The Squeeze: Higher Costs And Smaller Paychecks

The economy may be on the rebound, but life is getting tougher for some people in the middle class. With rising gas prices, insurance costs, and higher payroll taxes, people are feeling squeezed. Host Michel Martin asks if there's any financial relief in sight.

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MICHEL MARTIN, HOST:

I'm Michel Martin and this is TELL ME MORE from NPR News. Coming up - now, we're not trying to cause any friction here, but if you haven't already bought something sparkly for your beloved for Valentine's Day, you might want to hold off. We'll tell you why in just a few minutes.

But first, speaking of buying stuff, if you are a person who receives a paycheck, you've probably noticed by now that your take-home pay is getting a little smaller since the beginning of the year, all things being equal, and some of your basic expenses like gas are costing more. So no, you are not imagining this.

NPR's senior business editor, Marilyn Geewax, is back with us to tell us what's going on. Thanks for being here with us once again.

MARILYN GEEWAX, BYLINE: Hi, Michel.

MARTIN: So the first thing we wanted to talk about is something that you'd actually warned us about at the end of last year, which is that payroll taxes were going to go up at the beginning of the year. Tell us why.

GEEWAX: We all pay into this Social Security system with something that we refer to as the payroll tax, so if you're a worker, you've got an employer, you're on somebody's payroll, 6.2 percent of your pay goes into this fund, and that's a good thing when you're 60. You want to look forward to getting that monthly check, but right now it does take a bite out of your paycheck.

Well, one of the things that Congress did two years ago to help the economy was to reduce that tax by two percentage points. That is, during the years of 2011 and 2012, you actually had more money to take home, so that was good for the economy. The average family got about $1,000 a year from that, but like all holidays, they come to an end and that tax holiday expired as of January 1. So now all of a sudden your paycheck is smaller.

MARTIN: So now it's going back up to the level that it was before, but it still feels kind of like an ouch.

GEEWAX: Right.

MARTIN: But you're saying it's not just payroll taxes. Also, a lot of people are paying more for their health care costs. Tell us about that.

GEEWAX: Well, we don't have solid data on exactly what it's costing people yet, but we know from - health insurance companies have been going to their regulators, asking for these hikes. Anecdotally, you hear a lot about people seeing more coming out of their paychecks, higher co-pays. The prices have been going up, so if you're a typical worker, all of a sudden your take-home pay is smaller because of the higher premiums, smaller because of the higher payroll tax, and you know, you're kind of scratching your head - where did my money go?

MARTIN: And, speaking of scratching - when you think about, you know, you get in the car to go cash that paycheck - people who still do that - or go to the grocery store, let's say, and you see that gas prices are creeping up, even though it's the beginning of the year. And I think that a lot of people are used to the idea that gas prices kind of inch up over...

GEEWAX: Right.

MARTIN: ...the course of the year. You can maybe tell us why that is, but why now?

GEEWAX: Well, it is a bit of a shocker. Again, you - all of a sudden you open up that first paycheck in January and you see you have less money and then you're paying more - and a lot more - for gasoline. In just the past week it's gone up about 18 cents a gallon. That's very shocking for this time of year. We're now up to about $3.54 a gallon on average for regular unleaded gas, and of course if you live in California, it's much worse than that. It's more than $4 a gallon.

So this is really a big bite out of people's paychecks. The reasons for that - there are kind of a lot of little reasons, everything from Super Storm Sandy disrupted gasoline supplies on the East Coast; you've had some refinery fires that have happened. There's also normal maintenance that's been going on on some of the refineries.

But usually these kinds of problems don't all come together so much in winter, and another part of the equation there is that crude oil prices have been high. There's a lot of tension in the Middle East. And the rest of the world - the economy's perking up more in Asia, in Europe as well, so there's an expectation that there will be more demand for oil in the coming year for around the globe.

So you put it all together and all you know is that when you drive up to the pump, it's expensive.

MARTIN: Well, speaking of this - and if you're just joining us, I'm speaking with NPR's Marilyn Geewax. We're talking about the middle class squeeze a lot of people are feeling right now. We are here to tell you, you're not imagining it, that - you know, if you have a middle class paycheck, chances are you're feeling the pinch in a number of areas.

To the point that you were making, Marilyn, we caught up with the owner of a gas station. His name is Mahmoud Kassim(ph). He's better known as Mike to his customers in Struthers, Ohio. He says he can actually lose money selling gas because of tight margins and credit card costs, and that the high gas prices are actually bad for his business. And you might think it's the other way. You think, you know, he's great, but he says no. Here it is.

MAHMOUD KASSIM: Instead of buying a case of beer, they'll buy a six-pack. Instead of buying a carton of cigarettes, they'll buy one pack. And instead of buying, like, a cup of coffee, probably, I might - because, you know, I'll make coffee at home. When the gas prices goes up, our sale on the end side(ph) goes down dramatically because people have less money to spend.

MARTIN: You also talked to him. Tell us a little bit more about him, if you would.

GEEWAX: He is a Palestinian who was raised in a refugee camp in Lebanon, but he moved to this country because he was hoping for the land of opportunity. He lives in northeast Ohio and he was - he says - he told me that he feels like in the years that he's been in the United States, he's seen the income gap widen. He feels like a lot of his customers say that the rich are doing pretty well, but it's not so great for regular people.

MARTIN: Did anybody talk about - at least one of these factors, the payroll tax cut, is a matter of policy, and obviously there's a lot of debate over the whole health care question, which we're not going to revisit. But the payroll tax cut was an explicit decision that policymakers could have - and I just - could have - they could have made a different choice and not let the tax holiday expire, could have set the rate lower permanently. They chose not to, and I just wondered, was there any thought about this kind of January shock to the system?

GEEWAX: Well, a lot of economists did warn about this and I think economists were a little surprised, a little shocked themselves, that Congress went with this very sudden increase in the payroll tax.

When I was talking to economists last fall, everyone was saying, you know, they really need to phase this back in to not shock people so much. Make a change, you know, over six months or over a year or two and get people accustomed to this idea. Well, Congress chose not to do that.

Now, the politics of that - keep in mind, the payroll tax funds Social Security, and Democrats, you know, support Social Security very vigorously. So they didn't want people to get used to that lower payroll tax. They wanted to get back to full funding. And of course Republicans were very concerned about debt and deficit issues, so they were all sort of agreed that they'd just take us right over this cliff of sorts, and suddenly your paycheck is smaller.

MARTIN: To that end, though, there is another issue on the table right now in front of policymakers and that's this question of these across-the-board spending cuts that could take effect fairly soon if Congress and the White House don't agree on a deficit reduction package. We're calling this the sequester. You know, the funds would actually be sequestered or taken off the table.

We talked with earlier - with Congressman Elijah Cummings, and he said that really the government needs to avoid this at all costs. Would there be an impact on middle class families if this were to take place, beyond the people who we know are directly affected, like people who are contractors, for example, people who are federal employees?

GEEWAX: Well, Michel, let me just say that all of the things we've talked about so far, the reduced take-home pay, the higher gasoline - it's really eroding consumer confidence, and a big part of the economy is consumer spending. People need to be confident to spend money. And one of the key factors - I mean the key factor in your sense of confidence is knowing that you have a job, that you will - even if your paycheck's a little smaller, you want to know you have a paycheck.

Well, with this big across-the-board spending cuts coming, for people who - say you work in a machine shop and you do work for defense contractors, or you work directly for, you know, companies that do business with the government in all sorts of ways, if you don't know if you're going to get cut in March, people say that there could be 800,000 jobs lost if this goes forward.

So you're putting together an awful lot of pressure on consumer confidence. People are worried about their jobs. They're worried about their paychecks. They're worried about what they have to spend, and when you look at the consumer confidence data, last fall people were rising. They were feeling better. There was a certain surge in confidence up until about October, and then now it's really dropping rapidly, and that is not a good economic sign.

MARTIN: Marilyn, can you leave us with some hope? Is there any...

GEEWAX: Yes.

MARTIN: Is there any relief on the way at all? Are there any bright spots out there at all?

GEEWAX: Well, there's always another hand when you're talking about economics. So on the other hand, there are some good things - and we've talked about this, too, in the past, Michel - that housing is looking good. The energy sector is strong. Auto manufacturing is pretty good, just because things wear out. And let's say you were a truck manufacturer. You're looking at the energy sector is doing well. Agriculture is doing well. Home construction is doing well. That means people are going to buy trucks this year, so there are people who are tied to the automotive industry who have reasons for optimism.

And really more than anything, some of that surge in housing really could spread out jobs and maybe we'll turn this corner, but right now it's dicey.

MARTIN: Marilyn Geewax is a senior business editor here at NPR. She was with us once again in our Washington, D.C. studios.

Marilyn, thank you so much for joining us.

GEEWAX: Pleasure to be here, Michel.

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