How Generous Are Social Security and Medicare?
Friday, October 27, 2006
by Andrew J. Rettenmaier & Thomas R. Saving
Table of Contents
- Executive Summary
- Comparing Retirees' Social Security Benefits to Their Average Lifetime Wages
- Wage Indexing versus Price Indexing
- Adjustments for Health Care and Taxes
- Comparing Social Security and Medicare Replacement Rates over Time
- Comparing Retirement Benefits to Average Workers' Wages and Total Compensation
- About the Author
Comparing Retirees' Social Security Benefits to Their Average Lifetime Wages
"Elderly entitlements should be compared to preretirement consumption instead of wages."
A convenient way to measure the value of Social Security benefits is to calculate the percentage of retirees' preretirement, or lifetime, earnings the benefits replace. Table I is based on projections in the 2006 Social Security Trustees Report and shows rates for workers in different income groups who are ages 65, 45 and 20 today.
The percentage of preretirement wages Social Security benefits replace depends on retirees' wage histories. Social Security replaces a smaller percentage of higher-wage workers' incomes because of the progressive benefit formula. Table I shows that for people who retired last year at the normal retirement age:
- Social Security benefits replaced 30.1 percent of preretirement wages for individuals who earned the maximum taxable income ($94,200 currently);
- Benefits replaced 43.1 percent of preretirement wages for individuals with medium lifetime earnings; and
- Benefits replaced 58.1 percent for individuals who earned 45 percent of the Social Security average wage over their careers.
Table I also indicates that the percentage of wages Social Security will replace for each income group will stabilize in the future due to changes to the benefit formula included in Social Security reforms enacted in 1983.3