It could be rightly argued that Social Security is America's most important social program. Not to take any light away from Medicare, but there's simply no program out there more directly responsible for keeping retired workers out of poverty than Social Security. According to the Center on Budget and Policy Priorities, Social Security's monthly stipends ensure that 15.1 million seniors remain above the federal poverty line.
However, Social Security isn't as glorious as it might appear on the surface. It harbors three sad facts that working Americans and retirees need to come to terms with.
1. Social Security is in deep trouble
The first cold hard truth about Social Security is that it's in deep trouble. Though retirees having been counting on Social Security's consistently for nearly eight decades, the program itself is just 16 years away from a major change.
According to the 2017 report from the Social Security Board of Trustees, the Old-Age, Survivors, and Disability Insurance Trust will begin paying out more in benefits than it's collecting in revenue beginning in 2022. That means the projected $3 trillion in asset reserves will also begin to dwindle. It's expected to take just 12 years, until 2034, before Social Security's asset reserves are completely exhausted.
What does that mean exactly? The good news is it doesn't mean Social Security is going bankrupt. Since a vast majority of revenue is derived from the 12.4% payroll tax on earned income, working Americans will continue to fund Social Security ad infinitum, barring a fundamental change in how the program is funded by Congress.
However, it does mean that the current payout schedule isn't sustainable. Estimates from the Trustees report call for an across-the-board cut to benefits of up to 23% by 2034 should no additional revenue be raised or cuts passed along. That would slash the current average payout of $1,404 a month down to just $1,081 a month, in current dollars.
And if you're looking for a single factor to blame for this mess, don't. it's a combination of multiple factors that includes:
- The ongoing retirement of baby boomers, which is pressuring the worker-to-beneficiary ratio;
- A steady lengthening in life expectancies since Social Security came into existence;
- Growing income inequality, which is allowing higher-income folks to live longer, and draw a bigger monthly payout, than lower-income people;
- Years of Federal Reserve-induced monetary easing that reduced the interest earning power of Social Security's asset reserves; and
- Congress' inability to agree on anything.
2. Most seniors are way too reliant on Social Security income
The second sad fact is that seniors are currently, and expected to remain, far too reliant on Social Security income during retirement.
According to the Social Security Administration, the average retired worker should expect to have about 40% of their working wages replaced by the program. There is, of course, some wiggle room in there based on your lifetime earnings. For example, if you're a high income-earner, you might have about 25% of your working wages replaced. Comparatively, if you're a lower wage-earner, Social Security might replace more than 50% of your working wages.
However, the data shows that most folks lean quite heavily on Social Security. In total, 62% of retired workers rely on Social Security for at least half of their monthly income, while 34% of retirees expect it to provide 90% to 100% of their monthly income, per the Social Security Administration. Both figures are way too high, especially considering that in the previous point we discussed the growing possibility that benefits could be cut by up to 23% within the next 16 years.
Making matters even worse, St. Louis Federal Reserve data shows that personal saving rates in America are a paltry 2.4% as of December 2017. That's a nearly 13-year low, and it's just 0.5% away from tying the all-time record low. American workers aren't saving much at all, and that's a really big problem for Social Security.
3. Most people don't understand basic Social Security concepts
Finally, to top things off, most folks don't know very much about Social Security. This sad fact means that in addition to the program facing imminent problems within the next two decades, workers' lack of knowledge could be causing them to leave money on the table.
An informal, 10-question, true-false online survey conducted by MassMutual Financial Group in 2015 found that only 28% of more than 1,500 respondents passed (i.e., got at least seven out of 10 questions correct). What's more, just one person answered all 10 questions correctly. Remember, passing isn't good enough, because one incorrect answer could be the difference between leaving money on the table and making sure you get every cent you deserve.
For example, a 2017 survey from Fidelity found that only 26% of respondents knew their full retirement age. If you'd classify yourself among the 74% who didn't know, your full retirement age is the age at which the Social Security Administration deems you eligible to receive 100% of your retirement benefit. It's also determined by your birth year. Knowing your full retirement age is imperative if you're to understand how much you'll be paid from Social Security during retirement...yet 74% people have no idea what their full retirement age is. That's frightening.
Knowing this, it's perhaps not too shocking then that 60% of seniors enroll for benefits between ages 62 and 64, which is well before their full retirement age. Benefits can begin at age 62, or any point thereafter, but they grow on a monthly and annual basis for those who wait, until age 70. It means that seniors claiming between ages 62 and 64 are accepting a permanent double-digit percentage decrease in their monthly payout of up to 30%, depending on when they claim and their birth year.