Wharton Pension Research Council Working Papers
 

Title

Retirement Replacement Rates: What and How

Document Type

Working Paper

Date of this Version

8-7-2015

Abstract

Replacement rates compare retirement income to pre-retirement earnings. They are used both by financing advisors in advising households on how much to save for retirement, and by policymakers who wish to assess the adequacy of retirement saving in the population. But in recent years, there has been renewed discussion of how replacement rates should be calculated. I discuss three topics in this current debate. First, should policymakers be presented with replacement rates based upon stylized workers or using administrative or microsimulation data? Second, should the denominator of the replacement rate calculation—pre-retirement earnings—be adjusted for the growth of prices or the growth of economy-wide wages? And third, should replacement rates incorporate a family-size adjustment to account for how having children affects parents’ need to save for retirement? I illustrate the effects of these methodological choices using a microsimulation model of Social Security benefits and employer-sponsored pensions. The results suggest that much of the disagreement over whether Americans face a ‘retirement challenge’ or a ‘retirement crisis’ stems not from differing estimates of how much income American retirees will have, but of how much income they will need to maintain their pre-retirement standards of living.

Comments

The published version of this Working Paper may be found in the 2016 publication: Retirement System Risk Management.

Working Paper Number

WP2015-20

Copyright/Permission Statement

All findings, interpretations, and conclusions of this paper represent the views of the authors and not those of the Wharton School or the Pension Research Council. © 2015 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.

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Date Posted: 12 March 2019