Adequacy and equity of Social Security benefits are major policy considerations for the program. One measure of adequacy is the percentage of pre-retirement earnings that Social Security benefits replace, or the “replacement rate”. The numerator of this replacement rate is well established as the Social Security benefit. One indicator of equity is the degree of variation in replacement rates across different career-average earnings levels and birth cohorts.
In this note, we use the average of the highest 35 years of earnings, wage-indexed to the year before retirement, as the replacement rate denominator. Because Social Security serves a large population of workers with career earnings patterns that vary greatly, we believe the denominator used in this note is the most appropriate choice for measuring the adequacy of Social Security retirement benefits.
– Social Security Administration