Why Social Security Should Not be Your Retirement Plan
By Michael McDonald
Social Security provides only modest benefits. Yet for 65 percent of beneficiaries, the federal payouts make up the majority of their cash income. For another 36 percent of recipients, Social Security provides 90 percent of their income. And for 24 percent of them, Social Security is their sole source of income.
If Social Security were to disappear tomorrow, more than half of all retirees would have no significant income to fall back on.
The Program’s Sustainability Is in Question
For most retirees who by definition are beyond their prime working years, there is little that could be done to reverse what would be a sad state of affairs. Younger generations are another story, though. Consider these reasons why younger workers should not rely on Social Security to fund their retirement.
- Social Security finances are insecure.
- The benefits are too small to provide for a comfortable retirement.
- Most people can save more on their own than what Social Security provides.
The Social Security Administration has said that the federal program, as well as Medicare, “cannot sustain projected long-run program costs under currently scheduled financing.” In other words, Social Security benefits are not sustainable at current levels unless the program is modified in some way, such as by raising taxes, lowering benefits or both.
Given the risk of benefit cuts, younger generations should not rely on Social Security to bankroll their retirement. What’s driving Social Security’s insecurity? The size of the retiring Baby Boom generation, falling birth rates (fewer workers paying into the program), Medicare expenditure growth rates and slower income growth are straining the program, which has been a safety net for millions of retirees.
Benefits Are Relatively Modest
Another problem with using Social Security as a retirement plan is that the benefits paid out are relatively modest. The average Social Security monthly benefit is about $1,300 per individual and about $2,200 for couples. That adds up to annual incomes of roughly $15,600 and $26,400, respectively. For people hoping to enjoy their golden years without having to worry about their finances, this level of annual income will not be sufficient.
Social Security pays out benefits based on what workers pay into the system, the age at which they claim benefits and other factors. Essentially, people will have to earn more to collect more. The benefit in 2015 is capped at a maximum $2,663 a month for those retiring at age 66, which is the full retirement age. If they claim their benefits early at age 62, that benefit falls to $2,025. Wait until age 70 to collect and retirees in 2015 will get $3,501 a month. Clearly, waiting a few years to retire can dramatically increase benefits no matter how much you earn.
Still, Social Security benefits will never be high enough to offer a lavish retirement. Relying on Social Security benefits to fund a retirement is a recipe for forced frugality for the remainder of one’s life. For those interested to learn what their benefits might amount to in retirement, check out the SSA’s online calculator.
Save More to Supplement Possible Cuts
Perhaps the easiest way for people to avoid having to rely on Social Security benefits for their retirement is to save more. The median income among U.S. workers is about $54,000. The average savings rate is 4.9 percent, according to the Federal Reserve. That rate is too low for most people to be able to save enough for a comfortable retirement. So if an individual earns the median income and gets a 2.5 percent annual raise, then saving 7.65 percent of their own income in a tax-deferred account like a 401k or IRA would net them far more at retirement than what Social Security provides.
A college graduate at age 22 today, earning $54,000 a year with a 2.5 percent annual raise and saving 7.65 percent of income annually — the same rate that a worker is required to pay into Social Security — would have a nest egg of more than $900,000 after working for 44 years to age 66. That assumption is based on a 5 percent annual investment return, which is below the average rate of return for stocks over the last few decades.
The retiree could then draw 4 percent of that nest egg for an annual income of nearly $40,000. By comparison, using the SSA calculator, Social Security benefits for that income level provide about $2,000 a month or $24,000 a year. This example illustrates how important long-term savings are to creating a comparable lifestyle in retirement.