For many Americans, Social Security is nothing short of indispensable. The Social Security Administration finds that 61% of retired workers currently receiving benefits counts on their check to provide at least half of their monthly income. And according to a study from the Center on Budget and Policy Priorities, more than 40% of seniors would be living under the poverty rate if not for their monthly Social Security income.
This reliance by current retirees, and the expectation that many soon-to-be retired boomers will lean heavily on Social Security in their golden years, could turn out to be bad news for seniors.
Why Social Security will soon have no asset reserves
For years we've known that the Social Security program was skating on thin ice. Though the program ended 2016 with $2.85 trillion in asset reserves, last year's Social Security Trustees report suggested that by 2034 this extra cash would be completely gone. Why? Partly because of the ongoing retirement of baby boomers from the workforce. There simply aren't enough new workers, and not enough payroll tax revenue being generated from new workers, to counterbalance the steady stream of baby boomers heading into retirement and claiming benefits.
However, this is far from just the baby boomers' fault. Life expectancies have been increasing at a pretty steady pace for decades, meaning people are living longer, and therefore able to draw a payment from the trust for an extended period of time. Between 1983 and 2022, the full retirement age -- the age at which you become entitled to 100% of your retirement benefit -- is rising by two years, from age 65 to 67. But between 1983 and 2017, the average life expectancy has shot higher by a quicker 4.2 years.
What's more, the rich have been able to use Social Security as their piggy bank, whether that was their intention or not. Well-to-do folks have no financial impediments when it comes to getting regular medical care, which cannot be said for those who are low-income. As a whole, the rich tend to live notably longer than the poor and in the process are able to pull a higher monthly check from the Social Security Administration for a long period of time.
Are you ready for a 23% cut to your current or future benefits?
Yet what's truly terrifying about Social Security is the outlook for what'll happen once the program does run out of its spare cash.
According to the newly released Social Security Board of Trustees report, the asset reserve depletion date of 2034 remains unchanged from the previous year, but the long-term cash shortfall for the program ("long term" defined as 75 years) has jumped by $1.2 trillion to $12.5 trillion. In other words, for Social Security to remain comfortably solvent for the next 75 years, benefits may need to be cut across the board by 23%! Last year, the trustees had projected the need for a cut in benefits of up to 21%.
What's this mean for the average retired worker? As of May 2017, the average retiree was taking home $1,367.58 a month, or about $16,411 a year. If that were to be cut by 23%, the average retiree would only be receiving about $1,053 a month, or $12,636 a year. That's not very far from where the federal poverty level sits for 2017.
The problem could be even more pronounced for seniors who choose to take benefits as early as possible at age 62. The Social Security Administration dangles a pretty juicy carrot to those who wait. Beginning at age 62, for each year you hold off on signing up for benefits, your eventual payout grows by 8%, up until age 70. It even grows incrementally with each month you hold off. Thus, depending on your birth year, and therefore your full retirement age, those claiming at age 62 are accepting a 25% to 30% reduction in their payout from their full retirement benefit. If we tack on another 23% cut in benefits within 17 years, those claiming at age 62 could be looking at an aggregate cut to their payout of between 42.2% and 46.1% from what they'd have received at their full retirement age. Ouch!
Worse yet, about 45% of those who enroll for Social Security do so at age 62!
What's a retiree to do?
So, what are working Americans, pre-retirees, and current retirees supposed to do? You could always cross your fingers and hope that Congress stops dawdling on a solution, but that's not the best strategy by any means. Both Democrats and Republicans have a workable solution for Social Security, but since each party's solution works, neither is willing to back down and find a middle ground with the other party.
A considerably smart strategy would be to adjust your Social Security claiming approach and, if you're still years or decades from retiring, adjusting your saving and investing habits so you aren't as reliant on Social Security when you do retire.
As noted, in spite of some very alluring incentives to hold off on claiming benefits, 60% of seniors do so between ages 62 and 64, while just 3% wait until age 70. Yet at age 70 you'll receive a 24% to 32% bonus on top of your full retirement benefit, based on your birth year and full retirement age. Even if a 23% benefits cut were coming, those who chose to wait it out until age 70 would still receive 95.5% to 101.6% of their full retirement benefit. Don't get me wrong: There would be definite disappointment for these folks in having their benefits slashed by 23%, but their prudence in waiting to claim until age 70 would yield a long-term payout that's pretty close to what they'd have received at their full retirement age. In other words, as long as Social Security wasn't your primary income source, you should still be in good financial shape.
The more important moves to consider are creating a workable budget and utilizing the stock market to your advantage. Just a third of households in America were keeping a detailed monthly budget in 2013, according to Gallup. Without a monthly budget, it's nearly impossible to adjust your spending habits and maximize your ability to save.
Likewise, Gallup found that only 52% of Americans as of April 2016 were invested in the stock market. While the stock market has had its bouts of volatility in recent decades, it's also one of the best long-term creators of wealth, with a 7% historical return, inclusive of dividend reinvestment.
We'd love for Congress to do its job, but for now the best we can do to avoid become a victim of Social Security's imminent cash shortfall is to save more, invest more wisely, and take a long look at when we should claim Social Security benefits.