Today, we celebrate our freedom as a nation, as was symbolized by the signing of the Declaration of Independence 242 years ago. Whether we're with friends or family, manning the barbeque, out enjoying a sporting event, or preparing to unleash an arsenal of fireworks, we as Americans understand and appreciate the freedoms afforded to us.
However, one "freedom" that continues to elude many Americans is the ability to retire comfortably, and on your own terms.
According to a Bankrate survey released in March, most Americans fail to save an adequate amount of their income. While most financial advisors recommend that people save 15% or more of what they earn, just 16% of respondents to Bankrate's survey were heeding this advice. By comparison, 19% weren't saving a red cent, 21% were putting away 1% to 5% of their earnings, and another 25% were saving 6% to 10% of their income. In another context, essentially two-thirds of Americans are saving nothing or very little, thusly putting their retirement in jeopardy.
Americans are leaning heavily on Social Security
One thing that has happened as a result of poor saving rates in recent decades is a growing reliance on Social Security to provide a financial foundation. Though it's a program that's only designed to replace 40% of working wages for the average retired worker, it's currently leaned on by 62% of aged beneficiaries for at least half of their monthly income, per the Social Security Administration. Worse yet, 34% of aged beneficiaries rely on Social Security for virtually all of their income (90% or more).
Still, it's a Gallup survey from April 2018 that's truly telling. Gallup asked both retirees and non-retired workers what role Social Security currently plays for them, or is expected to play in the future. Of current retirees, 57% cited that it was a "major source" of income, compared to 33% who considered it a "minor source," and the 10% who responded that it wasn't a source at all. Among non-retirees, 30% expect Social Security to be a major source of income, with another 54% suggesting it will play a minor role, and 14% not expecting it to be a source of income.
Considering that non-retirees tend to overestimate their ability to prepare for the future, the percentage of retired and non-retired workers who'll have complete freedom from Social Security -- i.e., not rely on it as a source of income during retirement -- is probably at, or just above, 10%.
Meanwhile, an analysis conducted in 2016 by the Center on Budget and Policy Priorities found that the mere existence of Social Security and its guaranteed monthly payout is responsible for keeping an estimated 22.1 million people out of poverty. Of these folks, 15.1 million are retired workers. While retirement may not be lavish for these more than 15 million retired workers, it proves beyond a shadow of a doubt that building a financial foundation is rare without Social Security playing a role.
Big trouble awaits
Though Social Security payments have been nothing short of a godsend for seniors over the past 78 years, the program is also on the verge of major changes that could adversely impact the perceived financial freedoms afforded to current and future retirees.
According to the newest Board of Trustees report, the program is on track to pay out more in benefits than it generates in revenue this year. This'll be the first time that's happened since prior to the Reagan administration reforms passed in 1983.
Between 2018 and 2034, the roughly $2.9 trillion in asset reserves that've been built up over more than three decades will be depleted. With no excess cash estimated to be in its coffers by 2034, the Trustees intimate that an across-the-board cut to benefits for current and future beneficiaries of 21% may be needed to sustain payouts through the year 2092. That's a terrifying proposition given how few people aren't reliant on Social Security in some capacity to help make ends meet when they retire. Based on the monthly average retired worker benefit of $1,412 as of May 2018, a 21% reduction would lead to an average monthly payout (in 2018 dollars) of $1,115. That's only $103 a month above the federal poverty level for the average retired worker!
It's time to break the cycle
In short, no one is denying the role Social Security has played up to this point in helping retirees form a financial foundation. But, truth be told, this cycle needs to be broken with today's working-age Americans. Social Security was never designed to be leaned on this heavily, and changing demographics are likely to sting those who continue to substantially rely on Social Security in the decades to come.
How does the cycle get broken? It means Americans will need to formulate a budget and stick to it in order to save more of their income. A 2013 Gallup poll found that just a third of American households stick to a detailed monthly budget, which makes understanding your cash flow, and therefore saving a reasonable amount of money, almost impossible.
It also means putting the money you do save to work over the long run. Sure, the stock market may have its hiccups every now and then, but there's been no more consistent creator of wealth over the long term.
No one ever said the path to financial freedom was easy. If you want your shot at the American dream, which includes financial freedom, you'll need to be proactive about saving more of your income and putting those savings to work.