Wall Street Journal: “Miscalculating the Retirement Income You'll Need”

I have an op-ed in today’s Wall Street Journal co-authored with Syl Schieber which draws on our larger piece on the “retirement crisis” that appears in the Summer issue of National Affairs. The Journal piece focuses on how SSA calculates replacement rates for Social Security and how that differs from the way financial advisors calculate them. Here’s a snippet:

It is now conventional wisdom that Americans face a retirement "crisis," in part because Social Security benefits are seen as inadequate. For instance, the Social Security Administration's website explains that "most financial advisers say you'll need about 70% of your pre-retirement earnings to comfortably maintain your pre-retirement standard of living." It then notes that "under current law, if you have average earnings, your Social Security retirement benefits will replace only about 40%."

That line of thinking is misleading, often cited by progressives fighting benefit reforms that would address Social Security's $10 trillion shortfall. Here's why: Financial advisers do not calculate replacement rates the same way the Social Security Administration does. When the calculations are consistent, the replacement rate paid by Social Security comes closer to 60%, which substantially changes the retirement-income picture.

Financial advisers measure replacement rates relative to final earnings, generally meaning they divide the first year of retirement income by a worker's final year of working income, or average pay during the past five working years. The SSA, on the other hand, measures replacement rates relative to the wage-indexed average of lifetime earnings. "Wage indexing" increases past earnings to reflect the growth of average wages. These are very different numbers that produce very different outcomes.

Check out the whole article here. Related: my 2008 article on measuring replacement rates co-authored with Glenn Springstead of SSA.