There are a number of issues coming to the forefront in this year's presidential election. Growing the U.S. economy, paying off our ballooning national debt, and protecting our borders are just some of these important issues. However, for the more than 40 million retired Americans who are receiving Social Security checks each month, and the tens of millions of baby boomers set to retire over the next two decades, the survival of the Social Security program may take precedence.
According to the latest report from the Social Security Board of Trustees, the program is facing a crisis of sorts in less than 20 years. The Trustees predict that the program will exhaust its excess cash reserves by 2035, mainly as a result of people living longer and being able to draw upon benefit payments for a longer period of time, and the exodus of boomers from the workforce, which is pushing the worker-to-beneficiary ratio down. All told, the program will soon be paying out more in benefits than what it's bringing in via payroll taxes -- and that's a problem.
Although plenty of solutions have been proposed to fix the program (more than a dozen, actually), each comes with its own set of shortfalls and talking points that prevent a single solution from emerging. As it stands now, a substantive cut of 21% in benefits could be coming by 2035 in order to sustain the Social Security program for another five-plus decades.
One chart showing how much retired workers are paid
Social Security is particularly important for today's workers, since a third of them (34%), according the Social Security Administration, haven't saved a dime toward their retirement. Another half (51%) of the workforce has no private pension coverage.
But what sort of monthly benefits should workers be expecting when they retire? Let's take a look at what America's approximately 40.1 million retired beneficiaries were taking home on a monthly basis as of December 2015.
As you can see from the above chart, there's a really strong cluster that begins right around $500-$599 per month and begins to taper off right around $2,300-$2,399 per month, so this is certainly where you'll find the vast majority of retired worker paychecks. Averaging this out over the course of the year, it means most retired Americans are probably living off of $6,000 to $28,800 in Social Security benefits annually. Comparably, that's not a lot of money, considering that the U.S. government pinpoints $11,770 in annual income as the federal poverty level in 2016. By this definition, around 12 million (or 30%) of the 40 million retired workers receiving benefit payments are on pace for less than $11,770 this year, and are thus below the poverty line.
In contrast, just 331,437 retirees, based on SSA data in December 2015, were netting benefit checks of $2,700 or higher per month. This works out to less than 1% of all retired workers currently receiving benefits.
What this chart can teach us
Your initial reaction to this chart might be "Oh, numbers!" And as a numbers guy myself, I can tell you that I'm attracted to charts that can tell a story in a simplistic manner. But this chart does indeed tell a very important story: namely, that waiting to file for benefits for as long as possible can really pump up your monthly Social Security payment in retirement, and that few people are actually doing this.
Eligible Social Security beneficiaries are free to file for benefits anytime between ages 62 and 70. However, the earlier you file for benefits, the lower your monthly payments will be. Each year that an eligible beneficiary holds off on filing for benefits, their payment grows by about 8%. It also grows incrementally on a monthly basis, too, so even waiting a few extra months before signing up can be helpful in boosting your benefit check.
What we're seeing from the aforementioned chart is that a good chunk of Social Security recipients are taking their benefits early, or perhaps around their full retirement age (which currently is 66). This is probably why we're seeing such a huge jump in beneficiaries being paid between $700-$799 and $1,700-$1,799 per month.
Scenarios for seniors to consider
One possibility eligible beneficiaries may want to consider is working into the early portion of their golden years if they're able to. Working income could allow seniors to cover their month-to-month living expenses without relying on Social Security, thus allowing their benefits to grow roughly 8% larger every year through age 70. Also, since the SSA averages out a worker's 35 highest-earning years to calculate their benefit, working a few extra years in your 60s may wind up improving the average benefit payment you receive.
Beneficiaries should also be aware that a mulligan of sorts exists should they need it. Form 521 allows beneficiaries who filed early for benefits but regret their decision to change their mind within a 12-month period. To repeat, you only have 12 months from the point when you sign up for benefits to file Form 521 and withdraw your benefits application, but if you do, and you repay every cent in benefits you've received from the program, it'll be as if you never took a cent from the SSA and your benefits will begin accruing at 8% annually once again.
The biggest key to getting the most out of Social Security is understanding the program. This chart could be just the kick-start you need to planning out how you'll maximize your lifetime benefits.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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