Most Americans will be eligible to receive Social Security when they retire, and many of them expect Social Security to be a major source of income during retirement. If you're one of them, you may have a problem: Social Security benefits may not be as substantial as you expect and living off those benefits could be very tough. A quick look at Social Security statistics -- which show an average monthly benefit of just $1,404 for all retired workers and just $2,340 for a senior couple receiving benefits in 2018 -- reveals the issue. 

These numbers should make you very nervous if you're counting on Social Security to support you. Looking at low average benefits doesn't even tell the whole story, as Social Security benefits may actually be even lower than they seem at first glance. Here are four reasons why your Social Security benefits may be a lot lower than you expect.

Social Security card sitting on top of money

Image source: Getty Images.

1. You may be taxed on Social Security benefits

When you receive Social Security benefits, there's a chance your benefit will be reduced by federal and state taxes. 

The federal government taxes Social Security benefits once your income as an individual exceeds $25,000. If you file a joint return with your spouse, you'll have to pay taxes on benefits if you have a combined income of more than $32,000. If you're married and file separate tax returns, the Social Security Administration also indicates you'll probably be taxed on benefits. For these purposes, combined income is generally defined as your income from sources other than Social Security, plus one-half of your Social Security benefits.

For singles with income between $25,000 and $34,000, up to 50% of benefits is taxed. If your income exceeds $34,000, up to 85% of benefits is taxed. If you file jointly, you're taxed on 50% of Social Security benefits if your income is between $32,000 and $44,000. If your income exceeds $44,000, you'll pay tax on 85% of benefits.

Depending upon where you live, you could also end up paying taxes on Social Security to the state, reducing benefits even further. There are 13 states that tax Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.

Not everyone pays taxes on Social Security in these states -- your income usually has to be above a certain threshold, with rules varying by state. But if you do, you'll typically see a significant reduction in benefits when state and local taxes combine. 

2. Social Security benefits aren't keeping pace with rising costs of living

Retirees receiving Social Security benefits get periodic cost of living adjustments (COLAs). COLAs are tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Unfortunately, many believe this is the wrong index to tie benefit increases to because it does not accurately reflect seniors' spending patterns.

Seniors often devote more of their income to medical costs than the general population. Unfortunately, in 33 out of the past 35 years, healthcare costs have risen at faster rates than Social Security COLA increases. Food and housing cost increases are also outpacing COLA for retirees on Social Security. 

If Social Security benefits don't rise as much as the costs of products and services used by seniors, the latter have less purchasing power. Even if income appears to go up because you receive a small raise, benefits will actually be worth less in real terms. 

And, unfortunately, there's not even a guarantee you'll get a raise -- even on paper. Since 2010, COLAs have averaged just 1.35% per year. In three of the past 10 years, seniors didn't get a raise at all, and in 2016, the COLA was just 0.3%. 

3. Medicare premiums are paid out of Social Security

Seniors on Social Security are typically covered by Medicare. However, contrary to what many believe, Medicare isn't free. Premiums are typically charged for Medicare Part B, which covers routine visits to the doctor. These premiums are directly deducted from Social Security checks for most seniors. 

Most retirees pay a standard Medicare Part B premium and are protected by hold-harmless provisions preventing premiums from rising more than a Social Security COLA adjustment. If premiums rise $20 but COLAs provide only a $10 raise, you'll only pay $10 more. However, seniors with modified adjusted gross incomes above $85,000 for singles or $170,000 for married couples must pay an income-related monthly adjustment amount and aren't protected by hold-harmless provisions. 

The problem occurs when Social Security raises come and seniors are paying premiums below the standard premium because of hold-harmless provisions. When this happens, Medicare costs increase.

This occurred when seniors got a 2% COLA from 2017 to 2018. In 2017, standard Medicare premiums were $134, but seniors protected by hold-harmless provisions were only paying $109. When Social Security went up in 2018, they became responsible for the extra $25 in premiums.

Since Medicare premiums increased so much, around 70% of retirees saw their entire COLA eaten up by the extra premiums and won't get any more money in their Social Security checks in 2018, even with a 2% raise. This is a problem many older people will face throughout their lifetimes while collecting Social Security. 

4. You could be forced to take benefits early and get less than expected 

If you have little savings and plan to rely on Social Security, you may plan on working longer to increase Social Security benefits. This isn't a bad idea because if you retire after full retirement age (FRA) -- 67 for those born in 1960 or later-- you'd get an increased benefit. The amount of your monthly benefit increases by two-thirds of 1% for each month after FRA that you delay claiming benefits. 

Unfortunately, you may not have a choice about when you retire. If you're in a physically demanding job, you may get too old to work. And, in any job, if you're laid off in your 60s, finding new work could be difficult.

An analysis by the Schwartz Center for Economic Policy Analysis found the real unemployment rate for workers 55 and up was 12% in 2016 -- almost 2.5 times the national jobless rate when factoring in those who'd dropped out of the workforce, who were underemployed, or who were looking for work. 

If you're forced to take Social Security before your FRA, your benefits could be substantially reduced. Social Security benefits are reduced by five-ninths of 1% for each month before FRA that you retire. If you retire more than 36 months before FRA, benefits are reduced by an additional five-twelfths of 1%. This reduction is permanent. Consider how retiring early impacts an average $1,404 Social Security benefit if FRA was 67: 


Change in Benefits Compared to FRA

Monthly Benefit Amount


30% reduction



25% reduction



20% reduction



13.3% reduction



6.7% reduction


Being forced to retire early could also impact benefits in other adverse ways. Your Social Security benefits are based on formula factoring in your highest 35 years of earnings, adjusted for wage growth. If you're forced to retire earlier than planned and don't have 35 years of earnings, you'll have some years of $0 earnings factored in. The average wages your benefits are based on will be lower. 

Don't let yourself depend on Social Security benefits

With Social Security benefits providing such a limited income, start saving early to build a nest egg so you don't have to rely on Social Security. 

If you have access to a 401(k) at work, talk to your payroll or HR department about setting up automatic contributions so money is diverted to retirement savings each paycheck before you have a chance to spend it. If you don't have a 401(k), set up a tax-advantaged account such as an IRA at a bank or brokerage firm and automatically transfer funds from your paycheck to the account on payday. 

Try to work up to saving at least 15% of your income for retirement. While this may seem daunting, start small. Making little lifestyle changes to cut spending like skipping meals out, planning weekly menus to avoid food waste, and cancelling unnecessary subscriptions could make a surprisingly big difference in freeing up money in your budget.

You'll be happy to have the extra cash as a senior and grateful for your efforts when you're not struggling to survive on a Social Security benefit that is far too low.