Social Security benefits help support you in retirement by replacing some of the income you were earning before you left the workforce. But they do not replace as much of your earnings as you might think -- and the replacement rate has fallen over time.
Here's what you need to know about how much of your pre-retirement income Social Security will actually replace when the time comes for you to start claiming.
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This is what Social Security's replacement rate is
When the Social Security benefits program was first designed, retirees had a designated "full retirement age" (FRA) of 65 years old. This was the age when they could leave their job, claim Social Security, and get their "standard" benefit. The standard benefit for someone who claimed it at 65 was intended to replace around 40% of pre-retirement income
However, in 1983, Social Security was amended, and full retirement age has gradually been shifting later. For anyone born between 1943 and 1954, for example, FRA was moved to the age of 66. It then increases in two-month increments until 67, which is the FRA for anyone born in 1960 or later.
As FRA has changed, the replacement rate has also changed. In fact, according to the Center on Budget and Policy Priorities, a person who worked all their adult life, had average earnings, and retired at the age of 65 would see a replacement rate of about 37%.
That may not seem like a big drop from the original replacement rate of 40%, but with millions relying on Social Security as their primary source of income, even that small change can have a substantial impact on their retirement and financial security.
Your personal replacement rate depends on many factors
While the replacement rate for the average wage earner is about 37%, many factors affect how much of your personal income Social Security benefits will replace. Of course, one of the most important factors is how much you earned in your own career.
For example, if you retired at a full retirement age of 66 and 8 months in 2024, here's what you can expect your replacement rate to be based on three scenarios:
- The replacement rate for someone with very low career earnings ($15,867 per year in 2022 dollars) would be about 78.9%.
- Someone with medium-average earnings ($63,469) would be able to replace about 42.6% of pre-retirement earnings.
- Someone with maximum average earnings ($156,274) would replace around 28% of pre-retirement earnings.
Higher earners replace less of their income because the Social Security benefits formula is progressive. Lower earners get back a higher percentage of their average wages when their benefit is calculated.
The reality, though, is that the change to full retirement age always means you'll get less lifetime Social Security income because you either have to retire later (and pass up several months of benefits) to get your standard benefit or accept a reduction.
You should be prepared for the fact Social Security is unlikely to replace enough of your earnings that you can live on it without supplementary savings. That means socking money away in your 401(k), IRA, or other accounts as early as you can so you can be prepared in your later years.
