CBO Corrects its Social Security Replacement Rate Calculations

By ASPPA Net Staff • February 19, 2016 • 0 Comments
The Congressional Budget Office (CBO) has made some corrections to the calculations of replacement rates — the ratio of Social Security recipients’ benefits to their past earnings — that it had released in December. CBO Director Keith Hall made the announcement in a Feb. 10 CBO blog post.

It is, however, probably more accurate to say that CBO merely revised its replacement rates to levels it had previously reported, and levels consistent with that reported by the Social Security Administration. The major change in 2015 was to switch the calculation of replacement rates from (a) the ratio of initial benefits to average lifetime earnings adjusted for wage growth to (b) the ratio of initial benefits to the average of the last five years of substantial earnings before age 62 adjusted for price growth — accompanied by, according to Boston College’s Alicia Munnell, an error that included years of low and zero earnings in the calculation. The new, corrected replacement rates are now consistent with the agency’s previous estimates.

The Social Security income replacement rate is relevant to comprehensive retirement readiness — and to the role employer-provided retirement plans play and their importance.

In “CBO’s 2015 Long-Term Projections for Social Security: Additional Information,” which the CBO released on Dec. 16, the CBO had defined replacement rates to be initial benefits as a percentage of average late-career earnings; for those calculations, earnings consisted of the last five years of earnings that were at least half of a worker’s average indexed earnings, adjusted for growth in prices.

The CBO says that the estimates reported in December inadvertently included years with earnings below those intended amounts. The errors occurred in the calculations of replacement rates, the CBO says, and appeared in Exhibits 10 and 12. The errors affected no other estimates in the report, according to the CBO.

Hall writes that the corrected version, which appears on the CBO website, shows substantially lower mean initial replacement rates for retired and disabled workers.