Depends what you mean by "phased out". Commercially it already has been from what I can tell.
No carriers in the UK sell G1s any more. They've all moved on to the likes of the HTC Desire and Nexus One.
T-Mobile UK stopped selling G1s about a year ago, if memory serves.
However, the most common version (by number of handsets) of Android at the beginning of this month (May) was Android 1.5, followed by 2.x, followed by 1.6. Although they're all pretty close. [source]
So right now there's a strong reason to continue updating and creating apps for 1.5/1.6 phones. There will come a time when developers stop updating their apps for 1.5 and 1.6 as they move onto newer phones and/or wish to take advantage of features offered in later versions. When this happens their apps will disappear from older versions of Android on the Market when they flag them as 2.X compatible only, so you will no longer receive updates.
There will also come a time when new apps will stop appearing for 1.6. because developers want to take advantage of the new stuff 2.x offers. When this happens, you'll stop seeing new apps on the Market.
Of course, your phone will still work, you'll still have all the apps you installed, it's just that people will move on and you won't be able to do anything new with your phone.
You can also try a custom ROM on it and get some of the features of 2.x. But there will also come a time when new ROMs simply won't fit on your phone, even if it's rooted and repartitioned to get more memory for the OS.
The G1 still has some life left in it yet.