Social Security is, for many Americans, a financial lifeline during retirement. Even though the January 2018 snapshot from the Social Security Administration shows that the average monthly payout is just $1,407, this is more than enough to keep over 15 million seniors out of poverty each and every year, according to a study from the Centers on Budget and Policy Priorities.
However, in spite of the program's seemingly growing importance for seniors during their golden years, there's still a significant knowledge gap that exists between Social Security and the American public. In other words, people don't really understand the basics of how Social Security works or even how much they'll be paid. How do we know this? Surveys consistently show that the public isn't "in the know."
Most Americans are clueless about their Social Security benefit
Nearly two weeks ago, MoneyTips released the results of an online survey that examined Americans' financial preparedness for retirement. In particular, it asked respondents about whether they'd picked an amount they needed to save to retire comfortably and whether they've ever checked their Social Security benefit estimate. As you might imagine, the answers to both questions were worrisome.
A whopping 63% of respondents hadn't picked an amount to save for retirement, with another 12% choosing under $1 million. This is significant because a growing number of financial advisors are cautioning that $1 million may not be enough money to last throughout retirement. In other words, just 25% of those surveyed has a number in mind that would, by progressive definitions, be adequate to last throughout retirement.
Arguably even more worrisome were the results of the following question asked by MoneyTips:
Have you ever checked your Social Security benefit estimate?
- No, not expecting any (24.7%)
- No, but I should get something (21.6%)
- Yes, checked more than a year ago (22.7%)
- Yes, checked within the last year (30.9%)
This survey suggests that a mere 31% of the population has a good bead on what they'll be paid by the Social Security Administration when they retire. The other 69% are somewhat or entirely in the dark.
A quarter of the population is likely wrong
The first thing that probably stands out is the roughly 25% of respondents who believe that they'll receive no Social Security payment. While it is true that Social Security is a benefit that needs to be earned through work over one's lifetime, it's paid to around 90% of all Americans.
More importantly, Social Security benefits can continue, in theory, ad infinitum. Even though the program is facing an estimated $12.5 trillion cash shortfall between 2034 and 2091, based on the current payout schedule, the primary funding mechanism for Social Security -- its 12.4% payroll tax -- ensures that money is always being generated. As long as Americans continue to work, and Congress leaves the funding mechanisms untouched, the payroll tax will keep being collected, allowing for funds to be disbursed to eligible recipients. Understand that this doesn't mean the current payout schedule is sustainable. However, it does mean that eligible beneficiaries will receive some form of payout come retirement.
In short, if you earn 40 lifetime work credits, you'll receive retired worker benefits. It's that simple.
"I should get something"
Unless you're Warren Buffett or Bill Gates, there's a pretty good chance you're going to rely, in some capacity, on your Social Security benefit during retirement. It also means that "I should get something," as cited by almost 22% of respondents, isn't an acceptable answer.
According to Gallup's April 2017 survey, 34% of nonretirees expect Social Security to be a "major" source of income during retirement, with another 45% implying it'll be a "minor" source. That's essentially four out of five workers needing income from Social Security to help make ends meet during their golden years.
But how can you make ends meet if you have no clue what you'll be paid once retired? The Social Security Administration sends retirement benefit estimates on paper to workers once every five years, although Americans can check their estimated retirement benefit through their "My Social Security" online account at any time. You really have no excuse not to create an account and check in at least once or twice a year.
Things can change over time
Even those 23% of respondents who've checked their estimated Social Security benefits before, but haven't done so in more than a year, need to do better. You might think you have a good idea what you'll be paid during retirement, but your benefit can shift depending on your work history and income.
The Social Security Administration takes into account your 35 highest-earning years, adjusted for inflation, when calculating your monthly payout at full retirement age. If you retire early, or take some time away from the labor force, that could certainly impact your payout. Each year less of 35 worked results in a $0 being averaged into your average annual earnings.
Similarly, getting a better-paying job could increase your average annual payout and boost what you'll receive from Social Security. If you aren't actively checking your estimated benefits with the Social Security Administration, or through a My Social Security account, you simply won't know if you'll have enough to cover your financial needs during your golden years.
Plus, checking your estimated benefits with regularity can give you an opportunity to ensure that the Social Security Administration has the correct earnings data on file. Mistakes are possible, and correcting errors before you begin receiving a Social Security check is a lot easier than trying to fix them afterwards.
Take the initiative, be proactive, and make today the day that you find out what your estimated Social Security benefit will be at full retirement age.