely by falling sentiment among lower earners (42% of lower earners reported not feeling financially healthy in April 2020 vs. 47% in February 2022).
- Underemployment: Underemployment—working less (or for less money) than desired—has shown a marked improvement compared to April 2020, though lower earners have not recovered at the same rate. Rates of underemployment dropped by 14 percentage points for middle earners (21% in April 2020 vs. 7% in February 2022), by 10 points for higher earners (13% vs. 3%), and just four points for lower earners (22% vs. 18%).
- Income: While shocks were felt across income bands early in the pandemic, a steady share of lower earners continue to report that their income decreased recently (33% in April 2020 v. 35% in February 2022) whereas far fewer middle earners and higher earners now report income decreases (36% in April 2020 v. 21% in February 2022 for middle earners, and 32% in April 2020 v. 13% in February 2022 for higher earners).
- Lower earners continue to face outsized economic hurdles, impacting not only their financial—but physical, mental and emotional health—at roughly two times the rate of higher earners. Nearly half of lower earners (47%) say their current financial situation impacts their mental and emotional health negatively, and 39% report negative impacts to their physical health - at nearly twice the rate of higher earners.
- Against the backdrop of rising prices, roughly one-in-four Americans were unable to pay for at least one bill in the past month. In February 2022, roughly one quarter of consumers (26%) were unable to pay at least one bill while 27% borrowed in some way to pay bills or make ends meet. Nearly half (47%) are concerned about paying at least one bill in the next month.
- As concerns over inflation increase, about six-in-ten Americans report that rising prices have affected their spending, leading to cuts in discretionary purchases. The majority of respondents (62%) reported that inflation affected their spending recently, with lower and middle earners most affected. As a result, more than one-third of lower earners are making significant cuts to their travel, entertainment and dining spend (ranging from 33-37% across the aforementioned categories) compared to much lower rates among higher earners (9-17%).
- The vast majority of Americans don’t think wages have kept up with inflation, with lower earners falling furthest behind in non-performance based increases. Only 18% of consumers say their wages have fully kept up with their cost of living, with only 9% of lower earners reporting the same. Meanwhile, 10% of lower earners got a non-performance-based raise or bonus in the past 3 months, vs. 20% of middle earners and 30% of higher earners. These disparate impacts are even more pronounced when considering the already pronounced difference in wages across all three income groups.
- To compensate for rising prices, some Americans are turning to other funding sources, like savings or borrowing. Four in ten consumers (38%) took proactive measures to spend less (e.g. cutting back on discretionary spending and canceling/not taking trips), and four in ten (42%) took a hit to their longer-term financial health (e.g. saving less, tapping into savings, borrowing money, taking out a loan).
- Tax refunds are expected to be a boost for considerable shares of Americans. 47% of respondents expect a refund after filing their 2021 taxes, with over half of lower earners (57%) and nearly half of middle earners (49%) saying their tax refunds would be very or moderately important to their overall financial health this year.
- Working Americans across the earnings spectrum report increasing income. In the month of February, more working Americans reported their income increasing (43%) than those who reported a decrease in income (27%), largely from year end bonuses (10%) and merit-based raises from their same job (14%) and/or from working more hours (18%).
- Despite increasing concerns over affordability among middle and higher earners, there is considerable hope for their financial future: Middle and higher earners express hope for their financial futures: 31% of middle earners and 45% of higher earners are more optimistic about their financial futures than they were pre-pandemic; and 77% of higher earners and 48% of middle earners report feeling confident about saving for their long-term goals. A smaller share of lower earners express a similarly positive view (27%).
Lower earners continue to face steep financial hurdles
Across several key dimensions of financial health and wellbeing, the gap between lower and higher earners continues to widen. However, against the growing backdrop of affordability concerns, even higher and middle earners are showing an increased level of strain in covering monthly costs.
Lower earners continue to face outsized economic hurdles, impacting not only their financial, but physical, mental and emotional health. Nearly half of lower earners say they are somewhat more (23%) or much more (23%) stressed about finances than pre-pandemic. In addition, 47% say they do not feel financially healthy right now, while an identical share say their current financial situation negatively impacts their emotional and mental health, and 39% reporting negative impacts to their physical health.
Higher and middle earners are also showing an increased strain in keeping up with day to day expenses. While higher earners are not as likely to report such finance-induced strain, they are having a harder time keeping up with bills and maintaining financial health than in the past. In February 2022, the share of middle earners (47%) and higher earners (33%) concerned about paying for at least one bill in the next month is up from August 2021 (40% and 27%, respectively). Middle (26%) and higher earners (24%) are also now slightly more likely to say they borrowed in some way to pay bills in the past month than in August 2021.
Savings for the future and confidence in planning for long-term goals favors middle and higher earners, while lower earners fall behind. Lower income earners are also particularly pressed when looking toward their financial future. Less than half have enough to cover all expenses in the next few months; 45% report only having enough savings to cover the next month (e.g. March 2022) of costs. About half report having somewhat less (16%) or much less (35%) savings than pre-pandemic, compared with smaller shares of middle and higher earners. About four-in-ten (41%) lower earners are not at all confident in planning for their long-term financial goals, while middle and higher earners express much more confidence.
Tax refunds, other glimmers of hope hold steady—for middle and higher earners
Despite affordability pressures and continued uncertainty, middle and higher earners are increasingly optimistic about their financial futures.
Many see tax refunds as important to their financial health. Tax refunds are expected to be a boost for considerable shares of Americans across income groups. Roughly eight-in-ten lower and middle earners and seven-in-ten higher earners who expect a tax refund this year say it would be at least somewhat important to their overall financial health. About one-in-five middle earners (22%) and one quarter of higher earners (26%) expect a tax refund of more than $1,500, while similar shares of each expect a smaller refund. Meanwhile, half of lower earners (51%) aren't sure if they will get a tax refund or not, further compounding their future financial uncertainty.
Americans across the earnings spectrum report increasing income. In the month of February, more working Americans reported their income increasing (43%) than those who reported a decrease in income (27%), largely from year-end bonuses (10%) and merit-based raises from their same job (14%) and/or from working more hours (18%). Across the income spectrum, higher and middle earners are more likely to report income gains than lower earners. For example, while similar shares of lower (30%), middle (26%) and higher earners (27%) say their income has decreased in the past month (as of February 2022), slightly higher shares say their income has increased. Among lower earners, 36% say their income has increased; by comparison, 42% of middle earners and 51% of higher earners report increasing income. (Data from the Bureau of Labor Statistics backs up this trend: Earnings for private employees increased to $31.63 in January 2022, a 5.7% increase over the past year.)
Middle and higher earners express hope for their financial futures, as well as a smaller but significant share of lower earners. As of February 2022, eight-in-ten higher earners say they expect to be financially healthy in six months, compared with nearly six-in-ten middle earners and roughly three-in-ten lower earners.
Rising prices are an additional foe for Americans navigating troubled financial waters
Many Americans are personally feeling the effects of rising prices, partially as a result of the supply-and-demand tumult wrought by the pandemic. In February 2022, roughly three-quarters of lower earners (73%) and middle earners (75%) say they have personally felt the effects of inflation recently. Among high earners, 67% say they have felt inflation’s effects.
Against this backdrop of rising prices, more Americans are struggling to keep up with bills and monthly expenses. In February 2022, roughly one quarter of consumers (26%) were unable to pay at least one bill while 27% borrowed in some way to pay bills or make ends meet. Nearly half (47%) are concerned about paying at least one bill in the next month (e.g. March 2022). Moreover, about four-in-ten (41%) low earners said they have struggled to pay for staple categories – such as groceries and household products – in the past month because of increased prices. One quarter of middle earners and 15% of higher earners said they’ve struggled to pay for basics in the past month.
As concerns over inflation increase, Americans are cutting back on discretionary purchases in favor of essentials. As consumers struggle to meet the increasing prices of staple categories, many are also having to cut discretionary spending. This is particularly true for lower and middle earners. About half of lower and middle earners say they are spending somewhat or much less on travel, entertainment and dining than a few months ago, compared with smaller shares of higher earners who say the same. Similarly, about four-in-ten lower and middle earners are spending less on shopping in stores than a few months ago, compared with about three-in-ten higher earners.
To compensate for rising prices, some Americans are turning to other funding sources, like savings or borrowing. Four in ten consumers (38%) took proactive measures to spend less (e.g. cutting back on discretionary spending and canceling/not taking trips), and four in ten (42%) took a hit to their longer-term financial health (e.g. saving less, tapping into savings, borrowing money, taking out a loan).
The vast majority of Americans don’t think wages have kept up with inflation, with lower earners falling furthest behind in non-performance based increases. Only 18% of consumers say their wages have fully kept up with their cost of living, with only 9% of lower earners reporting the same. Meanwhile, 10% of lower earners got a non-performance based raise or bonus in the past 3 months, vs. 20% of middle earners and 30% of higher earners. These disparate impacts are even more pronounced when considering the already pronounced difference in wages across all three income groups.
As inflation continues to affect the lives of many Americans, a big question remains: How long will it last? Despite the promise of improvement in some areas (such as decreasing unemployment), persistent challenges and questions surrounding the broader labor landscape threaten to exacerbate inflation. Workers’ sentiments and willingness to return to the workforce play an outsized role in the future of economic stabilization.
If history is any indication, COVID-19 could affect that willingness: The pandemic has slashed hours for lower earners: 31% say they work fewer hours compared with pre-pandemic, the highest among income groups. And 13% of these workers, who often work high-contact jobs, left jobs out of concern over the virus.
Just as the past two years have evaded prediction, the trajectory of the COVID-19 pandemic and the American economy, as well as how they interact, is impossible to foresee. Americans across income groups continue to face significant financial struggles, from trying to make financial ends meet to responding to rising prices. In light of an unpredictable financial future, Americans are learning and embracing the closest thing to a solution: Adaptability.
Coming soon: How labor market shifts are unfolding, and more
In light of COVID-19’s manifold effects on labor, Americans are reevaluating their relationship to work. About one-quarter of low earners and roughly one-in-five middle and higher earners left a job of their own free will since the pandemic began. Of those workers who left roles, a greater share (42%) cite company or role specific factors (e.g. as work-life balance, desire for a change of pace, seeking more purposeful work, remote work options, company culture, etc) as the predominant factors for leaving over financial reasons (18%). While the Great Resignation may be the apt phrase to characterize this phenomenon from an employer standpoint, findings suggest that for workers and job seekers, it increasingly resembles something closer to a Great Re-evaluation. The next installment of the Marketplace Index will dive into these key factors driving the labor force turnover – and what it means for business and labor.
This Spring, the Center will also release two additional installments, focusing on disparate impacts by race-ethnicity and gender, followed by the potential impacts of tax refunds across income groups.
In September of 2021, Capital One launched the Capital One Insights Center, and its first release, Capital One Marketplace Index: The Road to Recovery. Since April 2020, the Capital One Insights Center has conducted studies every four to eight weeks with a nationally representative group (2-10K) of U.S. respondents covering a range of topics from job loss, to how they used government stimulus, to their outlook on economic recovery.
The study divides these Americans into three income groups to better understand the impacts: lower earners making less than $25,000 in household income (HHI) annually; middle earners making $25,000-$100,000 HHI; and higher earners making $100,000 or more HHI. The Marketplace Index is one of the longest-running surveys on COVID-19’s social and economic effects to date by a private sector enterprise.
In December 2021, the Center released the Pulse Update of the Marketplace Index which outlines a snapshot of key trends across several indicators since the release of the inaugural Index published in September 2021, leveraging data points as recent as October 2021.
This release trends data first collected in April 2020 to data collected as recently as February 2022, resulting in a two-year retrospective look at the pandemic’s enduring economic effects across lower, middle and higher earners.
About the Capital One Insights Center
The Center combines Capital One research and partnerships to produce insights that advance equity and inclusion. As a nascent platform for data and dialogue, the Center strives to help changemakers create an inclusive society, build thriving communities and develop financial tools that enrich lives. The Center draws on Capital One’s deep market expertise and legacy of revolutionizing the credit system through the application of data, information and technology.