Many Americans rely on Social Security benefits to see them through retirement, but how much should they really be depending on those checks?
Not very much, experts said.
Social Security is not being used as it was intended, said Ric Edelman, executive chairman and co-founder of Edelman Financial Services in Fairfax, Va. and author of “The Truth about Your Future.” When Congress and President Franklin D. Roosevelt created the system in 1933, the program was designed to be a safety net for Americans — for those who had no financial support. Now, “a great many Americans are relying heavily on Social Security to maintain their lifestyle in retirement.”
More than 66,000 people received Social Security and/or Supplemental Security Income in August, more than 46,000 of which were Americans 65 and older. Social Security makes up a majority of cash income for 61% of elderly beneficiaries, and a third rely on this benefit for 90% or more of their income, according to the Center on Budget and Policy Priorities, a governmental budget policies think tank based in Washington, D.C. The average monthly retirement benefit under the Old-Age and Survivors Insurance was $1,326, according to the Social Security Administration. Retired workers received an average of $1,371 while spouses of retired workers received $714 and children of retired workers received $659. “Social Security is funding as last resort, and if it goes away there is no government program to serve as a fall back,” Edelman said. “This is the fall back.”
See: These Americans will never get Social Security benefits — and we don’t mean millennials
How did Americans get here?
Unfortunately, it’s a familiar story: many Americans just haven’t saved enough for retirement, either because of poor planning or an inability to put money away for their futures. Most Americans have access to some sort of workplace savings account, such as a 401(k) plan or 403(b) plan, but there are still 40% who don’t, said Robert Reynolds, president and chief executive officer of Boston-based investment management firm Putnam Investments and author of “From Here to Security: How Workplace Savings Can Keep America’s Promise.” The good news? Employees are starting to take retirement saving more seriously, as financial services see an uptick in opened employer-sponsored accounts and contributions, as well as more engagement between employers and employees on financial well-being. There are also other sorts of retirement accounts available outside of work, such as traditional or Roth individual retirement accounts.
Don’t miss: Why retiring in America has become less attractive
How much should Americans ideally be relying on Social Security?
First, Americans should look at how much they depend on Social Security, Edelman said. They should either look at how much they receive in these benefits, and how much that benefit funds their lives (or their parents if they’re not yet receiving their own checks). Then, cut that check by 30% and see if that reduction would put them in the red, he said. “Could that cause your mom to be homeless? Could she afford food and medications?” he asked. Depending on the answers, “you have to start developing a plan to deal with it.” Younger Americans in particular need to take notice and adjust their expectations, as some sort of change to the Social Security system is expected within the next 13 years.
What’s the future for Social Security?
The system is expected to be exhausted by the early 2030s, experts say. Americans are still paying into the system every paycheck. What will happen, however, will be a cut to the benefits Americans receive. The government has noticed. The Social Security Administration put out a note last year saying Social Security and Medicare are both facing long-term shortfalls under the current structure, and that they together accounted for 42% of federal program expenditures in the fiscal year of 2016. In its 82 years, Social Security alone has collected almost $20 trillion — and it’s already paid out $17.1 trillion, leaving about $2.8 trillion in its two accounts (the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund) at the end of last year. The government expects the accounts to steadily decline until they are depleted in 2034. One way to relieve this over-exhaustion of the program is a 31% cut in benefits, the House Ways and Means Social Security Subcommittee Chairman proposed last December, which includes raising the full retirement age to 69 (up from 66 to 67), reducing benefits for above-average earners and eliminating the cost-of-living adjustment for individuals earning more than $85,000 (or $170,000 for married couples).
See also: Trump administration wants to replace Social Security numbers with something less vulnerable
Many people overestimate their Social Security benefits
There are a lot of nuances to claiming Social Security benefits, such as when to do it or what is considered when calculating these payments. Two in five future retirees say they don’t know what can be withheld from payments, and more than half are not sure how divorcees or children benefit, if at all, from Social Security, according to a Nationwide survey of more than 1,000 adults. Retirees are also more likely to overestimate their benefits than underestimate them — about 25% of recent retirees said their Social Security payments are less or much less than expected, the survey found. Three in five said they received what they expected. Future retirees can create an account with the Social Security Administration’s “my Social Security” to view their statement, where they can see estimates for their future benefits and earnings once a year to verify wages and taxes paid are correct.
What can people who rely so much on Social Security do?
Americans should look at expenses they can control on a monthly basis, such as shelter, food and clothing, said Ryan Miller, a wealth manager at Plancorp Financial Services in St. Louis. Some expenses, such as health care, vary widely and are constantly increasing. Americans, at least those in good health, can also control how long they work and what they do, so if they can keep working, they probably should, he said. “They may just have to work another five or 10 years, or decide the kind of lifestyle they want they may have to turn back a little, and not be so extravagant,” he said.
Though the trust funds for Social Security aren’t expected to be depleted for another 17 years, which means older Americans today don’t need to do much, those about 15 to 20 years out from retirement should start acting now, Edelman said. “They need to assume their Social Security benefits will be smaller than they anticipate,” he said. “Someone who is 40, or 20, will probably see a radical difference.”
To get early access to many more stories like this, subscribe to Retirement Weekly.