According to the Social Security Administration (SSA), via its June 2017 monthly statistical snapshot, nearly 61.5 million beneficiaries were receiving a monthly stipend from the program, a majority of which (41.91 million) are retired workers. A previous study has shown that, without this income, there is a strong likelihood that millions more seniors would be living below the poverty line.
Yet, in spite of the importance of Social Security, Congress has hardly lifted a finger in 34 years (since the 1983 Amendments were passed) to improve the program -- and that's a problem. You see, according to the newly released report from the Social Security Board of Trustees, Social Security's nearly $2.9 billion in asset reserves will soon be completely gone. Beginning in 2022, more money will be paid out in benefits than is being generated through payroll tax, interest income on its asset reserves, and via the taxation of benefits. By 2034, Social Security will have completely exhausted its asset reserves, leading to a possible cut in benefits of up 23%. Not exactly a rosy forecast.
How your Social Security benefit is calculated
However, looking 17 years down the road is pretty difficult for seniors and future retirees because there's just so much that could change over that time frame. Looking, say, three years into the future is far more practical because there's much less chance of any reforms being made, especially with Donald Trump as president, and given his campaign pledge to leave Social Security "as is."
What might the average Americans' Social Security benefit be come 2020? While there are a number of variables at play that could alter these figures, we can probably take a well-educated guess given inflationary data and statistics from the SSA.
In June, the average retired worker brought home a $1,368.67 check, per the SSA. This average check is based on three variables that you control:
- Your work history.
- Your earnings history.
- Your claiming age.
The first two factors are intricately linked. The SSA takes into account your 35 highest-earning years and uses those to tabulate your monthly benefit. Thus, it's in your best interests to work 35 or more years and to earn as much as you can in those years. Every year less than 35 results in a $0 being averaged into your monthly average earnings.
The other factor is your claiming age relative to your full retirement age (the age at which you become eligible for 100% of your retirement benefit). You can begin receiving Social Security benefits at age 62 or any point thereafter. The key point being that your benefits grow by 8% annually for each year you hold off on claiming them, up until age 70. Therefore, all things being equal, a person claiming at age 70 could net a 76% higher monthly payout than someone claiming as early as possible at age 62. Your claiming age, along with your work and earnings history, decides your monthly benefit from the SSA.
The average Americans' Social Security benefit in 2020
One of the variables we can't control, though, is inflation. Inflation describes the amount by which the prices on the goods and services we buy rises from year to year. Social Security doles out annual "raises" to beneficiaries based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. If the average reading of the CPI-W in the third quarter of the current year is higher than the average reading in the third quarter of the previous year, seniors get a "raise" based on the percentage increase, rounded to the nearest 0.1%. Unfortunately, the CPI-W doesn't rise every year, and in the years where it falls, benefits are frozen from one year to the next.
Over the past 10 to 15 years, cost-of-living-adjustments (COLA), as these raises are officially known, have tended to come in right around 2%. Again, we can't forecast with any certainty what'll happen on the inflation front, so a 2% approximation for COLA is the best guess we can make, based on the CPI-W readings over the past decade and change.
What would a 2% annual COLA do for the average Americans' Social Security benefit by 2020? Instead of the $1,368.67 he or she is bringing home today, by 2020 we could be talking about an average monthly check of $1,452.44. On an annual basis, we're talking about an extra $1,005 per year ($17,429 overall), if 2% COLAs are passed along in each of the next three years.
Social Security isn't designed to be a primary income source
But before you get too excited, keep in mind that even with a steady 2% COLA, there's a really good chance that a number of costs seniors are facing will continue to outpace the inflationary increases of the CPI-W. A good example is medical care inflation, which over the past decade has consistently been between 2% and 5%, averaging right around 3%-3.5%. This would imply that even with a growing stream of income, the purchasing power of seniors' Social Security income will continue to dwindle. In other words, those planning to be reliant on Social Security are in for an unpleasant surprise.
Of course, those still working do have options. For one, they could consider not following the 60% of seniors who claim Social Security benefits between ages 62 and 64 and accepting a permanent reduction in their payout in the process. Waiting until full retirement age, or after, would boost the monthly payout of future retirees.
However, what we should really be seeing is more work being done outside of Social Security. In short, Americans should be saving more than a few pennies on the dollar of their income and socking away 10% to 15% as recommended by financial advisers. They should also be investing what they've saved more wisely. Putting money into a CD isn't going to do much when inflation rates are outpacing CD yields. Instead, the stock market has demonstrated time and again that it's one of the best sources of long-term wealth creation at an average of 7% per year, inclusive of dividend reinvestment.
Saving more and investing smart is a big key to helping America overcome its Social Security problem.