How Reliant Should You Be on Social Security?

Social Security cards with dice and poker chips

There’s no two ways about it: Social Security is a financial savior for our nation’s retired workforce.

According to an analysis conducted by the Center on Budget and Policy Priorities, the mere fact that qualifying aged beneficiaries are receiving a guaranteed monthly payout from the Social Security Administration (SSA) is keeping roughly 15.1 million retired workers out of poverty. That’s an incredible statistic, and it suggests that we would probably be dealing with a significant elderly poverty crisis right now if not for Social Security.

But the big question — other than “When should I claim?” — is, “How reliant should I be on Social Security?” And to be honest, there is no one-size-fits-all answer here. The real answer depends on perspective.

How reliant should you be: The Social Security Administration’s perspective

According to the SSA, Social Security benefits are designed to replace about 40% of the average retired workers’ wage income. The emphasis on “average” there is my own. This is to point your attention to the fact that your particular situation is unlikely to be “average.” If, for instance, your wage income was well above that of the average American during your career, you can expect your monthly benefit to replace less than 40% of your earned income. Meanwhile, lower-income folks would see a higher percentage of their working wages replaced during retirement from Social Security.

Ideally, you’d like to have saved enough throughout your lifetime, and invested a good portion of what you’ve saved, to be financially independent of Social Security when you retire. However, an April 2018 Gallup poll shows that just 1 out of 10 current retirees have achieved this feat. This means there’s a very good chance you, too, will be reliant on Social Security in some capacity when you retire.

Personal factors matter

Of course, SSA recommendations and guidelines can only carry an individual so far. At some point, we need to look beyond line-in-the-sand suggestions and toward the myriad of factors that make our situations unique to determine what role Social Security will play in our lives.

As noted, your financial situation is going to play a pretty important role in determining how heavily you lean on the program. Since Americans are pretty poor savers — just a third keep a detailed monthly budget, according to a 2013 Gallup survey — it’s probably not a surprise that 62% of aged beneficiaries are currently leaning on Social Security to supply at least half of their monthly income. Breaking that down even more, roughly a third of aged beneficiaries lean on the program for virtually all of their income (90%-plus).

In addition to your nest egg, your health comes into play as well. Life expectancies in the U.S. have risen nine years since 1960 as medicine and our knowledge of diseases and ailments has improved. Increased longevity could wind up catching those who’ve not saved enough off guard.

Now, for a curveball

Just to make things a bit more complicated, Social Security is also entering a rough patch in its existence. Beginning this year, and continuing through 2034, the program is expected to pay out more in benefits than it collects in revenue. The last time that happened was all the way back in 1982. By the year 2034, the $2.9 trillion in asset reserves that the program had built up since 1983 should be completely exhausted.

What’s this mean exactly? Well, the good news is that there’s no concern about Social Security’s longevity. The program’s payroll tax on earned income and taxation of benefits ensure that money will continue to flow in, allowing the SSA to make payouts to eligible beneficiaries.

The bad news is that this persistent and growing net cash outflow proves that the current payout schedule isn’t sustainable. The latest Trustees report has forecast the need for an across-the-board 21% cut to benefits by 2034 in order to sustain payout through 2092, without any additional cuts. Or to put this another way, your current or eventual Social Security benefit could be 21% smaller than you expect if lawmakers on Capitol Hill can’t find an amicable way to raise additional revenue, cut expenditures, or do some combination of the two.

It’s all about perspective

As I stated at the beginning, your reliance on Social Security is all about perspective and your unique situation. Given Social Security’s imminent issues, and Congress’s inability to pass any major reforms for the program, you’d ideally want Social Security to be nothing more than a minor source of your retirement income.

But if your nest egg isn’t what you want it to be, then your chances of Social Security playing a big role definitely increase. Should this be the case, among your potential options might be working into your late 60s, if not longer, as well as holding off on claiming benefits in order to maximize your monthly payout (assuming you’re in good health).

There is no one-size-fits-all answer, and that’s an important point for future retirees to keep in mind.

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