The Pension Research Council
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Working Paper

Social Security Replacement Rates For Alternative Earnings Benchmarks

Olivia S. Mitchell and John W. R. Phillips
WP2006-06

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Abstract

Social Security reform proposals are often presented in terms of their differential impacts on hypothetical or ‘example’ workers. Our work explores how different benchmarks produce different replacement rate outcomes. We use the Health and Retirement Study (HRS) to evaluate how Social Security benefit replacement rates differ for actual versus hypothetical earner profiles, and we examine whether these findings are sensitive to alternative definitions of replacement rates. We find that workers with the median HRS profile would be estimated to receive benefits worth 55% of lifetime average earnings, versus 48% for the SSA medium scaled profile. Since US policymakers tend to prefer a replacement rate measure tied to workers’ own past earnings, using these metrics would yield higher replacement rates compared to commonlyused scaled illustrative profiles. However, benchmarks that use population as opposed to individual earnings measures to compare individual worker benefits to pre-retirement consumption produce lower replacement rates for HRS versus hypothetical earners.