In this note, we use the average of the highest 35 years of earnings, wage-indexed to the year before retirement, as the “standard” replacement rate denominator. Because Social Security serves a large population of workers with career earnings patterns that vary greatly, we believe the denominator used for the standard replacement rate in this note is the most appropriate choice for measuring the adequacy of Social Security retirement benefits. For a full analysis of this and other possible concepts of replacement rates, see Actuarial Note 155 at:
www.socialsecurity.gov/OACT/NOTES/n2010s.html.

The Social Security benefit formula1 uses wage-indexed earnings in computing the Social Security primary insurance amount (PIA). For a retired worker starting benefits at any age, the Social Security PIA formula:

Our analysis includes five hypothetical workers with different pre-retirement career-average earnings levels. Four of the hypothetical workers in the tables assume the earnings history of workers following scaled-earnings patterns2 and reflect very low, low, medium, and high career-average levels of pre-retirement earnings starting at age 21. The fifth hypothetical worker assumes the earnings history of a steady maximum earner starting at age 22. The scaled-earnings patterns are derived from earnings experienced by insured workers during 1991‑2010. The earnings levels differ by age, reflecting both the likelihood of having earnings at each age, and the average earnings levels for those who have earnings. The career-average level of earnings for each scaled case targets a percent of the national average wage index (AWI). For the scaled medium earner, the career-average earnings level is about equal to the AWI (or $46,787 for 2014). For the scaled very low, low, and high earners, the career-average earnings level is about 25 percent, 45 percent, and 160 percent of the AWI, respectively (or $11,697, $21,054, and $74,859, respectively, for 2014). The steady maximum earner has earnings at or above the contribution and benefit base for each year starting at age 22 through the year prior to retirement (or $117,000 for 2014).

Tables A through D show benefit and replacement rate information for the five different pre-retirement earnings levels. Each table shows the Social Security benefit in wage-indexed 2014 dollars and as a percent of career average earnings (the standard replacement rate measure in this note). The denominator of this replacement rate is the average of the highest 35 years of earnings for these hypothetical workers, wage-indexed to the year before retirement3. This calculation is very similar to the present-law AIME calculation, except that the AIME calculation wage-indexes earnings to age 60 rather than to the year before retirement. The calculations in these tables are wage-indexed to just before retirement to provide a closer comparison of pre-retirement earnings and post-retirement benefit levels.

Tables A through C show benefit amounts and replacement rates for retirement at 62, at 65, and at normal retirement age (NRA) for the hypothetical workers born in 1948 and selected subsequent years. In comparing across tables, benefit levels and replacement rates are lowest at age 62, and highest at NRA. This occurs because an actuarial reduction applies to the monthly benefit for those retiring before NRA. For an NRA of 67, individuals retiring at exact age 62 would have a 30 percent reduction in benefits, and those retiring at age 65 would have a 131/3 percent reduction. Table D shows benefit amounts and replacement rates for retirement at 624, at 65, and at normal retirement age (NRA) for selected hypothetical workers born between 1875 and 1945.

Tables A through C also include present-law scheduled and payable benefits in CPI-indexed 2014 dollars.5 The present-law scheduled column shows a general increase over time in the purchasing power of Social Security benefits, which would be necessary for retirees across generations to maintain a similar standard of living.