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4 Hard-to-Believe Social Security Facts

By Christy Bieber - Apr 4, 2020 at 12:02PM

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Some of them will surprise you!

Social Security is one of the most important benefit programs in America, but many people have misconceptions about it or don't fully understand how it works. By acquiring knowledges about how Social Security functions, you can become better prepared for retirement.

Check out these four facts below. They'll help you learn more about what to expect when you claim benefits in the future. 

Social Security card sitting on top of money.

Image source: Getty Images.

1. Social Security's average benefits may cover just over 1/3 of household expenses

Millions of Americans expect to rely on Social Security benefits as their primary source of income when they're retired -- or even as their sole source. Sadly, Social Security is woefully inadequate to provide for your needs without supplementary savings.

In fact, the Bureau of Labor Statistics reported mean average spending of households 65 and over was $50,860 in 2018 (the most recent year for which data is available). The average Social Security benefit, on the other hand, was just $18,036 in 2020. Even if spending stayed the same since 2018, the average benefit would cover around 35.5% of it. And it's likely that spending has increased over the past two years due to inflation.

The shortfall between spending and the size of your benefit check exists because Social Security is intended to replace only about 40% of pre-retirement income -- it's not meant to be your sole source of retirement funds. 

2. Social Security lifts more than 21 million people out of poverty

While Social Security doesn't provide enough for most people to live on without supplementary savings, it's still a vitally important program that's relied upon by millions. According to the Center on Budget and Policy Priorities, benefits lift 21,661,000 people out of poverty. 

This includes not just seniors who receive retirement income, but also people of all ages who receive various types of benefits including survivor benefits, disability benefits, and Supplemental Security Income (SSI)

3. Social Security can't run out of money under current laws

Studies have repeatedly shown the majority of workers fear Social Security benefits won't be there for them. In reality, Social Security cannot run out of funds because of the way the program is structured. 

Social Security is funded largely by payroll taxes collected from current workers. So unless the laws change and payroll taxes are ended, there will always be some money coming into the system. In fact, even if the Social Security trust fund runs short in 2035, as it's projected to do, there will still be enough money coming in from tax collection to pay around 80% of promised benefits

Even this cut is unlikely to occur as there are lots of options for shoring up Social Security's finances, including raising the payroll tax rate or lifting income limits subject to the payroll tax. 

4. Cost-of-living adjustments for Social Security are based on price increases for urban wage earners and clerical workers

Social Security recipients receive periodic cost-of-living adjustments. Whether beneficiaries get an annual adjustment depends on how a specific financial index measures rising prices.

Specifically, benefit increases are tied to CPI-W, or the Consumer Price Index for Urban Wage Earners and Clerical Workers. This measures the increase in prices these workers are subject to. 

Unfortunately, this probably isn't the best financial index to determine if prices are rising for seniors who have different spending priorities than urban wage earners. Seniors generally spend more on healthcare, for example. And since the index may not accurately take into account the rise in costs seniors actually face, there's some evidence suggesting Social Security benefits are losing their buying power over time

Some experts have suggested that cost-of-living adjustments should be determined using CPI-E instead, which is the Consumer Price Index for the Elderly. And while it obviously makes more sense to use an index that specifically measures price changes for seniors, this switch would likely lead to bigger raises, so the Social Security trust fund could run short sooner unless other changes are made to raise revenue. 

Know the facts about Social Security 

While the facts show you can rely on Social Security to be there for you, it's also clear that benefits aren't going to provide enough income for most retirees -- particularly since their buying power is decreasing. While you should factor Social Security into your retirement plans, it's essential you have enough supplementary savings in your retirement accounts to help you maintain a good quality of life in your later years.

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