Is Social Security too generous? Conservatives want us to think so

Alicia Munnell

Alicia Munnell

Just how much pre-retirement income does Social Security replace? It’s an important question for workers planning for retirement, and the standard answer – for quite some time – has been “about 40 percent, depending on your income history.”

But for the past two years, a battle has been waged inside the Beltway by conservatives to undermine traditional replacement income math. It started in 2014 when the Social Security trustees agreed to remove replacement income data from their annual report, and it’s continued since then with a succession of academic papers by Andrew Biggs of the American Enterprise Institute and others, making the case that the 40 percent figures is an inaccurate expression of the amount of income that Social Security actually replaces – and that a far more generous 60 percent is a more accurate number.

The conservative campaign seemed to reach a crest in December, when the Congressional Budget Office (CBO) – which provides budget and economic information to Congress – embraced the higher numbers. Biggs took that as non-partisan validation of the conservative view, arguing in a Wall Street Journal op-ed piece that the retirement crisis is phony. But in a remarkable turn of events, CBO was forced to retracted its analysis earlier this month when it discovered calculation errors.
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The agency backtracked and published revised figures very close to those of the Social Security actuaries. And, back in 2014, the Social Security actuaries went back and compared various approaches to calculating replacement rates – and all the methods yielded just about the same results.

Paul Van de Water of the Center on Budget Policy and Priorities sums up the numbers debate here:

Before 2014, the annual Social Security trustees’ report estimated replacement rates for hypothetical workers whose earnings follow a smooth path over their lifetime. The measure of earnings was the average of a person’s 35 highest years of earnings, adjusted to reflect wage growth across the economy through the year before retirement. In 2014 the trustees dropped these replacement rates from their report, arguing that they were potentially confusing.

However, the 2015 Technical Panel — a group of economists, demographers, and actuaries appointed by the independent Social Security Advisory Board to advise Social Security’s trustees and staff — recommended restoring replacement rates to the trustees’ report. In addition to showing replacement rates based on career-average earnings for hypothetical workers, the panel advised, the trustees’ report should show replacement rates based on late-in-life earnings for actual beneficiaries.

The claim that Social Security benefits are generous doesn’t pass a back-of-the-envelope test. The average benefit this year is $1,341, or $16,092 a year – just enough to stay out of poverty. Replacement rates will fall in the years ahead, from 40 percent in 1985 to a projected 30 percent in 2030, according to CRR. The
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