Though there are numerous possible channels of income available to senior citizens once they retire, Social Security can arguably be described as the most vital.
According to data from the Social Security Administration (SSA), 61% of all seniors currently receiving benefits, as well as 71% of unmarried elderly beneficiaries, count on their Social Security benefits to comprise at least half of their monthly income. This data agrees with a somewhat recent Gallup survey, which found that 59% of seniors rely on their Social Security benefits to make up a "major" part of their income.
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Social Security has issues
Yet there are two key problems with this critical source of income for seniors.
First, the Social Security Administration suggests that your benefits are only designed to replace approximately 40% of your working wages. This is an average figure, so it's not uncommon for it to be a lower percentage for individuals who earned a lot annually during their lifetime, and for it to even cross the 50% threshold for lower-income folks. Nonetheless, senior citizens appear to be leaning above and beyond the recommendation of the SSA to make up for their own lack of savings.
The other major issue for the program is that its current payout structure isn't sustainable over the long term. Two notable demographic shifts -- the ongoing retirement of baby boomers, and lengthening life expectancies -- are weighing down the worker-to-beneficiary ratio and are expected to switch the program from a cash inflow to an outflow by the year 2020. The Social Security Board of Trustees 2016 report projects that the Social Security Trust will have exhausted its more than $2.8 trillion in spare cash by 2034, at which point benefits may need to be cut across the board by up to 21%.
So what exactly is the average senior citizen bringing home each year in Social Security benefits? Let's have a look.
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Here's how much the average senior gets from Social Security each year
According to the SSA's December snapshot, more than 41.2 million retired workers were bringing home an average of $1,360.13 each month. Over the course of the year, this would work out to just $16,321.56. For comparison, the federal poverty level in 2017 is $11,880. This means if the average senior were wholly reliant on Social Security income (which some indeed are), he or she would be earning only 37% above the federal poverty rate for a single individual. This is precisely why the SSA suggests retirees have additional income sources beyond just Social Security.
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Another concern with leaning so heavily on Social Security and its average annual payout of $16,321.56 is that annual cost-of-living adjustments (COLA) simply aren't keeping up with the actual expenses for seniors. Over the previous 35 years, the medical care inflation rate has outpaced Social Security's COLA (i.e., the raise that seniors get if the price of goods and services goes up as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers) in 33 of 35 years. In fact, Social Security had no COLA in three years since 2009, and this year's COLA of 0.3% is the smallest increase on record.
And, of course, there's the real possibility that if Congress doesn't find a way to generate more revenue, a benefit cut of up to 21% may be needed within the next two decades. Based on 2017 dollars, this would push the average annual payout to just above the current federal poverty level.
One surefire way to boost your Social Security take-home pay
The data from the SSA suggests that most seniors are going to rely to some degree on their Social Security benefits to aid them in meeting their monthly expenses during retirement. This means that your decision on when to file for benefits can have a huge bearing on how much you'll earn annually.
Certain factors that determine what you're paid at full retirement age are established throughout your lifetime. For instance, your full retirement age benefit is based on your average monthly income over your 35 highest-earning years. Thus, the more you earn each year, and the closer you come to working at least 35, if not more, years, the better chances you have of maximizing your Social Security benefit.
But just as important is deciding when you'll claim your Social Security benefits. Seniors can claim as early as age 62, but they're financially incentivized to wait. For each year an individual waits to enroll in Social Security, their eventual payout grows by approximately 8%. This annual accrual ends once a person turns 70 years old.
The Social Security retirement benefit schedule for people born between 1943 and 1954. Data source: Social Security Administration. Chart by author.
At the center of your claiming decision is your full retirement age, or FRA. Your FRA is determined by your birth year, and it's the point at which you're eligible to receive 100% of your benefit. Put simply, if you claim Social Security before hitting your FRA, your benefit could be up to 25% to 30% lower each month than your FRA benefit. Wait until age 70 to claim, and your benefit may be up to 24% to 32% higher than your full retirement age benefit, as you can see from the chart above for seniors born between 1943 and 1954.
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In 2017, the full retirement age has risen by two months to 66 years, 2 months. Claiming at age 62 would result in a reduction in benefits of 25.8%, or an annual payout of just $12,110.60 based on the average payout for retired workers. Comparatively, wait until age 70 and you can net a 30.7% increase over your FRA payout. Once again using the average payout for seniors as the baseline, this would boost the annual payout to a more respectable $21,332.28.
Waiting to claim benefits is a surefire way to boost your take-home pay, but just keep in mind that it may not be the smartest move for all seniors. Those who are in good health, have little or nothing saved in retirement, or are the high-income earner of an elderly married couple are often best off waiting to claim Social Security benefits. Persons in poor health, or those unable to find work or another source of income, may still benefit from taking a cut in benefits and claiming early.
