Social Security is arguably the most important social program in this country. Without the guaranteed monthly check Social Security provides for more than 25 million retired workers each month, poverty rates among seniors would soar. In fact, an analysis conducted by the Center on Budget and Policy Priorities found that without Social Security income, more than 40% of seniors would be living below the federal poverty level. It's essential to the financial welfare of America's retirees.

Social Security's downward spiral

Unfortunately, this crucial program is about to fall on hard times, and both lawmakers and the public have known it for quite some time. Soon enough, demographic changes have the potential to turn Social Security upside-down.

Dice sitting next to a piece of paper that reads, "Will Your Social Security Be Enough?"

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According to the newly released report from the Social Security Board of Trustees, the program will begin paying out more in benefits than it brings in via revenue by 2022. Between 2022 and 2034, Social Security's projected $3 trillion in spare cash will be completely wiped out, forcing the program to cut benefits by up to 23%. For those of you who regularly keep track of these Trustee report updates, the projected cut of 23% is actually two percentage points higher than last year's estimate, which called for a 21% cut to sustain the program for another 75 years.

Why are such steep cuts needed? The confluence of demographic changes impacting Social Security includes the mass retirement of baby boomers, a steady lengthening of Americans' life expectancies, and the life expectancy gap between the rich and the poor, which is leading rich Americans to receive bigger benefit checks (because benefits are based on income) for a longer period of time than low-income retirees.  

To put it mildly, Social Security is in trouble, and so are those who plan to lean heavily on the program. According to data from the May 2017 snapshot from the Social Security Administration, a 23% haircut to the average retired worker's benefits would reduce their take-home income from $16,411 a year to just $12,636 a year. In 2017 dollars, that's less than $1,000 away from dropping below the federal poverty level.

A baby boomer worried about his heavy reliance on Social Security and whether it'll be enough to cover his bills.

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Say what? Our reliance on Social Security is growing

One would like to assume that Americans of all ages are working to reduce their reliance on Social Security, given that we're all aware of the problem and that Congress has come nowhere near to producing a solution.

However, as a recently released poll from Gallup has shown, reliance on Social Security has actually risen across all non-retiree age groups over the past decade. Gallup's data shows that 43% of pre-retirees aged 50 to 64 now expect Social Security to be a "major" component of their income in retirement, up from 37% a decade prior. Further, 28% of folks between the ages of 30 and 49 now expect Social Security to be a major source of income in retirement, up from 25% in 2007, and the percentage of younger millennials aged 18 to 29 who expect Social Security to be a major income source practically doubled to 25% from 13% over the same time frame.

What the heck is going on?

Part of the blame for our increased reliance on Social Security may fall on Americans' poor saving habits. The St. Louis Federal Reserve pegged the personal saving rate at 5.5% in May, an eight-month high. Unfortunately, financial advisors recommend that working Americans save between 10% and 15% of their earned income, meaning we're coming up well short. In fact, personal saving rates are less than half of what they used to be 50 years ago. Long story short, we're not saving enough money for retirement.

A millennial looking at her piggy bank.

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The other issue is that we're also not being smart with what we do save. A 2016 Gallup survey found that just 52% of those polled had investments in the stock market, which matched an all-time low. Yes, the stock market has gone through its bouts of volatility, but it's also one of the best wealth-creators of all time, with historic annual returns averaging 7%. If boomers fear volatility, or if millennials distrust Wall Street, these groups may shun the stock market and fail to earn enough on their savings to retire comfortably and avoid relying heavily on Social Security.

Two simple ways to reduce our reliance on Social Security

Though many of you can probably see where I'm headed with this, there are two simple solutions that should help reduce working Americans' future reliance on Social Security.

First, working Americans need to save much more than 5.5% of their income if at all possible. The easiest way to do this is to formulate and stick to a detailed household budget. A Gallup survey from 2013 finds that only a measly 32% of households kept a detailed monthly budget, which is all the more evidence that we're pretty poor savers.

Creating a budget has pretty much never been easier. Software to create a budget can be found online, and as long as you know your income and monthly expenses, the software can even help create a savings plan, too.

A young man working on perfecting his budget.

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The real challenge is sticking to your plan. One of the best ways to stay committed to your monthly budget is to set up an automatic deposit to your retirement savings on a weekly, bi-weekly, or monthly basis. Doing so removes the "I forgot" element from the equation, and it should help keep you on target to hit your savings goals.

Secondly, working Americans need to be smarter with their money, which means a willingness to invest in the stock market. An oft-overlooked fact is that despite the 35 stock market dips of at least 10% in the S&P 500 since 1950, all those corrections have been left in the rearview mirror by bull-market rallies within weeks, months, and in rarer cases, years. Translation: High-quality stocks tend to increase in value over time, so if you invest with a long-term mindset, you should handily outperform the inflation rate and generate real wealth.

Our growing reliance on Social Security is worrisome given the program's uncertain future, but working Americans thankfully have plenty of time to right the ship if they choose to do so.

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