Social Security’s Low-Ball Estimates

It appears that for some reason Social Security deliberately underestimates the value of future retirement benefits. A few weeks back I came across an item that argued when SSA estimates future benefits it deliberately uses a low inflation or growth forecast. This item argues that SSA also understates the percentage of income that will be replaced by Social Security. Most SSA reports state that on average retirement benefits are 40% of average income. But this article says SSA is referring to average lifetime benefits. In fact, it says, Social Security retirement benefits typically replace 60% of final pre-retirement income. That’s a big difference and leaves most people better off in retirement than they realized and than most studies indicate.

Of all the different ways of measuring replacement rates, SSA’s is by far the lowest. It also makes the least sense, since there’s nothing in the “life cycle” theory in economics or in standard financial planning in which people base their retirement saving on the growth of other people’s earnings, which is what wage-indexing does. It’s your own earnings, and smoothing your standard of living between work and retirement, that matter.

Why does SSA measure replacement rates the way it does? It’s a long story. But the short story is that we shouldn’t take it for granted that Social Security benefits fall far short of what financial planners recommend as an adequate retirement income.