Last week I updated my commentary on household income distribution to include the Census Bureau's release of the 2010 data. My focus was on arithmetic mean (average) household incomes by quintile (and the top 5%) over the 43-year history of this data series. The analysis offered some fascinating insights into U.S. household incomes.
But the classification misses the implications of age for income. Households are by no means locked into the same quintile over time. Young educated households with professional skills and aspirations will typically move into the higher earning brackets during their financial life cycles. Households dependent on income from unskilled labor and service employment will seldom see the same financial progress over the years.
So let's review the household income data another way, this time focusing on the incomes by the age bracket. The data I'm analyzing is the arithmetic mean (average) household income the age brackets for the heads of household (see Table H.10).
Because this is a longitudinal analysis across four decades, including the stagflation of the 1970s, I've used the Censusl Bureau's real (inflation-adjusted) series chained in 2010 dollars based on a research variant of the Consumer Price Index, the CPI-U-RS. In other words, the incomes in earlier years have been adjusted upward to the purchasing power of the most recent year in the series.
The first chart shows real household incomes of the six age brackets from 1967 through 2010.
But a more telling illustration is provided by a comparison of the cumulative real growth of incomes for the six age brackets.
Let's focus on the plight of the peak earning age bracket, ages 45-54.
There are some immediate observations we can make about these charts:
- In the first chart we see clearly that the 45-54 age bracket lays claim to the peak earning years for U.S. households.
- In the second chart we see that the two older age brackets have cumulative growth superior to the peak earnings bracket. In fact, the 65 and older has been the best performer over all, and it has especially outperformed since the recession of 2001. We can no doubt attribute the outperformance to the contribution of Social Security to the income stream. It's reliable and carries a cost of living adjustment. Private and government pensions also contributed to the superior growth rate.
- In the third chart we see in isolation the earnings decline for the households in the peak ten-year bracket. They have experienced an average real decline of 13.3% in earnings over the eleven year period. The reasons, of course, can be widely varied — periods of unemployment, salary cuts, layoffs followed by a lower paying new job, a multiple earner household in which one of the earners is a victim of unemployment, etc. Interestingly the decline for the 45-54 cohort is most closely matched by the youngest age bracket, the 15-24 year olds.
- The first decade of the 21st century has seen a remarkable decline in income for the first four age brackets, and with the onset of the Financial Crisis of 2008, incomes for the 55-65 bracket have joined the downward trend.
For more precise quantification of household income declines in recent years, here is a table showing the peak income year for each age bracket, the 2010 income, and the percentage change since the peak.
The lack of sustained growth in household incomes is no doubt a major factor in the general decline in consumer confidence since 2000, which was, after all, the peak year for four of the six cohorts, including the one with the highest income.
Ultimately the problem of shrinking incomes extends beyond the households to the economy as a whole. If household have less money for consumption, businesses suffer, which in turn leads to layoff and further declines in household incomes. Governments receive less in tax revenues, and the financial burden on social programs increases.
Eventually, this cycle of contracting household income will reverse, and incomes will rise. But in the 43-year history of this data series, there has never been such sustained period of contraction as is now the case for five of the six cohorts — all but the 65 and older households.Further Reading - A Lost Decade Into The Great Middle Class Poverty?
About The Author - Doug Short is the Vice President of Research for Advisor Perspectives. He holds a Ph.D. in English from Duke, and maintains a blog at dshort.com. Doug's last name is not representative of his investment style. (EconMatters author archive here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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