Social Security is a critical program for millions of senior citizens that helps ensure they can meet their financial obligations during retirement. More than 42 million retired workers were receiving a monthly benefit check from the Social Security Administration (SSA) as of July 2017, and according to SSA data, better than three out of five of these retirees were reliant on their monthly stipend to account for at least half of their income. This social program is simply that important.

Another reason for Social Security's importance is the poor saving habits of working Americans. St. Louis Federal Reserve data from July found that workers were saving just 3.5% of their earned income on an adjusted annual basis, which is less than a third of the 12.5% that they were socking away 50 years ago in July 1967.

Saving less means having to do more with what they do save, and with an all-time record number of Americans not invested in the stock market per Gallup, many seniors' nest eggs are coming up short during retirement. This is leading to a consistently high level of dependence on Social Security, despite the SSA guiding workers to expect the program to replace just 40% of your working wages during retirement.

Social Security cards atop a benefit-calculating card.

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How Social Security benefits are calculated

So, what can the average worker expect from Social Security during retirement? Generally that answer depends on a number of factors, including work history, average annual earnings, and the year you file your claim with the SSA. The first two factors, work history and earnings, go hand-in-hand. The SSA factors in your 35 highest-earning years when calculating your full retirement age (FRA) benefit, which is the age at which you become eligible to receive 100% of your monthly benefit.

Your claiming age simply determines how much of that FRA benefit you'll receive based on the age you choose to begin receiving benefits. Your FRA is based on your birth year (you can find yours using this handy table from the SSA), and claiming at any point between age 62, the earliest age to receive benefits, and a month prior to your FRA, will result in a permanent reduction in your payout of up to 30%, depending on your birth year. Conversely, claiming after your FRA and up until age 70 can boost your payout up to 32% beyond what you'd have received at your full retirement age, depending on your birth year. Generally, your payout grows by 8% each year you hold off on signing up for benefits.

How much can the average American earning $30,000 expect from Social Security?

According to SSA earned income data from 2015, the average worker earned $46,120. However, this data can be greatly skewed by a small percent of rich folks earning millions of dollars annually. A quick look at median earnings shows that the average American is taking home $29,930 annually as of 2015. For the sake of simplicity, and the assumption of growth since 2015, let's just round this neatly to $30,000 in median annual earnings for the average American worker.

A working man with folded arms standing in front of heavy-duty machinery.

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How much would this worker generate if he or she worked at least 35 years averaging this wage? Though it'll depend on their claiming year, we can use Social Security's Quick Calculator to give us a rough estimate. 

Basing our answer on 2017 dollars (i.e., without adjusting for inflation in future years), the average worker born in, say, 1970 (thus a full retirement age of 67) earning $30,000 a year would bring home approximately $1,246 a month at age 67. Claiming as early as possible at age 62 would cut the average workers' Social Security benefit to about $849 a month, while waiting until age 70, the age at which benefits stop accruing by 8% annually, would pump up payouts to an estimated $1,569 a month. As you can see, waiting a few extra years can make a big difference with regard to how much you're paid by the SSA.

You'll also note in the estimated figures above that a median-earning worker claiming at age 62 and wholly reliant on Social Security income would be living below the poverty level at $849 a month. As of 2013, 45% of all claimants began taking Social Security at age 62, and three out of five accepted a steep permanent reduction by claiming at or before age 64. 

Two more concerns to factor in

While the SSA's Quick Calculator should give the average working American some general idea of what to expect from Social Security come retirement, it fails to factor in two pretty serious and growing concerns.

A worried senior with his hand on his head wondering how he'll pay his bills in retirement.

Image source: Getty Images.

For starters, the Social Security Board of Trustees has estimated that Social Security's Trust will begin paying out more in benefits than it's generating in revenue beginning in 2022. By 2034, roughly $3 trillion in asset reserves will be completely exhausted, leading to an across-the-board cut in benefits for current and future retirees of up to 23%. The Quick Calculator doesn't factor in the possibility that future benefits could be cut by up to 23% to preserve payments through the year 2091, but working Americans should certainly be factoring in that possibility if Congress doesn't act soon.

The other issue here is that while the Quick Calculator can factor in inflation, it isn't taking into account the reality that Social Security benefits are losing purchasing power with each passing year. Medical care inflation has outpaced Social Security's cost-of-living adjustments in 33 of the past 35 years (not counting 2017), and housing expenditures have also been rising at a quicker pace than the national rate of inflation in recent years. A Social Security dollar today probably won't be worth nearly as much five or 10 years from now.

This data is a wake-up call to working Americans to save more, invest wiser, and come to terms with the idea that Social Security was designed to be a supplementary income source for low-income workers, not a primary income source for a majority of retirees.

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