Social Security is arguably the most important social program for our nation's retired workers. Each month, more than 42 million of the 61.6 million people receiving a monthly stipend from the Social Security Administration are retired workers. Of these retirees, more than three out of five (62%) rely on their payout to account for at least half of their income, with about a third reliant on Social Security for practically every cent they get each month.
An analysis conducted by the Center on Budget and Policy Priorities found that Social Security income keeps senior poverty rates below 9%. Without this income, an estimated 41% of seniors would be living below the federal poverty level. It's simply that important of a program.
Can you count on Social Security?
But the big question is: Can you count on Social Security when you retire?
According to the newest report from the Social Security Board of Trustees, the program is set to face some major headwinds within the next two decades. By 2022, it'll begin paying more in benefits than it's collecting annually in revenue, which will result in a cash outflow from its nearly $3 trillion in asset reserves. By 2034, the trustees report projects that the program's asset reserves will be completely wiped out.
Why is this shift occurring? It's a function of the steady retirement of baby boomers from the workforce and not having enough new workers to replace them. This is weighing down the all-important worker-to-beneficiary ratio. Life expectancies have also been on the rise for decades, allowing retirees to pull a benefit from the program for perhaps two decades or longer, when it was initially designed to supplement retired workers for a much shorter period.
The end result, say the trustees, is the possibility that benefits could be cut on an across-the-board basis by up to 23%. In constant dollars, the average retired worker is currently bringing home about $1,372 a month, or close to $16,500 a year. If those payouts were cut by 23%, the average retired worker would see his or her monthly stipend drop to $1,056, or close to $12,700 annually. That's less than $1,000 above the federal poverty level.
Making matters worse, the purchasing power of Social Security income has been on a pretty steady decline since 2000. An analysis from The Senior Citizens League find that the purchasing power of Social Security dollars has declined by 30% since the start of the century. In other words, what once purchased $100 worth of goods and services now buys $70 worth of goods and services.
Social Security will be there for you, in some capacity
On the surface, Social Security doesn't look like something the average American worker should count on during retirement. But if we dig below the surface, we'd see that this view is incorrect. While the program might look quite a bit different when you retire than it does to current retirees, you can most definitely count on it being there in some capacity for you.
The key to Social Security's survival is its revenue channels. It's currently funded three ways.
The smallest contributor is the taxation of benefits. Yes, your Social Security benefits may be taxable if you earn too much. According to IRS rules, if you make more than $25,000 as a single tax filer, or $32,000 as a couple filing jointly, half of your Social Security benefits can be exposed to federal income tax. Last year, the taxation of benefits generated $32.8 billion of the $957.5 billion collected.
Interest earned on the programs' asset reserves added another $88.4 billion in 2016. The Social Security Administration invests nearly all of its assets in special issue bonds, with a small amount going into certificates of indebtedness. As of the end of the September 2017, the average yield on Social Security's asset reserves was 2.903%. Unfortunately, as its asset reserves become depleted, this revenue channel could wane and possibly even disappear entirely.
The bulk of the program's funding comes from the payroll tax on earned income between $0.01 and $128,700 as of 2018. This 12.4% tax was responsible for $836.2 billion of the $957.5 billion collected in 2016. As long as Americans keep working, this tax revenue will continue to be collected. That's the beauty of Social Security: It can't go bankrupt as long as the payroll tax remains in place and people keep working. This isn't to say payroll tax revenue alone will be enough to cover the benefits being paid out by the program each year, but it does suggest that a benefit in some form will be paid to those eligible to receive one during retirement.
It's designed to be a supplemental, not primary, income source
The important thing that working Americans and pre-retirees need to realize is that Social Security was never intended to make anyone rich, or to be a primary income source during retirement. The average retiree, according to the Social Security Administration, can expect the program to replace about 40% of his or her working wages. Though this percentage could be a bit higher for low-income workers, or a bit lower for the well-to-do, the key point is that it's not meant to be leaned on too heavily.
The data, of course, suggests otherwise. As noted, 62% count on Social Security for half their income, and about a third for 90% or more of their income. That's worrisome with a potential benefits cut looming within two decades.
Even though Social Security can be counted on during retirement, it doesn't mean today's workers should expect it to provide the same financial foundation that it did for their parents or grandparents. It's imperative for working Americans to save and invest for their future to reduce their reliance on Social Security.
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