U.S. Median Household Incomes By Age Bracket: 2011 Was A Bleak Year

Earlier today I updated my commentary on household income distribution to include the Census Bureau's release of the 2011 data. My focus was on arithmetic mean (average) household incomes by quintile (and the top 5%) over the 44-year history of this data series. The analysis offered some fascinating insights into U.S. household incomes, and as we saw, 2011 was a bleak year.

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 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 I'm analyzing is the median 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 Census Bureau's real (inflation-adjusted) series chained in 2011 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 2011.

But a more telling illustration is provided by a comparison of the cumulative real growth of median 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 16.9% in earnings over the twelve 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.
  
  
• 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 55-64 bracket have joined the downward trend.
  
  
• The age cohort with the grimmest history, of course is the 15-24 bracket. As of 2011 they have the sole distinction of a lower real median income than their 1967 counterparts -- 7.9% lower. At least 2011 was better for this cohort than 2011, when they were 11.9% below their real 1967 income level.

As we saw in the quintile analysis of household incomes, 2011 was a bleak year. When we slice the data by age cohorts, the picture is likewise grim.

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.

How about the year-over-year change from 2010 to 2011? It was grim. The second chart above illustrates the general decline incomes for most of the cohorts. Only two of them saw a real YoY increase in 2011 -- the youngsters and oldsters, which are also the two lowest earners, as we saw in the first chart. Let's quantify the YoY change in median incomes.

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.

Here are links to the consumer and small business confidence indicators I track. They all have conspicuous correlation with income data.

• Michigan Consumer Sentiment Index
• Conference Board Consumer Confidence Index
• Small Business Optimism Index

Of course 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 of social programs increases.

Ultimately this cycle of contracting household incomes will reverse, and incomes will rise. But in the 44-year history of this data series, there has never been such a sustained period of contraction as is now the case for five of the six cohorts. Only the 65 and older households have respectable slopes in the snapshots above, and that, as I mentioned above, is largely the result of Social Security with its history of Cost-of-Living Adjustments and, for some in that cohort, private and government pensions.

Note: For more information on the Census Bureau's Current Population Survey (CPS), visit the CPS Frequently Asked Questions page. A question I've often been asked over the years is what qualifies as income in CPS household survey. The CPS definitons pagelists the following:

1. Earnings
2. Unemployment compensation
3. Workers' compensation
4. Social security
5. Supplemental security income
6. Public assistance
7. Veterans' payments
8. Survivor benefits
9. Disability benefits
10. Pension or retirement income
11. Interest
12. Dividends
13. Rents, royalties, and estates and trusts
14. Educational assistance
15. Alimony
16. Child support
17. Financial assistance from outside of the household
18. Other income