Happiness or wealth? The $75,000 question

I have seen the headline ""The Perfect Salary for Happiness? $75,000 a year" so many times and in so many permutations that it has become a personal article of faith. The message is clear: all you need is $75,000 a year to be happy.  Anything more is superfluous, and maybe even a pointless waste of time.

Our household income is above the happy number, but believing that happiness peaks at 75K still matters.  The number is a consolation when I worry about whether I will be able to maintain my income at its current level because, well, at least I can still be happy if I earn less.  It is also a motivator in optimistic times - if I can save enough to generate investment returns of $75,000 a year, I can retire and be a happy unemployee.

Comforting fantasies, but fantasies all the same.

It's not all about the happy

The magic number of $75,000 comes from a 2010 study by economists Daniel Kahneman and Angus Deaton  (both now Nobel laureates).  The authors concluded that:

More money does not necessarily buy more happiness, but less money is associated with emotional pain. Perhaps $75,000 is a threshold beyond which further increases in income no longer improve individuals’ ability to do what matters most to their emotional well-being, such as spending time with people they like, avoiding pain and disease, and enjoying leisure.

All good so far.  Raising your income to $75,000 is likely to reduce the emotional pain you experience and therefore increase your level of emotional well being, i.e., happiness.  Once your income hits that level, happiness plateaus.  From there on, adding to your income doesn't seem to do a lot to increase your happiness.

But Kahneman and Deaton didn't just measure happiness, they also measured life satisfaction, which refers to a person's thoughts about his or her life.  The life satisfaction scale ranges from "the worst possible life for you" to "the best possible life for you."  This is where it gets interesting.

Life satisfaction doesn't stop improving at $75,000.  To the contrary, a person's perceived satisfaction with their life keeps increasing as they make more money, at least up to $160,000.  And even at that level, the data show no signs of slowing down.  Satisfaction could keep rising all the way to Bill Gates.

The authors summarize the difference between the effect of income on happiness and life satisfaction by noting that:

We observe a qualitative difference between our measures of emotional well-being and of life evaluation—the former satiates with high income, whereas the latter does not.

Put another way, our appetite for life satisfaction, and the money to feed it, might be insatiable.

Coming down is the hardest thing

That dispels my $75,000 fantasies.  I want to be happy, but I also want to be satisfied with my life.  If asked, I want to be able to tell economics researchers that I am living a life that is pretty close to my best possible life.  Regardless of whether the money is in the form of a salary or investment income, is that possible if I anchor on $75,000?

The evidence of the Kahneman/Deaton study suggests that the answer to that question is no.  If a person's income goes down, their satisfaction with life is likely to fall in lockstep.

There is one big caveat to keep in mind.  The authors emphasize that their study examines differences in income, not changes in income.

Our data speak only to differences; they do not imply that people will not be happy with a raise from $100,000 to $150,000, or that they will be indifferent to an equivalent drop in income. 

The point here is that while the study suggests that if person A earns $100,000 per year they are likely to be just as happy as person B, who earns $150,000 per year.  The study does not say that person B will remain as happy as person A if their income falls to $100,000 per year.  Maybe they will, maybe they won't.

The same distinction between difference and change applies to life satisfaction.  The Kahneman/Deaton study concludes that person B (with the income of $150,000) is very likely to report higher levels of life satisfaction that person A, who makes $100,000.  The study doesn't demonstrate that person A will be more satisfied with life if their income rises to $150,000, or that person B will be less satisfied with life if their income falls to $100,000.  But both outcomes seem pretty likely.

Mo' money, mo' money, mo' money?

Reading this study, one could draw the conclusion from that the path to life satisfaction is lined with gold, which might be true. But that would contradict centuries of experience and thought about the relation of money to happiness.

Philosophers from Aristotle to Schopenhauer and theologians from St. Thomas Aquinas to the Dalai Lama have all concluded that happiness does not consist in wealth.  But they didn't make Kahneman and Deaton's distinction between happiness and life satisfaction.  Would that matter?  I don't know.  Next time I see the Dalai Lama, I'll ask.

Modern students of wealth, happiness, and life satisfaction agree that money doesn't (necessarily) buy happiness or satisfaction.  Vicky Robin, author of Your Money or Your Life,  doesn't rely on outside income and she seems pretty satisfied with her life.  Mr Money Mustache lives on about $30,000 per year and he comes across as both happy and satisfied.

So here is the conundrum: if the philosophers are correct that money isn't the key to happiness or satisfaction, why do people tell economists that they are more satisfied with life at higher levels of income?  And what are the implications for our own lives?