The U.S. Government signed the Social Security Act into law in 1935, aiming to create a form of social insurance that safeguards retired Americans against bad turns of fortune. While the program has supported many Americans over the past 85 to 90 years, relying on the funds too heavily is risky.
“Although we view Social Security as a retirement income benefit, it’s actually an insurance program designed to supplement retirement income, not to replace your preretirement earnings. This is especially true for workers with earned income that exceeds the wage base for Social Security tax, which is $160,200 for 2023,” says Cody Garrett, a certified financial planner and the owner of Measure Twice Financial.
Social Security benefits should be part of a much larger retirement plan — not only due to their size but because the program’s future is uncertain.
“I encourage retirees to view Social Security as a side dish, not the main course,” Garrett says, “Like the stuffing alongside your Thanksgiving turkey.”
[READ: How Much You Will Get From Social Security.]
Social Security Is Not Enough to Replace Retirement Savings
Americans planning to rely solely on Social Security benefits in retirement will likely have trouble making ends meet.
“Social Security was designed to complement pensions and savings, not replace them.” says Jeff Rose, certified financial planner and founder of the website Good Financial Cents.
The average monthly benefit is about $1,706 as of August 2023.”For many, that isn’t enough to cover all the living and health care costs, especially with prices on the rise,” Rose says.
And the more you make, the less of your preretirement income Social Security benefits will replace.
“If you make the average wage of $55,000, Social Security will only replace roughly 37% of your preretirement income at full retirement age. If you earn more than $160,000 annually, the income replacement percentage drops drastically to about 18%,” says Christopher L. Stroup, a certified financial planner at Abacus Wealth Partners in Santa Monica, California.
“It’s critical to understand that the more money that you make, the higher your responsibility to save on your own and replace your income in retirement,” he adds.
Social Security Benefits Lack Flexibility and Features
Social Security benefits also lack features that come with many retirement accounts, like the ability to withdraw all of the funds at once or take out loans against your account balance.
[Related:Retirement Account Withdrawal Strategies]
“Unlike your 401(k) or IRA accounts, you can’t borrow against your Social Security balance. This is why it’s important to save up during your working years so that you can afford large-ticket items and pay for unexpected medical bills during your retirement years,” Stroup says.
The Future of Social Security Benefits is Uncertain
Beyond the shortfalls of Social Security benefits, there’s also the risk that the program may not pay out your full benefits when it’s your turn to retire.
The Social Security Administration reports that due to a drop in the birth rate of Americans, from three to two children per woman, the program’s cost is now higher than the revenues funding it. Benefits are, as a result, being paid out of the program’s trust, which is expected to run out in 2037. Once exhausted, the SSA says ongoing revenues will fund just 76% of the scheduled benefits.
“There’s uncertainty about the future of Social Security; the trust fund is predicted to run out, and after that, it might only cover about a portion of the promised benefits. And don’t forget, inflation can eat into the value of these benefits over time,” Rose says.
[Related:The Future of Social Security: Will Social Security’s COLA Boost Mean Benefits Run Out Sooner?]
While the SSA has ideas on how it may increase revenues for the Social Security program, there are no guarantees. So, while you can hope for the best come retirement, the safer bet is to build a retirement plan that doesn’t count on your full Social Security benefits.
“Having additional savings like a 401(k) or an IRA is crucial to ensure a more comfortable and secure retirement,” Rose says.
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Why You Shouldn’t Count on Social Security originally appeared on usnews.com
Update 09/29/23: This story was published at an earlier date and has been updated with new information.
