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Can I Rely On Social Security in Retirement?

Finance Mistakes Retirement

A few months ago, you may have heard news about the Social Security Administration’s largest trust fund being depleted by 2033. With the Old-Age and Survivors Insurance (OASI) Trust Fund heading for depletion and cash reserves running low, many are concerned about the solvency of Social Security and its ability to give the elderly a stable income in retirement. 

Many people pull income from various sources in retirement, whether it be from individual retirement accounts, a pension plan, personal savings, or Social Security. In this article, we’ll explore why some experts are worried about the Social Security program and what implications this has for your retirement savings plan. 

Key Takeaways 

  • The Old-Age and Survivor Insurance (OASI) Trust Fund will be able to pay all of its scheduled benefits until 2033, at which point its reserves will only be able to cover an estimated 77% of benefits. 
  • With the birth rate decreasing and the Baby Boomer generation entering retirement, the strain on the Social Security system is being felt nationwide. 
  • As lawmakers debate how to bolster the program and attempt to keep thousands of elders from slipping below the poverty line, it’s essential to plan for your retirement and know exactly what your sources of income will be.

The OASI Trust Fund In Danger 

Earlier this year, the Social Security Administration’s Trustees Report predicted the OASI Trust Fund wouldn’t be able to cover 100% of scheduled benefits for retired workers and their families by 2033. This moved up the predicted year of depletion by one year and has led to significant anxiety about the Social Security program’s solvency. 

The strain the Social Security system is currently under is caused by a few different factors. Life expectancy has increased over time, meaning more people have needed income for a longer amount of time after retirement. The Baby Boomer generation is also in the middle of retiring. Before being overtaken by millennials, the Baby Boomer generation was the largest in the U.S.’s history, so naturally Social Security had to stretch further to meet more people’s needs. 

There is a lot of debate over how to address solvency issues for Social Security. Many have suggested eliminating the tax cap on earnings over $250,000, which would likely keep the program solvent for another decade. Higher-income earners generally oppose this strategy as it places the burden of funding the program more on their shoulders. 

Some studies have suggested 73% of the Social Security program’s shortfall would be addressed by repealing the current cap on annual income subject to Social Security taxes, so long as this change isn’t accompanied by increased benefits for higher earners. As lawmakers go back and forth on the best way to address this issue, you can take action to protect your own retirement and build yourself a stable income stream once you stop working. 

Expectations Among Retirees 

A Gallup poll from 2023 gives significant insight into how non-retirees plan to use Social Security. In 2023, 34% of non-retirees expect Social Security to represent a significant portion of their income. 

Though this number has remained relatively stable over the past decade, it’s noteworthy that between 2001 and 2007 the number ranged between 25 and 29%. With a more significant number of people anticipating using Social Security benefits as a primary source of monthly income, the pressure is on to fix solvency issues with the program as fast as possible. 

Meanwhile, 48% of non-retirees in 2023 expect to use the program as a minor source of income. A greater number of non-retirees expected to use the program as a minor source of income in the early aughts. This has similar implications as the previous piece of information, suggesting that more people are increasingly relying on Social Security.  

Considering data from current retirees, 59% of retirees are using Social Security as a major source of income in 2023. 29% use it as a minor source of income. And 10% don’t use it as a source of income at all. Notably, there’s a 10% discrepancy between non-retirees expecting to use Social Security as a significant source of income and retirees who currently do. 

The most obviously concerning part of this data is that a significant portion of Americans still expects to use Social Security as a primary source of income, while at the same time, the program is facing solvency issues. 

Can You Expect To Rely on Social Security After Retiring? 

By now, it should be clear to you that you probably shouldn’t expect to rely on Social Security after retiring. In 2023, the average monthly benefit for retired workers was $1,825, and only 37% of men and 42% of women receive over half of their income from Social Security. Just 12% of men and 15% of women rely on Social Security for over 90% of their monthly income. 

While it’s technically possible to survive just off of Social Security, your comfort will largely depend on your financial goals for retirement. Know how much you expect to spend each month on rent, any debts you still owe, utilities, groceries, and other essential purchases. Compare that to the benefits you expect to earn from Social Security. 

Remember that your monthly benefit from Social Security is contingent on your highest 35 years of earnings. If you don’t have 35 years of earnings before retirement, remember that each year below 35 will count against your total average, with the Social Security Administration listing it as a year of $0 earnings. This is an especially important consideration for people planning to retire young. 

With the OASI at risk of depletion a decade from now, it’s never been more important to consider other retirement planning options than Social Security. 

Pensions and Employer-Sponsored Retirement Plans 

Many people take a significant portion of their post-retirement income from employer-sponsored retirement plans. Pension plans, while becoming increasingly rare, are a retirement income stream for some people. Pensions differ from 401(k)s in that contributions are made by employers, not taken from employees’ wages. 

A pension plan is an example of a defined-benefit plan, which involves an employer promising to pay an employee a specific monthly payment after retiring for the rest of their life. Employers are liable to make this payment, regardless of the performance of their own assets. 

Defined Contribution Plans

A 401(k) retirement plan has become a much more widespread option. This type of plan is called a defined contribution plan and involves employees deferring a part of their paycheck into a separate retirement account. This money is pre-tax, meaning you get to deduct your 401(k) contributions from your taxable income each year, with the expectation of paying taxes on withdrawals you make in retirement. 

If you set up a Roth IRA, that’s one way of having a post-tax retirement plan. Filling an account with after-tax money means you pay income taxes on your money in the present, with the expectation of not paying taxes on future withdrawals. A Roth IRA is a great option for people who anticipate being in a higher income tax bracket during retirement. 

The demise of defined-benefit plans is an interesting topic that deserves its own article. In the 1980s, workers could expect to put in 20 to 30 years of work for a company and be rewarded with a steady paycheck until they died. An increasing number of companies have opted for defined contribution plans over the years, though, largely hoping to reduce financial pressures on the company to fund pension plans. 

If you’re lucky enough to get a pension plan in 2023, take advantage of it. And if you’re relying on a 401(k), see if your company allows contribution matching, and try to maximize your monthly deferrals. 

Retirement Savings Habits 

When planning for retirement, there are a number of good habits to try to adhere to. Have a clear idea of when you want to retire and what kind of living situation you want to have. The more concrete your plans are, the more concrete your budget can be. Make an inventory of your current assets, current income sources, and expected income sources. Once you have an idea of how much money you’ll make in retirement – taking taxes into account – you can more easily gauge what you can afford. 

Automating savings is another great tip for retirement savings. It’s often the initiative required to save and invest money that keeps people from doing it. Automating your savings is one way of reducing the demand on your time. 

Finally, you can talk with a financial expert to have a better understanding of how your investments are working for you and whether you need to adjust your portfolio. No one wants to run out of money in retirement, so having a good sense of where your money will come from and where it will go is key to protecting your financial stability. 

The Bottom Line 

With the Social Security Administration worried its largest trust fund will be depleted by 2033, many Americans are becoming increasingly pessimistic about Social Security’s ability to provide them with a steady income. When preparing for retirement, it’s a good idea to know what kind of money you’ll need to live comfortably. Whether that means relying entirely on Social Security or planning to get income from other sources like a 401(k) or pension plan will depend on your needs. 

Do more research to understand what retirement options are available to you. 

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Personal Finance Expert
Eric Rosenberg is a personal finance expert. He received an MBA in Finance from the University of Denver in 2010. Since graduating he has been blogging about financial tips and tricks to help people understand money better. He is a debt master, insurance expert and currently writes for most of the top financial publications on the planet.

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