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CBO Issues Dramatic Corrections to Social Security Replacement Rates

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The Congressional Budget Office has published corrections to controversial Social Security income replacement rate data published in December 2015.

In the numbers first published in CBO’s 2015 Long-Term Projections for Social Security, the nonpartisan agency, which provides budget and economic research for Congress, reported that the average replacement rate for retirees born in the 1940s was 60%.

But the corrected number, which CBO said resulted from “questions raised by outside analysts,” is 43%, a “substantially” lower replacement rate, wrote Keith Hall, CBO’s director, in a blog post announcing the correction.

The question of how much income Social Security replaces for retirees is vital to assessing the country’s comprehensive retirement readiness.

The CBO estimates replacement rates by averaging annual earnings for the five years prior to age 62.

A lower replacement rate from Social Security of course means Americans will be required to supplement more retirement income from private-sector workplace savings plans or pensions.

And a higher replacement rate gives political fodder to stakeholders that argue Social Security’s benefits are too generous.

In an opinion piece published before the CBO released its downward replacement rate adjustments, Alicia Munnell, director of Boston College’s Center for Retirement Research, was critical of CBO’s original assessment, which she noted deviated substantially from the Social Security Administration’s own estimates of income replacement rates.

“Putting out such a high number without any effort to reconcile it with historical data is irresponsible,” wrote Munnell.

Between 2005 and 2013, the difference between SSA and CBO replacement rates was relatively stable, notes Munnell. “The bottom line is that the two agencies were telling the same story,” she wrote.

But after that period, CBO began basing its estimates on mean income, and not median income.

That produced an income average from all earnings, including the lowest earning years, which resulted in a lower average income, and consequently higher projected replacement rates.

In another opinion piece published after the CBO issued its correction, Munnell further explained that the initial replacement rate of 60% resulted in part from CBO actuaries including years of zero earnings in establishing an average income level.

Munnell commended the CBO for issuing the correction, but was nonetheless critical of the agency for ignoring its higher replacement rate in 2015 from both CBO’s and SSA’s earlier estimates.

“Tossing incendiary numbers into a charged political debate was not helpful,” wrote Munnell.

The CBO’s adjustment most dramatically impacted Social Security’s replacement rates for workers earning the least throughout their careers.

Under the numbers first published in December, CBO shows that workers in the lowest quintile of earnings born in the 2000s could expect Social Security to replace 128% of income. Under the revised numbers the expectation is 82%.

Replacement rates for the highest quintile of earners were less impacted by the revisions. For those workers born in the 1960s, CBO originally projected a 26% replacement rate. The revisions lowered that rate to 22%.

Middle-income workers born in the 1960s can expect to have 41% of income replaced by Social Security, according to the CBO’s newly revised numbers.

— Check out Kotlikoff: 5 Tips to Navigate Social Security Filing on ThinkAdvisor.


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