Summary: Experts say that retirees need 70-80 percent of their prior earnings to keep up their standards of living in retirement. Social Security today replaces less than that – about 40 percent for an average earner at 65. Yet most retirees rely on Social Security for most of their income. For today’s retirees, pensions are a distant second to Social Security as a source of income, while income from assets ranks third. Achieving an adequate retirement income will be a growing challenge for future retirees. Social Security will replace a smaller share of earnings under current law and employers are shifting away from traditional pensions to 401(k) plans that expose workers and retirees to more risks. Most experts agree that an ideal pension system would have broad coverage, be fully portable, avoid "leakage" from early withdrawals, provide inflation-indexed benefits that last for life, continue benefits for widowed spouses, and have low administrative costs. Social Security has all these features. Policymakers concerned about retirement income adequacy – for boomers, their children and grandchildren – will need to consider how much to build on Social Security’s strengths and how much to focus on other parts of the retirement system.
This brief focuses on the role of Social Security in producing adequate retirement income. Issues about the affordability and solvency of Social Security are discussed in other Academy briefs (Reno and Lavery 2005 and 2006).