A Thought Experiment in Age/Income Dynamics

What will be the effect of the retirement of income earners in the baby boom generation upon the distribution of income in the U.S.?

Today, we're going to do a back-of-the-envelope analysis as part of a thought experiment to take a stab at foreseeing the future!

We'll start with the number of registered births for each of our birth decades, and find the percentage of income earners making between $0 and $95,000 in 2005 with respect to that number. The table below shows our initial results:

Percentage of Income Earners by Age Group for 2005
Birth Decade	2005 Age Group	Registered Births	Number of Income Earners	Ratio of Income Earners to Registered Births (%)
1930-1939	Age 65 to 74	24,374,000	17,958,307	73.7%
1940-1949	Age 55 to 64	31,666,000	25,410,246	80.2%
1950-1959	Age 45 to 54	40,530,000	35,723,625	88.1%
1960-1969	Age 35 to 44	38,808,409	36,606,962	94.3%
1970-1979	Age 25 to 34	33,308,985	33,986,844	102.0%
1980-1989	Age 15 to 24	37,507,107	27,243,902	72.6%
1930-1989	Age 15 to 74	206,194,501	176,929,886	85.8%

For this analysis, we'll assume that these percentages representing the ratio of income earners to registered births will stay constant over the next 10 years for each of the age groups:

Projecting the Number of Income Earners for 2015
Birth Decade	2015 Age Group	Registered Births	2005 Ratio of Income Earners	2015 Number of Income Earners
1940-1949	Age 65 to 74	31,666,000	73.7%	23,330,916
1950-1959	Age 55 to 64	40,530,000	80.2%	32,523,125
1960-1969	Age 45 to 54	38,808,409	88.1%	34,206,194
1970-1979	Age 35 to 44	33,308,985	94.3%	31,419,498
1980-1989	Age 25 to 34	37,507,107	102.0%	38,270,400
1990-1999	Age 15 to 24	39,860,087	72.6%	28,953,028
1940-1999	Age 15 to 74	221,680,588	85.8%	188,703,161

So, we have projected the number of income earners increasing by 6.7% from 176,929,886 in 2005 to 188,703,162 in 2015.

Now, the next table shows the percentage changes in the number of income earners for each of our age groups from 2005 to our projected numbers in 2015:

Percentage Change from 2005 to 2015 for Number of Income Earners in Age Range
Birth Decade	2015 Age Range	Percentage Change from 2005
1940-1949	Age 65-74	+29.9%
1950-1959	Age 55-64	+28.0%
1960-1969	Age 45-54	-4.2%
1970-1979	Age 35-44	-14.2%
1980-1989	Age 25-34	+12.6%
1990-1999	Age 15-24	+6.3%
1940-1999	Age 15-74	+6.7%

In the table above, we see massive increases for the age ranges associated with the transition from working life and incomes to retirement incomes. Since this represents the upcoming retirement of the baby boom generation, let's consider what this will mean for the distribution of income in the United States.

In this next part of our analysis, we'll assume that the number of individuals in each age group for every $100 increment from $0 to $95,000 in 2004 U.S. dollars changes by the percentage given in the table above, and that there is no other shift in the distribution of income for each age range (no upward shifting of income for increased education level, etc.). In other words, the percentile distribution of income will not be changed.

The following chart reflects what happens when we add up the number of individuals at each income interval and age range:

This chart demonstrates that the number of low end income earners can be expected to go up substantially over the next 10 years, compared to the number of high end income earners. The following chart shows the projected percentage changes for our back-of-the-envelope analysis:

Even though the number of income earners at nearly all levels increased, the greatest increase occurred at the lowest end of the income spectrum. Once again, this effect is purely due to the age distribution of the income earners we're examining, as we have not altered the percentile distribution of income from 2005's level at all.

All this previous analysis holds true only if the same percentage of income earners to registered births holds constant from 2005 to 2015. But, if the ratio of income-earners to registered births for each age range were to change from 2005's level, this may well have a profound effect upon the percentile distribution of income, even if all other factors (such as level of education) remain unchanged.

For example, if we have a larger percentage of baby boomers opting to work longer, thereby delaying their transition to retirement income levels, the effect will be to shift the overall distribution of income in the U.S. toward higher income levels.

Likewise, if a higher percentage of baby boomers retire by 2015 compared to 2005's retirees, reducing the percentage of income-earners to registered births, the overall distribution of income in the U.S. will shift toward lower levels.

Certainly food for thought!

Previously on Political Calculations

• A Confluence of Factors in U.S. Income Distribution - Our wrap-up of our series on the distribution of income!
  
• The Big Picture: Shifting Incomes from 1995 to 2005 - We found that income inequality actually DECREASED from 1995 to 2005!
  
• Percentage Changes in Income Distribution from 1995 to 2005 - Where the biggest changes in the distribution of income happened (by age group!)
  
• Generations, Part Deux - Why did we choose 1995 and 2005 as the years we examined?
  
• Income/Age Percentiles in Pictures - How income shifted on a percentile basis between 1995 and 2005 for each age group.
  
• Comparing the U.S. Distribution of Income by Age Group and Year - Our tool that let's you do our math for comparing between our years of interest!
  
• Distributing Income by Age Group in the US: Ten Years Older - Each of our age groups cover a 10 year span. That means we can look at how a younger group's income distribution in 1995 became the next 10-year older group's income distribution in 2005!
  
• Estimating the U.S. Distribution of Income by Age - Our first tool which only extracts samples from our data model.
  
• The Shifting Demographics of Age and Income - our first comparison between 1995 and 2005 that showed dramatic shifts in how the distribution of income changed between those two years.
  
• Income/Age Demographic Snapshots of 1995 and 2005 - a bar chart comparison of the median incomes per age group of the two years.
  
• Raking It In: The Baby Boomers from 1995 to 2005 - here, we showed that the baby boom generation moved into the peak earning years for U.S. individuals.
  
• The Distribution of Income Earners by Age Group for 1995 and 2005 - in this post, we presented our foundational results of the income distributions we determined for each of our age groups.
  
• Changing Apples into Oranges - A discussion of how we developed the math behind our income distribution models (plus, a blind alley we started to go down!)
  
• 1995 U.S. Individual Income by Age Group Data
  
• The Distribution of Income by Age in 1995
  
• Income Distribution Percentages by Age in the U.S. (2005)
  
• Peak Earning Years for U.S. Individuals (2005)
  
• The Distribution of Income by Age in the U.S. (2005)
  
• Generations - Our series started with a pretty straightforward look at the number of people born into each generation in the U.S.
  

Update (21 June 2007): Given the heavy interest from this post's being featured on The Consumerist, we added links to the rest of our series on how the distribution of income has shifted in the U.S. from 1995 to 2005!