NCPA - National Center for Policy Analysis

Diminishing Income Replacement

March 31, 2003

The benefits that young workers receive from Social Security will be smaller than the benefits received by current retirees says economist Alicia Munnell. In a recent article published by the Center for Retirement Research at Boston College, she identifies three factors in current law that will reduce the proportion of younger workers' income Social Security will replace.

1. The age for collecting full retirement benefits will increase to 67 by 2022 -- amounting to a benefits cut for anyone who retires early:

  • From replacing an average of 55.5 percent of earned income in 2000, benefits will sink to 49.1 percent in 2030.
  • As an example, an earner who makes the maximum taxable wage will see the replacement rate fall from 27.3 percent to 24 percent.

2. The premium for Medicare Part B, the insurance that covers doctor bills and other services, is expected to rise faster than monthly retirement benefits:

  • A person who retired at 65 in 2000 paid about 6 percent of his retirement benefits for the insurance premium.
  • In 2020, when the same person is 85, the insurance premium will take 10.6 percent of retirement benefits.
  • A person retiring in 2030 can expect Medicare premiums to absorb 9.1 percent of his benefits at age 65 -- but 13.6 percent 20 years later.

3. The proportion of retirees paying income taxes on their Social Security benefits will rise, reducing net benefits. For example, a 15 percent personal income tax on half of the benefits will reduce replacement rates by another 7.5 percent.

These three factors will take the Social Security income replacement rate from the current 41.2 percent to 30.5 percent for a medium-income worker retiring at the early age of 65 in 2030 -- a loss of 26.5 percent.

Source: Scott Burns, "Security blanket is shrinking," March 30, 2003, Dallas Morning News.


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