Answer:
The replacement rate is the percentage of the final income that the pension compensates.
Before-tax replacement rate:
The worker made $2,000, and his social security benefits are $1,200.
1,200 x 100% / 2,000 = 60%
The before-tax replacement rate is 60%.
After-tax replacement rate:
His 2,000 income was subject to a 25% tax.
2,000 x 25% = 500
His after-tax income was 1,500
1,200 x 100% / 1,500 = 80%
The after-tax replacement rate is 80%.
