January 5, 2016

A COUPLE TWEAKS HERE AND THERE:

New Evidence on the Phony 'Retirement Crisis' : A CBO study shows that Social Security benefits are far from meager, despite progressive claims. (ANDREW G. BIGGS, Jan. 4, 2016, WSJ)

The bipartisan Social Security Advisory Board appointed an expert panel, headed by Boston College economist Alicia Munnell, to look into the issue. After almost a year of deliberations, the panel recommended in September that replacement rates be calculated relative to an average of several years of late-in-life earnings. Years of very low earnings should not be counted, it said, since many people shift to part-time work before retirement. The panel also said the focus should be on individuals with reasonably full working careers, since replacement rates aren't very meaningful for individuals with short careers.

Following the panel's recommendations, economists at the Congressional Budget Office compared retirees' Social Security benefits to the inflation-indexed average of their last five years of substantial earnings, defined as annual earnings equal to at least half the individual's career-long average. The calculations were restricted to retirees who had earned at least 10% of the national average wage over at least 20 years of work.

The results are striking: The CBO projects that a typical middle-income individual born in the 1960s and retiring in the 2020s will be eligible for a Social Security benefit equal to 56% of his late-in-life earnings. For individuals in the bottom fifth of lifetime earnings, Social Security replaces about 95% of their substantial late-in-life earnings.

Even so, the CBO excluded the spousal or widow's benefits that more than one-third of female retirees receive on top of the benefit based on their own earnings. Among retired women who receive these auxiliary benefits, the average total monthly benefit was $1,128, versus $634 based only on their own earnings. In short, the true replacement rates for many retired women are significantly higher than CBO figures show.

Add in 401(k) and other plans, and it should not be difficult for a typical worker to achieve a total replacement rate of 70% or even 80% through individual savings and Social Security benefits. Total retirement savings measured by the Federal Reserve are at record levels relative to personal incomes, additional evidence that this goal can be reached.

Posted by at January 5, 2016 5:31 PM

  

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