Social Security and Total Replacement Rates in Disability and Retirement

Mashfiqur R. Khan, Matthew S. Rutledge, Geoffrey T. Sanzenbacher

NBER Disability Research Center Paper No. NB 16-05
Issued in September 2016

Social Security Disability Insurance (SSDI) beneficiaries have greater Social Security replacement rates than retired worker beneficiaries. This fact reflects two factors: 1) SSDI beneficiaries have lower career earnings, and Social Security benefits are progressive; and 2) SSDI beneficiaries do not face the actuarial adjustment for early claimers. This project uses the 1992-2010 waves of the Health and Retirement Study (HRS) linked to Social Security Administration earnings records to decompose the differences between the Social Security replacement rates for retired worker and SSDI beneficiaries into these two factors. The project also examines how the total replacement rate – which accounts for other sources of income – differs between retirees and SSDI beneficiaries to capture the difference in overall retirement security between the two groups. The results indicate that about half of the 10-percentage-point advantage in Social Security replacement rates for SSDI beneficiaries is due to the actuarial adjustment, implying that career earnings are not that different between retired workers and SSDI beneficiaries. But total replacement rates are substantially lower for SSDI beneficiaries, which indicates that, despite Social Security’s vital role in providing a reliable later-life income source, SSDI beneficiaries have much lower post-career well-being than retired workers.

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