Sorting Out Social Security Replacement Rates

Alicia H. Munnell Mauricio Soto

JTF#19

Introduction

For anyone interested in retirement income policy, the most basic question is how much are people receiving today from Social Security, the backbone of the nation’s retirement income system. The traditional measure of generosity is the replacement rate — namely, the ratio of benefits relative to pre-retirement earnings. The Social Security administration provides two sets of replacement rates. The first set is “policy model” estimates for hypothetical individuals. The second set is actual replacement rates for new beneficiaries. The two approaches happen to produce the same number for the median earner. However, this result is strictly a coincidence as the two methods involve different measures of pre-retirement earnings, different employment patterns, and different retirement ages. This brief explains these differences…