CBO Issues Dramatic Corrections to Social Security Replacement Rates

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.