Earnings replacement rates of new retired workers.

This article presents replacement rates based on actual earnings for persons first receiving Social Security retired-worker benefits in the early 1980’s. One of the advantages of actual earnings replacement rates is that they reflect the complexities of real-life workers. Because there is no well-established procedure to calculate actual rates, several alternative definitions are used to show the range of possible figures based on reasonable starting assumptions. This analysis demonstrates that actual earnings replacement rates vary greatly depending on how they are measured and on the employment earnings patterns over the worker’s entire career and during the last few years of the worker’s career. For this reason, it is difficult to point to one summary measure of replacement rates based on actual earnings. Replacement rates based on earnings in both the 5 years of highest earnings and the last 5 years before benefit receipt converged when quarters of coverage in the last 5 years were near the maximum possible, when work on the last job was full time rather than part time, and when the earnings in the last 5 years were close to the 5 years of highest earnings. However, most retirees had gaps in earnings or declining earnings during the last 5 years before benefit receipt and, in some cases, last earnings replacement rates were several times higher than highest earnings rates.