4 Harsh Realities of Social Security That Future Retirees Need to Know

Many Americans look forward to the time when they’ll be able to claim Social Security benefits. After all, receiving a guaranteed income for life from the government may seem like an ideal way to fund an enjoyable retirement.

The reality, however, is that Social Security benefits may not be as generous as you think. And you could end up in dire straits if you over-rely on them as a retirement income source. 

To make sure you don’t end up suffering financial insecurity in your later years due to a misunderstanding about the role that Social Security will play in funding your future, you need to know these four harsh truths about the benefits you’ll get in your golden years. 

1. The average benefit in 2022 is just $1,657

Future retirees often assume that they’ll be able to live on Social Security alone if they need to —  or that their retirement benefits will at least be a primary income source that covers many of their essential costs.

The reality, however, is that the average benefit in 2022 comes in at only $1,657 total according to the Social Security Administration. That means if you were reliant on Social Security without any additional savings, you would need to live on an annual income of just $19,884 if your monthly benefit was around the average. 

This is only a bit above the federal poverty level for a household size of one, and it’s far below the amount of money you’d actually need to live a comfortable life. 

2. Benefits are meant to replace only 40% of pre-retirement income

Knowing the average benefit sheds important light on what you can realistically expect Social Security will do for you. But that number alone isn’t enough to give you a clear picture of how much your own benefit will be. After all, you could receive checks that are above or below the average.

That’s why it’s also helpful to understand that Social Security benefits are designed to replace approximately 40% of pre-retirement income for seniors. For those with lower annual salaries, it will replace a bit more than this and for the highest earnings, it could replace much less — but this is a good general guide. 

Understanding that retirement benefits will only give you around 40% of what you were earning before leaving work helps to drive home the necessity of supplementary savings. Most financial experts advise replacing around 80% of earnings at a minimum in order to avoid drastic lifestyle changes. Even if you plan to drop your spending more than that, a 60% cut to your take-home pay would seriously change your quality of life.

It may seem surprising to realize that your benefits equal such a small percent of earnings. But the reality is that’s all they were designed to do. Social Security is supposed to work in conjunction with a pension and savings to support you, rather than being your only source of retirement funds.

3. Cost of Living Adjustments aren’t keeping pace with inflation

One big reason why so many future retirees anticipate relying on Social Security is that benefits are supposed to be protected against inflation. As the cost of goods and services rises, benefits go up as well thanks to periodic Cost of Living Adjustments that are built into the program. 

These COLAs are based on year-over-year changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When CPI-W shows that costs have gone up, benefits increase by a specific percentage as well. 

Unfortunately, CPI- W doesn’t reflect senior spending very accurately. Further, the formula measures inflation during a specific time period each year. When prices are rising quickly, it may not provide a large enough raise to actually keep pace with rapidly rising costs. 

The consequence of inadequate COLAs is that Social Security benefits lost an estimated 32% of buying power between 2000 and 2021, according to an analysis by the Senior Citizens League. It’s important to realize that the value of retirement benefits is likely to erode over time so you can plan for the fact that your Social Security income isn’t likely to stretch as far later in retirement. 

4. Many people are forced to claim benefits sooner than preferred 

Many people hope to keep working and to put off claiming Social Security. It’s smart to plan for this because Social Security benefits increase if you delay filing for them. While you can claim benefits beginning at 62, delaying as long as possible until 70 will allow you to raise the amount of your monthly checks. 

Unfortunately, data from the Employee Benefit Research Institute shows that many workers are forced to leave work much sooner than anticipated. In fact, 26% of current workers expect to retire at age 70 or later. However, among those who are already retired, only 6% were able to continue working for that long. Further, EBRI also indicated that the median age when workers estimate they’ll retire is 65, but current retirees report the median age when they left work was actually 62. 

Forced early retirement often means claiming Social Security ASAP in order to cover costs after no further paychecks come in. But if you claim Social Security sooner than you’d hoped, your benefit will be smaller than anticipated. 

Knowing these four harsh realities can help you to set more realistic expectations for exactly what Social Security can do as far as supporting you in your retirement years. While you can expect to receive benefits, your checks will very likely be smaller than you may be hoping for. 

You should be prepared for that by having plenty of retirement savings to help cover costs that Social Security doesn’t stretch to pay for so you don’t struggle financially during a time of life you should enjoy. 

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