The Mercatus Center at George Mason University has released “Understanding Social Security Benefit Adequacy: Myths And Realities Of Social Security Replacement Rates,” by Chuck Blahous, one of Social Security’s public trustees. Here’s the abstract:
“Discussions of Social Security benefit adequacy are often framed in terms of the replacement rate, defined as the ratio of one’s retirement benefits to pre-retirement income. Three aspects of Social Security replacement rates are often misunderstood. First, the rising tax costs of maintaining constant replacement rates cause
pre-retirement standards of living to decline relative to post-retirement standards of living. Second, Social Security’s actual replacement rates are substantially higher than many understand because they are not reported as defined by most financial planners. Third, the Social Security benefit formula causes replacement rates to rise over time for a given level of real wages. Removing these quirks that arise under the current benefit formula could both reduce projected cost growth and strengthen system finances, while still honoring the replacement rate concept.”
And for anyone interested, here’s Glenn Springstead and my take on replacement rates from a few years back. The main takeaway is that Social Security’s benefit adequacy depends a lot upon how you measure it, and SSA’s definition of replacement rates (as Chuck notes above) differs from the conventional one.