PensionReforms' summary and comments
When studies try to guess where individuals will be in future years with regard to incomes, savings and retirement income replacement rates, assumptions usually 'start from here' and maintain 'current' differences.  This takes today's 'snapshot' and suggests it will look similar in the future.  The real world is much is less tidy.

"This study examines income mobility over the period from 1996 through 2005 using data from a large sample of individual income tax returns for these two years. The panel uses a large sample of approximately 96,700 tax returns with 169,300 primary and secondary (i.e., spouses on joint returns) taxpayers who filed for tax years 1996 and 2005."

The rates of income mobility in the decade to 2005 were striking; and not much different to the mobility rates in the preceding decade.

"The key findings of this 2007 study include:
".   There was considerable income mobility of individuals in the U.S. economy during the 1996 through 2005 period with roughly half of taxpayers who began in the bottom quintile moving up to a higher income group within 10 years.
".   About 55 percent of taxpayers moved to a different income quintile within 10 years.
".   Among those with the very highest incomes in 1996 - the top 1/100 of 1 percent - only 25 percent remained in this group in 2005. Moreover, the median real income of these taxpayers declined over this period.
".   The degree of mobility among income groups is unchanged from the prior decade (1987 through 1996).
".   Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to 2005.  Median incomes of all taxpayers increased by 24 percent after adjusting for inflation."

Naturally enough, the gains over the period were not evenly distributed though most incomes increased in real terms:
"The real incomes of two-thirds of all taxpayers increased over this period. In addition, the median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the higher income groups."

As the report notes "U.S. Census data, for example, show that the share of household income of the top 20 percent of households increased from 44.1 percent in 1980 to 50.4 percent by 2005, with the share of the bottom 20 percent decreasing from 4.2 percent to 3.4 percent."  That may well have been the case but the report notes that they almost certainly aren't the same people at each of the points over that 25 year period.

PensionReforms acknowledges that there are different ways to present data and that distribution of incomes is just as important as mobility if we want to understand how society treats different groups.  But it does mean we need to take great care when we analyse whether people are saving enough for retirement on the assumption that the current relationships of incomes earned by workers today remain static.

Also, international comparisons of retirement income replacement rates are, potentially, similarly vulnerable.  Such analyses require considerable caveats, not just because of the issues surrounding income mobility. (File size 141 KB; 22 pp) 363