Our commentary on household income distribution focuses on arithmetic mean (average) household incomes by quintile (and the top 5%) over the 50+ year history of this data series. The analysis offers 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, but reached a new all-time high by 2019.
- 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. The COVID-19 pandemic derailed the progress that had been made and majority of household incomes have yet to return to their pre-pandemic peaks, with the exception of the two youngest cohorts.
Below is a more precise quantification year-over-year household income changes from 2021 to 2022. All cohorts saw deterioration in 2022, falling slightly lower than 2021 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. Conversely, as household incomes decrease, sentiment tends to follow suit - a pattern we have seen over the past few years.
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. The COVID-19 pandemic derailed the progress that had been made and majority of household incomes have yet to return to their pre-pandemic peaks, with the exception of the two youngest cohorts.
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:
Earnings, Unemployment compensation, Workers' compensation, Social security, Supplemental security income, Public assistance, Veterans' payments, Survivor benefits, Disability benefits, Pension or retirement income, Interest, Dividends, Rents, royalties, and estates and trusts, Educational assistance, Alimony, Child support, Financial assistance from outside of the household, and Other income.
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 VettaFi | Advisor Perspectives
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