Tuesday, January 5, 2016

WSJ: “New Evidence on the Phony ‘Retirement Crisis’”

In today’s Wall Street Journal, I provide an update on the debate over how to measure the adequacy of Social Security retirement benefits. The recent Technial Panel on Assumptions and Methods recommended a revised method for calculation “replacement rates.” The Congressional Budget Office, right before Christmas, followed up on those recommendations to produce replacement rate numbers using the CBO’s Long Term model. The results aren’t supportive of the idea that Social Security benefits are stingy.

The results are striking: The CBO projects that a typical middle-income individual born in the 1960s and retiring in the 2020s will be eligible for a Social Security benefit equal to 56% of his late-in-life earnings. For individuals in the bottom fifth of lifetime earnings, Social Security replaces about 95% of their substantial late-in-life earnings.

Even so, the CBO excluded the spousal or widow’s benefits that more than one-third of female retirees receive on top of the benefit based on their own earnings. Among retired women who receive these auxiliary benefits, the average total monthly benefit was $1,128, versus $634 based only on their own earnings. In short, the true replacement rates for many retired women are significantly higher than CBO figures show.

Add in 401(k) and other plans, and it should not be difficult for a typical worker to achieve a total replacement rate of 70% or even 80% through individual savings and Social Security benefits.

Check out the whole article here.


WilliamLarsen said...

Andrew those these values may be correct, does it really apply to the discussion of reforming social security? If social security is not fair, then your article is one alternative way of looking at social security. However, if social security was and is to be a fair program across generations and individuals, then can you explain why your method of looking at the social security benefit in terms of wages is fair?

Do your values assume fully payable scheduled benefits, if not how do payable benefits compare?

Andrew G. Biggs said...

The figures don't really address fairness, since they don't look at taxes and benefits across generations (or at least past generations). They're designed to look at the adequacy of benefits, that is, how far does Social Security take you in terms of achieving an adequate total retirement income. If we assume a target replacement rate of around 70%, then it seems that for a typical retiree Social Security is getting you about 60/70ths of the way there, rather than the 40/70ths people assumed from looking at the SSA actauries way of calculating replacement rates. That gives us some idea of whether benefits need to be increased, can they be cut, etc? These are scheduled benefit levels, so payable benefits are lower for those retiring post-2030 or so.