The Trend in Lifetime Earnings Inequality and Its Impact on the Distribution of Retirement Income

WP#2001-3  

Abstract

This paper examines the trend in career earnings profiles and lifetime earnings inequality using a new data set that links micro-census information from a Census Bureau survey (the Survey of Income and Program Participation, or SIPP) with the summary earnings records (SER) maintained by the Social Security Administration. It then considers the implications of these trends for the trend of Social Security replacement rates and future changes in the inequality of pension income. The data set covers men and women born in successive years between 1926 and 1965 using a combination of observed and predicted earnings.

Our analysis finds that aggregate male wage and employment patterns have remained much more stable than is the case for women. Although less educated men in recent birth cohorts have fared worse than men in earlier cohorts who had the same schooling, the increase in average educational attainment has largely offset the employment and relative wage losses suffered by less educated men. Among women, while female employment rates and average earnings remain lower than those of men of the same age, the male-female gap is now much smaller than it was in earlier cohorts. The age pattern of employment and earnings among women is growing more similar to the pattern observed among men.

Our tabulations of historical earnings and forecast of future earnings patterns suggest that that lifetime earnings inequality will increase significantly among men. Compared with men born between 1936-1940, we predict that men born in 1961-1965 will experience 12 percent greater inequality in career earnings. Even though women’s inequality has increased if we measure inequality among full-time, year-round workers who are employed during a particular year, inequality has fallen sharply if we widen the sample to include all women who are potentially available to work. The rising employment rate of women has increased the percentage of working-age years that women spend in jobs. It has dramatically reduced the fraction of women who earn extremely low lifetime wages because they are employed in only a few years of their potential careers. The noticeable increase in lifetime earnings inequality among men has thus been offset, at least in part, by a sizable reduction in career earnings inequality among women.

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Barry Bosworth and Gary Burtless are both Senior Fellows at The Brookings Institution. Claudia Sahm is a Research Assistant at The Brookings Institution. The research reported herein was supported by the Center for Retirement Research at Boston College pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. It is based in part on tabulations originally performed under a contract of the SSA with the Urban Institute to extend and validate the findings of SSA’s Model of Income in the Near Term (MINT). The opinions and conclusions are solely those of the authors and should not be construed as representing the opinions or policy of the Social Security Administration or any agency of the Federal Government, the Center for Retirement Research at Boston College, The Brookings Institution, or the Urban Institute.