Social Security Retirement Income Replacement Rates

Abstract

One of the main retirement income concerns is adequacy, which is generally measured as the percentage of preretirement income replaced by the retirement benefit. For defined-benefit pension plans the replacement rate or ratio is measured against some measure of final income. For Social Security (more accurately OASDI), however, the Social Security Administration uses a complex measure of career-average earnings. Since Social Security is the main, and often the only, source of retirement income for many millions of Americans, the question of adequacy is paramount. The benefit formula is heavily skewed in favor of lifetime low-income earners. In addition, Supplemental Security Income (SSI) and state augmentations add to the retirement income of low-income claimants. The combination of OASDI and SSI benefits result in retirement income that, while not overly generous, is adequate. This article examines the origins and development of OASDI and SSI with a focus on benefit adequacy.