Few social programs have done more for Americans over the long run than Social Security. Today, it's a program that provides a monthly benefit to more than 62 million people and, according to the Center on Budget and Policy Priorities, helps to keep more than 22 million beneficiaries above the federal poverty line.
Social Security was never designed to be a primary income source
But what you may not realize about Social Security is that it's not exactly a program designed to be a primary income source -- even if 62% of existing aged beneficiaries rely on it as exactly that. The Social Security Administration (SSA) suggests that beneficiaries lean on their benefit to replace about 40% of their working wages. Though this percentage could be a bit higher for lower-income folks and lower for those people with higher annual earnings, the gist is simple: Social Security isn't a primary income source.
According to the SSA, the average retired worker brought home $1,414.73 in July 2017. Extrapolated over the course of a year, this works out to less than $17,000 in annual income. That's not a lot to live off of if Social Security comprises a major source of income during retirement.
Making matters even dicier, the newest Social Security Board of Trustees report foresees big trouble ahead for America's most important social program. Beginning this year, the program is expected to expend more money than it generates. Though we're only talking about a relatively small net cash outflow of $1.7 billion in relation to the $2.89 trillion Social Security has in its asset reserves, this outflow is projected to rapidly accelerate in 2020 and beyond. By 2034, all $2.89 trillion in excess cash is expected to be gone.
Should Congress fail to raise additional revenue or cut expenditures prior to 2034, an across-the-board reduction in benefits of up to 21% may be needed to sustain payouts through the year 2092. In today's dollars, that would mean an average monthly payout for retired workers of $1,117.64, or just over $13,400 a year. That's less than $1,300 above the federal poverty level in 2018.
And, just to add the icing on the cake, Social Security's asset reserves, which are required to be invested in special-issue bonds and, to a lesser extent, certificates of indebtedness, by law, are only earning about 2.9% annually, which may soon be less than the inflation rate.
It's no wonder that more than a quarter of retired beneficiaries in a Nationwide Retirement Institute survey from earlier this year reported that their benefit was "less than expected."
Should you go long on the stock market with your Social Security income?
So what can a person do to improve their long-term financial outlook? One idea that's commonly referenced is that of putting your Social Security income to work in the stock market. But is this a good idea? The answer really depends on when you plan to claim Social Security benefits.
Over the long run, there's little disputing the fact that the stock market is a fantastic creator of wealth. Despite 36 stock market corrections in the S&P 500 of at least 10% since 1950, each and every one of these downturns has eventually been erased by a bull market rally.
Maybe even more impressive is that more than half of these corrections in the S&P 500 were erased in less than four months' time, according to data from Yardeni Research. Historically, the stock markets' annual average return of 7%, inclusive of dividend investment and when adjusted for inflation, trounces all other investments, including housing, bonds, and gold.
But, here's the catch: Social Security offers a very handsome return of its own if you're willing to wait to claim your benefit. Beginning at age 62 (the earliest age an eligible worker can start receiving their entitlement), and continuing each year thereafter until age 70, retired worker benefits grow by 8% annually. That's actually better than the historic return of the stock market. Or, in easy-to-understand terms, you'd actually be receiving a higher guaranteed rate of return by letting your Social Security benefits grow over time than the non-guaranteed historic average for the stock market.
Are there exceptions to this? Absolutely. For instance, the S&P 500 has averaged a better-than-16% annual return since hitting its Great Recession low in March 2009. Then again, if you'd invested in September 2007, before the downturn, your annualized return over the past 11 years is just over 6% in the S&P 500. That's not bad at all, but if you would have claimed your Social Security benefit early and accepted a permanent reduction in payout in the process, thereby bypassing a guaranteed 8% annual increase in your monthly payout, you'd have made a poor decision. Timing is everything, and you simply can't time the stock market with any consistency over the long run.
However, if you've maximized your monthly payout by waiting until age 70, you have every incentive to put some, or all, of your Social Security income to work in the stock market. After all, longevity has increased dramatically over the past couple of decades, which means we need our money to last longer than ever.
In sum, investing your Social Security income into the stock market if you're an early claimant may not work out in your favor. But if you wait to make your claim, then the stock market could be a nice way to bolster your nest egg.