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November 2004, Vol. 127, No.11
Measuring defined benefit plan replacement rates with PenSync
James H. Moore, Jr.
W ill future generations of retirees have adequate retirement income to maintain their preretirement standard of living? In an effort to better understand retirement income security, the Social Security Administration (SSA) developed a microsimulation model, called Modeling Income in the Near Term (MINT),1 to project the retirement income of persons born between 1926 and 1965. There are three main sources of retirement income: Social Security, employer pension benefits (from both defined benefit and defined contribution pension plans), and personal savings. This article focuses on a method for projecting income from defined benefit pension plans.
Version 1 of MINT used replacement rates calculated by the Bureau of Labor Statistics (BLS, the Bureau) to estimate retirement benefits from the private sector, as well as from State and local government defined benefit plans. Because the Bureau no longer publishes replacement rates,2 and because there are no other sources from which to obtain such rates, SSA has developed an experimental replacement rate calculation requiring BLS data on pension plans. A file containing both the statistically recreated BLS data and data from the Survey of Income and Program Participation (SIPP) is linked to earnings histories. Work was done under a memorandum of understanding between the Bureau and the SSA such that BLS data would be analyzed at the Bureau and only results of statistical equations could be taken offsite.
Under the MINT, two key components—pension plan characteristics and preretirement earnings—are used to calculate replacement rates. The statistical equations developed at the Bureau are used to estimate pension plan characteristics as a function of job characteristics, which are statistically matched to SIPP individuals. SSA administrative data on earnings are used to develop two measures of earnings and to calculate defined benefit amounts. These amounts, together with preretirement earnings, are then used to calculate replacement rates. The resulting dataset is called PenSync.
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1 MINT was developed to estimate the distributional effects of proposed Social Security policy alternatives on current and future beneficiaries’ retirement income. The model projects retirement income from Social Security, pensions, personal investments or savings, and partial retirement earnings. For a complete description of the mint project, see the final reports prepared by the rand Corporation (Constantijn Panis and Lee Lillard, "Near Term Model Development," draft final report, SSA contract no. 600-96-27335 (Santa Monica, CA, RAND, 1999); Constantijn Panis, Michael Hurd, David Loughran, Julie Zissimopoulos, Steven Haider, and Patricia St. Clair, "The Effect of Changing Social Security Administration’s Early Entitlement Age and the Normal Retirement Age," draft report, SSA contract no. 600-96-27335 (Santa Monica, CA, RAND, 2002)); The Urban Institute (Eric Toder and others, "Modeling Income in the Near Term—Projections of Retirement Income through 2020 for the 1931–1960 Birth Cohorts," final report, SSA contract no. 600–96–27332 (Washington, DC, The Urban Institute, 1999)); and the Social Security Administration (Barbara A. Butrica, Howard M. Iams, James Moore, and Mikki Waid, Methods in Modeling Income in the Near Term (MINT), ORES working study no. 91 (Social Security Administration, May 2001)).
2 The last years the Bureau published replacement rates for full-time employees were 1993 for those in medium and large private establishments and 1994 for State and local government employees.
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