This coming August, we’ll be celebrating Social Security’s 84th anniversary since it was signed into law by Franklin Roosevelt. Over its nearly 84 years of existence, more than 79 of which have included payouts to retired workers, it’s kept countless seniors, disabled workers, and survivors of deceased workers above the federal poverty level.
But as impressive as Social Security is as a program, one thing it was never intended to become was a primary source of income.
Chances are that you’re relying too much on Social Security
According to the Social Security Administration, average workers should see about 40% of their working wages replaced during retirement via a Social Security benefit, with perhaps a slightly higher percentage for lower-income workers, and a smaller percentage for the more well-to-do. This suggests that while Social Security will be there to assist seniors, they should have other sources of income, such as retirement accounts or a pension, that supersede their Social Security benefit in importance.
Yet, according to an annually released survey from national pollster Gallup, Americans’ reliance on the program remains unmistakably high — which, as you’ll see, isn’t a good thing.
The latest Gallup survey, which was conducted in early April, asked both current retirees and nonretirees how much they currently rely on, or respectively expect to rely on, Social Security income. Among current retirees, 57% consider it a “major source” of income, with 33% noting it’s a “minor source.” Meanwhile, 33% of nonretirees expect Social Security to be a “major source” of income, with 50% proclaiming it’ll be a “minor source.”
One way of viewing this data is by looking at it in the context of “respondents who’ll need their Social Security income to make ends meet” versus “respondents who don’t consider Social Security a necessary source of income.” In Gallup’s poll, a combined 90% of current retirees, and a combined 83% of nonretirees, will lean on Social Security in some capacity during retirement. For current retirees, this 90% reliance ties a 17-year high, and is unchanged from last year. As for nonretirees, their expected reliance on Social Security is just 1 percentage point below a 16-year high, and down 1 percentage point from 2018.
Big problems are right around the corner
Given that Social Security has been around for more than eight decades and is pretty much incapable of going bankrupt, this heavy reliance on the program may not seem like a big deal. But make no mistake: Big changes in the program look to be on their way, and an undue reliance on Social Security could come back to haunt seniors in relatively short order.
Every year, the Social Security Board of Trustees issues a report on the short-term (10-year) and long-term (75-year) outlook for the program. In the newest report, released in April, the Trustees forecast the beginning of annual net-cash outflows from Social Security in 2020, with these outflows growing with each passing year. By the time 2035 rolls around, the $2.9 trillion in surpluses that the program has built up since inception will be completely gone.
Understand that there’s a big difference between not having any asset reserves and not having any revenue. Social Security will still be generating plenty of revenue each year as a result of its 12.4% payroll tax on earned income, as well as the taxation of Social Security benefits. This is what ensures that Social Security can never go bankrupt or just disappear.
But the program’s absence of excess capital would mean that across-the-board benefit cuts are necessary to keep the program solvent for a long period of time. The Trustees have forecast the need for an up to 23% reduction in retired-worker benefits by 2035 if no additional revenue is raised by Congress, or expenditure cuts made.
As of May, the average retired worker was taking home almost $1,470 a month. But a 23% haircut to this average payout would reduce it dangerously close to the federal poverty level, in 2019 dollars.
Know your options
The fact is, Americans can’t rely on Congress to bail them out. This means the onus of a healthy retirement is on each of us. Thankfully, there are steps to take to improve our financial standing.
The easiest way to reduce your reliance on Social Security is by taking advantage of the retirement and investing tools available to you. This might include a 401(k) plan through your employer — particularly handy if there’s a company match option — or setting up an Individual Retirement Account (IRA), which can offer up-front or back-end tax benefits, depending on which method works best for your tax situation and current income.
It also helps to enter retirement with little or no debt and an ample emergency savings fund for those just-in-case moments. Having money saved up for a rainy day will ensure that you’re not waiting on the edge of your seat for that next Social Security benefit check to be deposited.
But just as important is understanding your Social Security claiming options. Although there is no perfect claiming strategy, there are certainly clues that can assist in your claiming decision. Ensuring that you understand your options — which may include waiting years before taking benefits, undoing a claim, or maximizing household income via spousal benefits and/or child benefits — can help get the most out of Social Security. By knowing your options, even a potential 23% haircut to your payout doesn’t have to be devastating.