10.06.15

BUDGET BULLETIN: Social Security Replacement Rates

WASHINGTON, DC – The Senate Budget Committee today released its October 6, 2015, issue of the Budget Bulletin focused on Social Security replacement rates. The Budget Bulletin provides regular expert articles by Senate Budget Committee analysts on the issues before Congress relating to the budget, deficits, debt, and the economy.

Read the full Senate Budget Bulletin here.

Excerpts follow:

Social Security Replacement Rates

Social Security provides monthly cash benefits to retired and disabled workers, as well as their eligible spouses, dependents, and survivors. The current benefit formula, enacted by Congress in 1977, was first applied to individuals born in 1917, who turned 62 in 1979. To evaluate the adequacy and equity of this formula, benefits are often compared with wages. The ratio of benefits to wages, known as the replacement rate, reflects the extent to which benefits replace the wages lost due to retirement, disability, or death. The higher the ratio, the easier it is for workers to maintain their standard of living after they become eligible for benefits.

Replacement rates provide a useful way to assess the relative value of benefits, provided they are presented in a clear and consistent manner. These rates as typically presented by the Social Security Administration (SSA), however, have been subject to criticism focused on SSA’s use of career-average, wage-indexed earnings as the denominator in their calculations, resulting in the rates’ removal from the 2014 and 2015 annual Social Security trustees’ reports. 

The Social Security disability trust fund will be insolvent by the end of next year. The retirement and survivor trust fund will be insolvent in less than two decades. While that might seem like plenty of time to solve the problem, it all depends on which path the federal government chooses to take. Some solutions are more time-sensitive than others.

The public deserves the opportunity to consider all the options to address Social Security’s pending insolvency while there is still time to make a difference. And careful consideration starts with a better understanding of replacement rates and their public policy implications.

 

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