For nearly eight decades, Social Security has been a financial rock for our nation's retired workforce. Today, according to an analysis conducted by the Center on Budget and Policy Priorities, more than a third of all beneficiaries (including survivors of deceased workers and the long-term disabled) are lifted out of poverty solely as a result of their guaranteed monthly payouts.
However, it's also a program that beneficiaries tend to lean on much more than they should. At last check, the Social Security Administration (SSA) found that 62% of retired workers were deriving at least half of their monthly income from Social Security, with 34% netting 90% to 100% of their income from the program.
Trusting in Social Security as a primary income source is dangerous
This overreliance on Social Security is worrisome for two reasons. First, Social Security is in some pretty deep trouble over the long run. Since 1985, the Social Security Board of Trustees' annual report has been cautioning that the program wouldn't generate enough long-term revenue -- "long-term" is defined as the next 75 years -- to cover expenditures. In simpler terms, the program is going to spend way more money by issuing benefits to eligible recipients than it's going to collect from its payroll tax on earned income, the taxation of benefits, and interest income on its nearly $2.9 trillion in asset reserves.
Possibly beginning in 2019 or sometime very soon, Social Security will expend more than it collects for the first time since 1982. Ongoing demographic changes that include the retirement of baby boomers, increased longevity over many decades, lower fertility rates, and growing income inequality are all playing a role in weakening Social Security and making the current payout schedule unsustainable. Assuming the Trustees' forecast is correct, the program will have burned through its asset reserves by 2034. If Congress does nothing to raise additional revenue, this could lead to a 21% across-the-board benefit cut for then-current and future retirees.
Secondly, even if lawmakers come to the rescue of the program, just as they did in 1983, it doesn't change the fact that the average Social Security benefit isn't all that impressive on a nominal basis. As of January 2019, per the SSA, the average beneficiary -- which includes all 63 million beneficiaries and not just retired workers -- was receiving $1,344.38 per month, or $16,132.56 per year. That's only 29% more than the federal poverty level in 2019, or $12,490 for a single individual. If this is your sole source of income as a senior, you could seriously struggle to make ends meet.
Where you live matters
Of course, where you live can play a big role in determining how far your Social Security dollars will stretch -- in more ways than one.
For example, owning your own home and having that home paid off before entering retirement is often a big weight lifted off the shoulders of senior citizens. However, more than 15% of seniors over the age of 65 today are renting, but a separate study from national mortgage banker American Financing found that 44% of seniors between the ages of 60 and 70 are still paying a mortgage when they retire. Chances are that $1,344.38 per month for the typical beneficiary isn't going to get you very far.
According to data released earlier this year by apartment research site Abodo, national median rent in the country for a one-bedroom apartment hit $1,025 in 2018. This means 76% of the average Social Security benefit is being gobbled up by rent on the national level. When broken down further, eight states had a higher average monthly rent for a one-bedroom apartment than the typical Social Security beneficiary would receive in a month:
- Massachusetts: $2,139
- Rhode Island: $1,732
- Hawaii: $1,676
- New York: $1,633
- California: $1,608
- Maryland: $1,504
- Vermont: $1,411
- New Jersey: $1,355
Chances are that if you're a senior and Social Security is your sole or major source of income, you'll struggle to simply pay for shelter in the above eight states. There are an additional seven states that have an average one-bedroom apartment rental price of between $1,013 and $1,331, which wouldn't be affordable, either.
You could be taxed, too
The state you choose to call home could also tax a portion of your Social Security benefits.
At the federal level, half of your benefits become taxable at the federal ordinary income rate if your modified adjusted gross income plus one-half of your benefits exceeds $25,000 as a single taxpayer or $32,000 as a married couple filing jointly. Should a single taxpayer or married couple filing jointly surpass $34,000 or $44,000, respectively, 85% of their benefits can be exposed to taxation at the federal level.
If and when you give Uncle Sam his due -- an estimated 51% of senior households are paying tax on their Social Security benefits today, per The Senior Citizens League -- you may also be taxed on your benefits by your state. Currently, 13 states tax Social Security benefits to some varied degree.
For example, Missouri has a relatively low cost of living, but it's one of the 13 states that imposes tax on Social Security benefits. Thankfully, the exemption levels are high, with individuals and couples allowed to earn $85,000 and $100,000, respectively, before any state-level tax on Social Security benefits kick in. Meanwhile, states like Vermont and West Virginia mirror the federal tax schedule, meaning it's pretty easy for even moderate-earning Social Security beneficiaries in these states to fall victim to double taxation.
Abide by the guidelines
As much as we might be born to break the rules, abiding by the SSA's recommendation of not counting on Social Security to replace more than 40% of the average worker's wages in retirement is a smart move. Even with the program lifting so many people out of poverty, a looming cash crunch, coupled with the fact that Social Security dollars continue to lose purchasing power over time, is all the more reason today's nonretirees should be focused on minimizing their reliance on the program.
To build on this point, it would also be a wise decision to consider the cost of living when you retire. If you're going to be somewhat reliant on your Social Security income, living in the Midwest, for instance, can allow your income to stretch much farther than if you were living in the Northeast or on the West Coast. Being mindful of the states that tax Social Security benefits, as well as the cost of living, can go a long way to help make your Social Security dollars count.