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June 18, 2007

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 Decade2005 Age GroupRegistered Births Number of Income EarnersRatio of Income Earners to Registered Births (%)
1930-1939 Age 65 to 74 24,374,00017,958,30773.7%
1940-1949 Age 55 to 64 31,666,00025,410,24680.2%
1950-1959 Age 45 to 54 40,530,00035,723,62588.1%
1960-1969 Age 35 to 44 38,808,40936,606,96294.3%
1970-1979 Age 25 to 34 33,308,98533,986,844102.0%
1980-1989 Age 15 to 24 37,507,10727,243,90272.6%
1930-1989 Age 15 to 74 206,194,501176,929,88685.8%

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 Decade2015 Age GroupRegistered Births 2005 Ratio of Income Earners2015 Number of Income Earners
1940-1949Age 65 to 7431,666,00073.7%23,330,916
1950-1959Age 55 to 6440,530,00080.2%32,523,125
1960-1969Age 45 to 5438,808,40988.1%34,206,194
1970-1979Age 35 to 4433,308,98594.3%31,419,498
1980-1989Age 25 to 3437,507,107102.0%38,270,400
1990-1999Age 15 to 2439,860,08772.6%28,953,028
1940-1999Age 15 to 74221,680,58885.8%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 Decade2015 Age Range Percentage Change from 2005
1940-1949Age 65-74+29.9%
1950-1959Age 55-64+28.0%
1960-1969Age 45-54-4.2%
1970-1979Age 35-44-14.2%
1980-1989Age 25-34+12.6%
1990-1999Age 15-24+6.3%
1940-1999Age 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:

Number of Income Earning Individuals (Age 15-74) vs Annual Income for 2005 and 2015 (Projected)

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:

Percentage Change in Number of Income Earning Individuals (Age 15-74) vs Annual Income between 2005 and 2015 (Projected)

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

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!

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