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Social Security is supposed to take care of seniors in their old age, but it cannot do it alone. If you're counting on Social Security benefits to be your sole source of income as a senior, you're almost assuredly going to find yourself in a dire financial situation.
The average monthly Social Security benefit is about $1,368 per month at the moment, and while some seniors receive a higher benefit if they paid more into the system, others receive much less.
Average monthly income from Social Security alone puts most seniors very close to the federal 2017 individual poverty level of $12,060. Even the maximum benefit -- which is very difficult to obtain -- nets an annual income of $42,456, which is far below the cost of comfortable living in many larger cities.
Seniors need much more than a poverty-level income, and most older people even need more than the maximum Social Security benefit. In fact, there are four key reasons why seniors cannot live on Social Security alone, and should make sure they save enough for retirement so they don't have to.
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1. A single unexpected expense could lead to disaster
When factoring in routine expenses like healthcare, food, and housing, the average American senior spends around $3,700 monthly, or $44,600 annually. If you want to live a routine middle-class lifestyle, your entire Social Security check will be eaten up -- and then some -- even if you earn the maximum in benefits.
If your income from Social Security is just average, your spending will be even more bare-bones. As a result, you'll need to live in a low-cost-of-living area. Otherwise your entire check could be spent just to pay the your monthly rent. The median monthly rent for a single-bedroom apartment in the top 50 major U.S. cities is roughly $1,234.
With Social Security either insufficient, or barely sufficient, to cover basic routine costs, saving money for emergencies is difficult or impossible. Close to half of all seniors currently have nothing set aside for an emergency, and you'll likely fall into this group if you're trying to live on Social Security alone. Unfortunately, emergencies happen. If your car needs costly repairs, your fridge goes on the fritz, or you have any unexpected expense, you could wind up in debt, unable to pay your bills, and with no savings to fall back on.
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2. Affording healthcare costs could be almost impossible
Seniors living at the poverty level or on a limited Social Security income could face a harder time than young people, because many pensioners have costly medical needs. Unfortunately, contrary to popular belief, Medicare does not make seniors' medical care free, and older people still need to be prepared for treatment expenditures -- particularly for prescription drugs.
Seniors account for 34% of all healthcare spending, and a 2012 analysis estimated senior spending on healthcare at nearly $19,000 per person. The government pays for around 65% of medical expenses for the elderly, and seniors are left to pay for Medigap or Medicare Advantage policies to cover additional costs.
Even with supplementary policies, coverage is not that comprehensive. The Bureau of Labor Statistics reported mean healthcare spending of $5,994 annually among those aged 65 and over in 2016, but seniors with high prescription drug needs could end up spending far more.
If you receive only the average Social Security benefit, then $5,994 per year in medical spending would eat up 37% of your entire annual income. You'd be left with about $10,000 to pay for rent and all of your other expenses. This is nowhere near enough, even if you don't suffer a serious medical emergency such as a stroke or heart attack.
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3. Other costs rise faster than COLA
Social Security beneficiaries are eligible for an annual cost-of-living adjustment (COLA), which is a small boost in benefits intended to protect their purchasing power from inflation. Unfortunately, COLAs for seniors aren't actually very effective at making sure that Social Security benefits keep pace with actual costs of living.
In 2017, seniors received a 0.3% cost of living adjustment. This was actually an improvement compared to 2016, when the adjustment was 0%. In fact, since 2010, there have been three years when Social Security retirement beneficiaries received no raise at all.
While Social Security benefits either rise slightly or not at all -- i.e., they can never decrease -- COLA increases have not kept pace with the rate of medical inflation in 33 of the past 35 years. Food and housing cost increases have also outpaced Social Security's meager COLA adjustments. Since prices increase faster than income from Social Security, the spending power your Social Security benefits provide is reduced each year -- making living on your benefits even harder as you age.
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4. The future of Social Security is uncertain
Social Security benefits are clearly insufficient to live on under the current system -- but things could actually get worse. Social Security's trust fund reserves are expected to be depleted by 2034, and if no steps are taken to fix funding shortfalls, Social Security will only be able to pay 77% of expected benefits.
Proposals to fix funding shortfalls include raising the retirement age and changing the formula by which cost-of-living increases are calculated to give seniors even smaller raises. Either option would reduce lifetime benefits, even as seniors struggle to make ends meet. This means if you want to achieve financial independence some day, it's even more important you make a retirement savings plan so you'll have plenty of cash to supplement Social Security.
