Here is an example that I find particularly misleading. The key to understanding this discussion of replacement rate is the word “earnings,” but because of the variables the word can be used to mislead.
Look below and you see 95% of prior earnings, what earnings?
To be more specific, look at the claim of 80% replacement rates. Technically correct, but when you read the assumptions you get a different picture. Here is what the CBO Report actually says:
“Because of the progressive nature of Social Security’s benefit formula, replacement rates are much higher for workers with lower earnings. For example, the median replacement rate based on all earnings from age 22 through age 61 is 80 percent for workers born in the 1960s whose lifetime earnings fall in the lowest earnings quintile, more than double the 34 per- cent for workers whose earnings fall in the highest quintile.”
The 80% is based on replacement of career (lifetime) earnings. That is irrelevant ‼️
A worker earning a low $20,000 in 2019 will receive about 53% replacement of that $20,000 based on the SS Quick Calculator. A worker earning $135,000 receives about 21.5% replacement.
When a worker retires, what matters is the income at the time of retirement which is what had determined their standard of living.
Retirement benefits for the lowest-income quintile of workers would exceed 95% of their prior earnings. A “replacement rate” is the percentage of one’s earnings as a worker that one’s subsequent retirement income is sufficient to replace. Most advisors recommend that individuals save enough to finance replacement rates of 70%-80% in retirement. According to data published earlier this year by the nonpartisan Congressional Budget Office, Social Security by itself already pays an average replacement rate of 80% for those in the lowest-income quintile.
The bill would increase these benefits, pushing these workers’ replacement rates above 95% on average. Combined with the bill’s tax increases, this means that low-income workers would not be able to amass retirement saving on their own without pushing their standard of living during their working years far below what they expect to experience as retirees.