Key aspects of per capita personal income.

• Author: Kinghorn, Matt

Total personal income and per capita personal income (PCPI) are two of our most relied upon measures of economic standing. These indicators are a useful way to, among other things, gauge economic growth over time or compare counties and states to their counterparts. Indiana's 2005 PCPI, for instance, stands at $31,150. This mark places Indiana thirty-fourth among all states and is only 90 percent of the U.S. PCPI of $34,495.

What does a figure like this actually mean though? What does it tell us about how Hoosiers earn their income or how much is actually available to them to be spent? The Bureau of Economic Analysis, which calculates these statistics, offers several ways to deconstruct personal income and view its component parts.

Components of Personal Income

The BEA uses three components to determine personal income: employment earnings, transfer payments (government payments made to individuals), and investment income (dividends, interest, and rent). Figure 1 shows that the component shares of Indiana's PCPI are nearly identical to those of the United States. In each case, earnings account for around 69 percent of all personal income. The lone difference among the two is that transfer payments hold a slight edge over investment income in Indiana while the opposite is true for the nation.

[FIGURE 1 OMITTED]

The key trend in terms of personal income composition has been the steady growth in transfer payments at the expense of earnings over the past forty years.

Indiana's share of transfer payments has grown from 5.7 percent of all personal income in 1965 to 15.4 percent in 2005 (see Figure 2). At the same time, Hoosier earnings as a share of the total decreased from 82.5 percent to 69.9 percent. Indiana's investment income as a percent of personal income reached as high as 19 percent several times between 1984 and 1990 before settling in at its current 14.7 percent.

[FIGURE 2 OMITTED]

What is driving this shift? The quick answer is the combined effects of an aging population, increased life expectancy, and an expansion in public benefits. In this respect, 1965--the year that the Medicare and Medicaid programs were created--is a watershed date. These two programs accounted for nearly 40 percent of all transfer payments to Indiana residents in 2005 (see Table 1). Other benefit types that increased their share of transfer payments between 1965 and 2005 were income maintenance benefits (supplemental security income, family assistance, food...