Please ensure Javascript is enabled for purposes of website accessibility

Retirees Are Losing Their Faith in Social Security

By Maurie Backman – Apr 25, 2018 at 6:18AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Will this key benefits program manage to keep up with its payments? Most retirees think not.

Social Security serves as a key source of income for millions of seniors today. But new data tells us that retirees are growing less confident in the program. Only 45% of retired workers think Social Security will continue to provide the same benefits it does today going forward, according to the Employee Benefit Research Institute. That's a drop from the 51% of retirees who felt the same way last year. The question is: Are today's seniors being overly pessimistic? Or are they really on to something?

The future of Social Security: Shaky but relatively certain

Many workers and retirees alike are under the impression that Social Security is at risk of going bankrupt. The reality, however, is that the program can't actually run out of money because it's funded by payroll taxes. Therefore, as long as we have a workforce and continue to take out those taxes, seniors will receive benefits in some shape or form.

Senior man on laptop, looking concerned

IMAGE SOURCE: GETTY IMAGES.

That said, according to the latest trustee report, Social Security's trust funds are set to run dry in 2034. Once that happens, the program might need to cut benefits by as much as 23%, which would no doubt constitute a major blow for current and future recipients. On the other hand, Congress has more than a decade and a half to intervene with a fix, and given the number of seniors who would no doubt be pushed well below the poverty line were those cuts to actually happen, lawmakers have a lot to lose by sitting back and doing nothing.

But even if benefits don't wind up getting slashed in the future, recipients still face a very real problem: Social Security isn't keeping up with senior spending. The program's meager cost-of-living increases have not done a good enough job of helping beneficiaries maintain their buying power in the face of inflation, partly because those boosts have been minor or nonexistent in recent years, and partly because they get eaten up by rising Medicare premiums before seniors even get their hands on them.

All of this means one thing for today's workers who are planning to fall back on Social Security in retirement: Be careful about relying too heavily on those benefits, and save for your own future instead. Otherwise, you might be in for a major financial struggle down the line.

Building your nest egg

Let's be clear about one thing: Social Security was never designed to sustain seniors on its own. In a best-case scenario -- meaning, none of the future cuts we talked about -- those benefits will replace about 40% of the average worker's pre-retirement income. Most seniors, however, need close to double that amount to live comfortably (not lavishly, mind you -- just comfortably). It's therefore on you, individually, to amass enough savings to pick up where Social Security leaves off.

Now the good news is that today's annual contribution limits allow for some serious savings in a 401(k) or IRA. Workers under 50 can put away up to $18,500 a year in the former and $5,500 in the latter, and these limits increase to $24,500 and $6,500, respectively, among those 50 and older.

Of course, not everyone can max out a 401(k) or even an IRA year after year, but if you commit to setting a decent chunk of cash aside each month, and invest that money wisely, you could accumulate a fair amount of wealth. Imagine you're 37 with no savings and start setting aside $400 a month until age 67. Let's also assume you invest heavily in stocks, and therefore generate an average annual 7% return on your savings (that 7% is actually a couple of points below the market's average). At the end of the day, you'll be sitting on $453,000, which, combined with whatever you do get out of Social Security, could make for a pretty decent retirement. Boost that monthly savings rate to $600, meanwhile, and you'll have $680,000 to work with.

Additionally, you can get more out of Social Security by being strategic about claiming benefits. For one thing, wait until your full retirement age to avoid having your benefits slashed. That age is either 66, 67, or somewhere in between depending on your year of birth. Furthermore, if you hold off on benefits past your full retirement age, you'll snag an automatic 8% boost for each year you delay up until age 70, and that increase will remain in effect for the rest of your life.

Finally, fight for raises during your career. The more money you earn from each job you have, the higher a benefit you stand to collect in retirement.

Though there's no need to write off Social Security anytime soon, you'll need more than those benefits to cover your costs in retirement. Save independently while maximizing those payments, and you'll be in a pretty good position to avoid financial stress when you're older.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.