Social Security may not be a program the average working American thinks about often, but statistics show that there's a better than 50-50 chance you'll be leaning on it to help meet your monthly expenses come retirement. Data from the Social Security Administration (SSA) shows that just over 3 in 5 people rely on their monthly check for at least half of their income, while a Gallup poll from April found that 79% of non-retirees expect Social Security to be a major or minor source of income. Translation: The program is relevant to helping a majority of retirees pay their bills during their golden years.
As of May, per the SSA, nearly 61.5 million people were receiving a monthly benefit check, of which 41.8 million were retired workers. The average retired workers was taking home $1,367.58 per month, which works out to about $16,411 a year. Mind you, Social Security was never intended by the program's architects to be a sole source of income. It was really only designed to replace approximately 40% of a person's working wages during retirement. Nevertheless, the average American is taking home enough from Social Security alone to keep above the federal poverty level -- and that's a good thing.
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Social Security's more than $2.8 trillion in asset reserves will soon disappear
What isn't a good thing is the longer-term outlook for this vital social program. A 2016 report from the Social Security Board of Trustees paints a grim picture of what might happen in less than two decades to Social Security if Congress doesn't enact changes to shore up the program. The trustees forecast that the SSA will begin paying out more in benefits than it's generating in revenue by 2020, leading to the steady depletion of more than $2.8 trillion in asset reserves by 2034.
If you're wondering what's causing this massive change, look no further than a handful of demographic shifts.
For starters, baby boomers are leaving the workforce and retiring at a rate of around 10,000 persons per day. Social Security's architects in the mid-1930s could never have fathomed there would be such a massive boom in baby births for a nearly two-decade period, and Social Security is now paying for that surge in births with a worker-to-beneficiary ratio that's under pressure.
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Secondly, life expectancies as a whole have been on the rise. Once again, Social Security's architects never imagined that seniors would be pulling a payment from Social Security for more than a couple of years. Today's seniors reaching the eligible age to begin taking payments (age 62) are living an average of two decades. Making payments for a longer period of time is an added burden on Social Security.
Lastly, the well-to-do are putting strain on the program. Since cost isn't an obstacle for wealthier individuals, they have readily available access to medical care should they need it. That's not necessarily the case for lower-income folks. As a result, well-to-do persons with higher monthly payouts from Social Security are living much longer than lower-income folks, and draining Social Security in the process.
Here's what the average American can expect from Social Security by 2035
So, what does this mean for the future of Social Security? Assuming Congress is unable to come up with amicable solution to fix Social Security for the long term, benefits might drop for current and future retirees by as much as 21% in 2034 in order to preserve payouts through the year 2090. Here's what that might look like for the average American, if we assume an average cost-of-living adjustment (COLA) of 2% per year.
Data source: Social Security Administration May snapshot, author's calculations assuming 2% COLA every year. Chart by author.
Understandably, the variables here aren't guessable with any exactness, but the general thesis is that if retirees are forced to take up to a 21% cut in their monthly payout, they'll deal with virtually no growth in their nominal benefit between 2023 and 2035. By 2035, the average retiree would be bringing home just $18,517 annually, or about $1,543 per month if COLA were to stay constant at 2% per year.
Meanwhile, the cost of other expenses that take a bite out of seniors' wallets would probably keep growing at a much quicker pace. Over the past 10 years, medical care inflation has averaged right around 3.5%, based on data from the Bureau of Labor Statistics. If medical care inflation kept pace at 3.5% per annum, medical costs would rise by 92% between 2017 and 2035 – all while nominal Social Security benefits rose by a modest 13% over the same time frame. Yikes! It would essentially mean that seniors would be kissing most, or all, of their Social Security COLA goodbye to Medicare Part B premiums.
Three important variables you control
With looming cuts on the horizon, it's more important than ever that working Americans and those about to retire remain proactive. This starts with budgeting and saving for the future.
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With a Gallup survey pointing out that just 32% of American households were keeping a detailed monthly budget in 2013, it's not surprising to discover that savings habits in this country aren't good. Far too many people are entering retirement with insufficient savings, forcing them to rely heavily on Social Security for income. Formulating and sticking to a monthly budget will allow you a keen understanding of your cash flow, which gives you the ability to maximize what you save for retirement. The more you save, the less chance you have of relying on Social Security as your plan A during your golden years.
Secondly, investing for your future is important. It's not prudent to let the money you do save sit under a mattress and get eaten alive by inflation. Consider proven investment tools like the stock market, which has returned 7% historically, inclusive of dividend reinvestment. Investing in stocks isn't without risk, but over many decades it's shown to be a tough investment tool to top.
Lastly, really consider when you're going to file for Social Security benefits. Even though you become eligible for benefits at age 62, the SSA dangles a very juicy carrot should you decide to wait to sign up. For each year that you wait, your Social Security benefit will grow by 8%, until age 70. This means a person claiming at age 70 could have up to a 76% higher monthly payout than someone of identical work history and earnings claiming at age 62. Understandably, it won't make sense to wait that long for everyone, but analyzing your health and unique financial needs should help you make a smart claiming decision that maximizes your lifetime benefits from Social Security.
