The average senior gets about $1,673 per month from Social Security, which comes out to just over $20,000 per year. That's a huge boon to families living on a fixed income, but it's not enough to provide most people with a comfortable lifestyle. Those who live in places with high costs of living may be especially disappointed in how far their Social Security checks go.
It would be great if we could all live off Social Security alone in retirement, but that's just not realistic for most people. Here are three reasons why.
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1. It was never intended to pay for all your costs
The Social Security Administration designed the program to replace about 40% of the average worker's pre-retirement income, although it doesn't provide a clear definition of what average earnings are.
For some people, Social Security may cover more than this, while it may cover less for others. But it was never intended to serve as anyone's sole means of financial support in retirement.
2. It could face benefit cuts in the future
You may have heard that Social Security's trust funds are nearing depletion. The latest Social Security Trustees Report predicts this will happen in 2035. Unless the government alters the program in some way to make it more sustainable, it will only be able to pay out 80% of scheduled benefits going forward.
Government officials have proposed a lot of possible solutions for this problem, including:
- Raising the full retirement age (FRA), which determines when a person qualifies for the full benefit they've earned based on their work history
- Raising the ceiling on income subject to Social Security taxes
- Raising the Social Security tax rate
But nothing's been decided yet. The final solution could involve all or none of these things. The only thing we know for sure is that the program's future is uncertain. So it's probably not wise to bank on it as your only source of retirement income.
3. Cost-of-living adjustments don't always help the program keep up with inflation
Every year, the Social Security Administration issues a cost-of-living adjustment (COLA), which is intended to help the value of your Social Security checks keep up with inflation. Though it won't officially be announced until next month, the 2023 COLA is likely to be quite large due to the high rate of inflation this year.
But the COLAs don't always do what they're supposed to do. They're calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This is a measure of the monthly change in cost paid by urban workers for a specific basket of goods and services.
Many people feel this doesn't accurately represent the spending of seniors. They think Social Security COLAs should be based on the Consumer Price Index for the Elderly (CPI-E), which is similar to the CPI-W, except it focuses on the spending patterns of the elderly rather than workers.
This is another change that many hope the government will make to the program in the future, but for now, we just have to accept the fact that the COLAs may not actually keep Social Security's buying power level over time.
So what can you do?
None of this means you should plan for retirement without Social Security. The program will still be around, even if you aren't retiring for another 40 years. But it's important to recognize it as just a part of a larger retirement plan, which should have your personal savings at its foundation.
If you haven't already begun saving for retirement, you should consider doing so as soon as it's financially feasible. You could open an IRA on your own or you could save in a 401(k) if your employer offers one. And if you qualify for a 401(k) match, claiming that should definitely be a top priority each year.
Those who struggle to save for retirement may have to explore ways to bring in more money each month, like negotiating a raise or finding a better-paying job. You could also rethink your plans for retirement. Though you may have originally planned to leave the workforce for good, you could instead transition to part-time employment, or find another job that's more in line with your interests so it feels less like work.
Maybe Social Security will change in the next few years, making it more stable or even more valuable to seniors. But we have to make the best decisions we can from the information that's currently available, and right now, that means expecting to pay for the bulk of our retirement expenses on our own.
