Just how much can you rely on Social Security income in retirement?

It’s been a question on more adults’ minds recently, as Baby Boomers increasingly reach retirement age. A question with uncomfortable answers, as it turns out.

The last decade has seen shrinking real-dollar benefits for retirees. That will only get worse over the next decade, as the US sees an exodus of Boomers out of the workforce and onto Social Security benefits.

On a nationwide economic level, that poses a serious problem for the federal budget. But Baby Boomers will experience a far more personal problem: most of them have nowhere near enough money for retirement.

How underprepared are we talking? A shocking 42% of Boomers have not even started saving for retirement, according to a recent study by Comet Financial Intelligence.

Fully 70% of Boomers have less than $5,000 saved, spelling real trouble as they enter their golden years.

Here’s what older adults need to know as they plan ahead for retirement.


More Americans Are Relying on Social Security for Retirement Income

Among adults aged 65 and over, the overwhelming majority (84%) receive Social Security income. That percentage has risen significantly since 1962, when only 69% of Americans over 65 took benefits.

Today’s retirees rely heavily on those benefits, too. For nearly two-thirds (62%) of households over 65, Social Security accounts for over half of their income. And for over a third of American retirees (34%), it makes up nearly all (over 90%) of their income.

Which is not what Social Security is designed to handle. According to the Social Security Administration, the benefit income is only designed to supply “about 40 percent of an average wage earner’s income after retiring.”

In 1962? It supplied even less than that, accounting for 30% of the average retiree’s income.


The End Is Nigh?

For decades now, analysts have known that Social Security in its current form is unsustainable.

And this is the year that Social Security’s costs surpass its income.

In their 2016 report, Social Security forecast that 2020 would be the year when costs surpassed revenue. Then in their 2018 report, they acknowledge it’s actually this year.

That means dwindling assets, as the trust fund depletes over the next 16 years. Social Security estimates that their trust fund will run dry in 2034.

Does that mean that suddenly retirees will stop receiving retirement benefits in 2034? No, of course not. Between now and then, the government will presumably continue slimming down benefits and raising taxes on younger workers to keep the program going.

Social Security will not disappear. But don’t expect it to provide the kind of benefits it has in the past, either.

In fact, the process of slimming retiree benefits has already started.


Retirement Benefits Already Declining

Ready for some bad news?

Between 2000-2017, Social Security benefits declined by 30%, in actual purchasing power. (In total dollars, benefits have still risen, but those dollars are worth far less due to inflation.)

The Social Security Administration knows how doomed its finances are. While their annual cost-of-living-adjustment (COLA) is technically determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers, benefits have still risen by far less than inflation over the last 18 years.

Consider that between 1975-1984, annual COLA increases routinely fell in the 6-14% range. The average COLA increase was 7.7%, and the highest was a whopping 14.3%.

Over the last ten years, the average COLA increase was 1.7%. The highest was 5.8% (in 2008) and that was a 25-year outlier.

In three of the last ten years, there has been no COLA increase whatsoever.

According to one study by The Senior Citizens League, retirees’ expenses rose by nearly $80/month over the last year, but the average Social Security benefit increase was about $4.


The Rise in Medical Costs

Rising medical costs pose a threat even for the minority of Baby Boomers who have more than a few thousand dollars saved for retirement. By some estimates, a healthy 65-year-old couple today can expect to pay around $400,000 in medical costs over their remaining lives.

And those estimates will only rise for adults younger than 65.

What are that majority of Baby Boomers who have less than $5,000 saved for retirement going to do? In all likelihood, they will be forced to rely on Medicare for the entirety of their post-retirement healthcare costs. But Medicare and Social Security are intertwined in some not-so-obvious ways, and their decline in spending power will likely happen in tandem.

Consider that in 33 of the past 35 years, medical care inflation has surpassed the CPI-W figure used to determine Social Security’s COLA increase.

Seniors who are enrolled in both Social Security and Medicare agree to have Medicare Part B premiums deducted from their Social Security benefits each month. Granted, Medicare Part B premiums are protected from rising faster than COLA increases. But as healthcare costs skyrocket, it means Medicare Part B premiums will eat up most (if not all) of any benefit increases served up to retirees from their COLA.

That puts retirees between a rock and a proverbial hard place, with the real purchasing power of their benefits shrinking, even as their healthcare costs rise. Medicare covers a lot, but it doesn’t cover everything, and many physicians no longer accept Medicare at all.


Looking Ahead: Americans Are Increasingly on Their Own for Retirement

Social Security won’t disappear entirely. But working adults today can expect to pay a whole lot more into Social Security than they’ll get back from it upon retiring.

Even today’s benefits won’t take you very far; the average monthly benefit check is $1,406.91, or $16,882.92 a year. That might cover your mortgage. Maybe. If you live in a very modest home.

As pensions have declined and defined contribution plans (e.g. 401(k)s) have risen, Americans must increasingly take the reins of their own retirement planning. That starts with knowing how much income you’ll need every month, and calculating what kind of savings you’ll need to accrue in order to achieve it.

Start with some flexible calculations using ChoosingWealth’s “not just for retirement” calculator, to get a better sense of your target nest egg and savings. You’ll also gain a sense for how long it will take you to reach, depending on how much money you can funnel into your retirement savings each month.

While you’re still fit, healthy, and working, start thinking in terms of creating financial independence. Your goal: to cover all of your personal expenses with passive income from investments.

Uncle Sam won’t pay all your bills in retirement, and neither will your employer. More than ever before, it’s up to you to plan your own retirement savings and income.

Start planning today, or risk being one of the 42% of older adults with no retirement savings!


How much of a nest egg will you need? How long will it take you to get there? Share your thoughts and projections below!