This article was originally written by Doug Short. From 2016-2022, it was improved upon and updated by Jill Mislinski. Starting in January 2023, AP Charts pages will be maintained by Jennifer Nash at Advisor Perspectives/VettaFi.
We have updated our commentary on household income distribution to include the Census Bureau's release of the 2020 annual data. Our focus was on arithmetic mean (average) household incomes by quintile (and the top 5%) over the 50+ 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 non-professional service employment will not 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 we're analyzing is the median (middle) household income the age brackets for the heads of household (see Table H.10 for all races).
Because this is a longitudinal analysis across nearly five decades, including the stagflation of the 1970s, we've used the Census Bureau's real (inflation-adjusted) series chained in 2020 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.
But more revealing is a comparison of the cumulative real growth of median incomes for the six age brackets.
Let's focus on how the peak earning age bracket, ages 45-54, has fared over time.
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 overall, and it has dramatically 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 a reliable source of income and carries a cost of living adjustment. Private and government pensions also contributed to the superior growth rate. Another key factor is the surprising growth in the labor force participation rate of this cohort, a topic we track in our monthly review of long-term trends in the workforce.
- In the third chart, we see in isolation the earnings decline and then rebound for the households in the peak ten-year bracket. They saw the largest decline in earnings out of all cohorts after the 1999 peak and as of 2019, has rebounded and reached a new high. The reason for the rebound over the last 5 years? Likely similar reasons that other cohorts have rebounded - a massive bull market and a seemingly excellent employment market. There are other reasons as well, which will be more apparent as time goes on.
- It seems that the decline in household income really began with the 2001 recession, was exacerbated by the Great Recession, and only began climbing back up around 2011, depending on the cohort.
We would like to point out the Census Bureau's comments on the COVID-19 pandemic and the resulting CARES act:
This report presents data on income and poverty in the United States based on information collected in the 2021 and earlier Current Population Survey Annual Social and Economic Supplements (CPS ASEC) conducted by the Census Bureau.1 This report provides estimates for calendar year 2020, which coincided with the COVID-19 pandemic, the end of the economic expansion in February 2020, and the recession that began in March 2020 and ended in April 2020.2 The data collection period for the 2021 CPS ASEC occurred about 1 year into the COVID-19 pandemic and the associated public health response. For details on the effect of COVID-19 on CPS ASEC data collection in 2021, refer to the text box “The Impact of the Coronavirus (COVID-19) Pandemic on the Current Population Survey Annual Social and Economic Supplement (CPS ASEC).”
In response to the COVID-19 pandemic, Congress passed legislation to aid individuals and families. This legislation included the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSA Act). The CARES and CRRSA Acts provided households with additional income in the form of stimulus payments and tax credits. For consistency with past reports, the income and poverty estimates in the main sections of this report are based on the concept of money income, which is pretax and does not include these stimulus payments and tax credits.3 Money income includes both regular compensation and expanded unemployment compensation. The value of expanded unemployment compensation is reflected in household income but is not included in earnings. For posttax household income estimates that include stimulus payments and tax credits, refer to Appendix C. For poverty estimates that include stimulus payments and tax credits, refer to the report “The Supplemental Poverty Measure: 2020.”4
Data for the Income and Poverty in the United States: 2020 report was collected between February and April 2021. Here the CB's comments on the COVID-19 impact:
The U.S. Census Bureau administers the CPS ASEC each year between February and April by telephone and in-person interviews, with the majority of data collected in March. In 2020, data collection faced extraordinary circumstances due to the onset of the COVID-19 pandemic as the Census Bureau suspended in person interviews and closed both telephone contact centers. The response rate for the CPS basic household survey was 73 percent in March 2020, about 10 percentage points lower than preceding months and the same period in 2019, which were regularly above 80 percent.
During collection of the 2021 CPS ASEC, for the safety of both interviewers and respondents, in-person interviews were only conducted when telephone interviews could not be done. In March 2021, the response rate for the CPS basic household survey improved to about 76 percent, though not quite returning to the prepandemic trend. While the response rate improved, it is important to examine how respondents differ from nonrespondents, as this difference could affect income and poverty estimates. Using administrative data, Census Bureau researchers have documented that the nonrespondents in both 2020 and 2021 are less similar to respondents than in earlier years. Of particular interest for the estimates in this report, are the differences in median income and educational attainment, indicating that respondents in 2020 and 2021 had relatively higher income and were more educated than nonrespondents. For more details on how these sample differences and the associated nonresponse bias impact income and official poverty estimates, refer to <www.census.gov/newsroom/blogs/research-matters /2021/09/pandemic-affect-survey-response.html>.
Below is a more precise quantification year-over-year household income changes from 2019 to 2020. Only one cohort, 25-34 years, saw improvement in 2020 and all others are slightly lower than 2019 figures.
Here is a chart of the Michigan Consumer Sentiment, of which there is a general correlation to household incomes. It's clear that when household incomes are increasing, sentiment tends to be higher.
Here are links to the consumer and small business confidence indicators we track. They all have a conspicuous correlation with income data.
Implications for the Economy
In the 50+ year history of this data series, the Great Recession proved to be the worst contraction. It seems that the decline in household income really began with the 2001 recession, was exacerbated by the Great Recession, and only began climbing back up around 2011, depending on the cohort. Only time will tell how the COVID-19 global pandemic will impact household income. The CARES Act will likely show up in these figures, but will be a bridge or a bandaid?
For more information on the Census Bureau's Current Population Survey (CPS), visit the CPS Frequently Asked Questions page. A question we've often been asked over the years is what qualifies as income in CPS household survey. The CPS definitions page lists the following:
- Unemployment compensation
- Workers' compensation
- Social security
- Supplemental security income
- Public assistance
- Veterans' payments
- Survivor benefits
- Disability benefits
- Pension or retirement income
- Rents, royalties, and estates and trusts
- Educational assistance
- Child support
- Financial assistance from outside of the household
- Other income
Read more updates by Jen Nash