Millions of seniors depend on Social Security to pay the bills in retirement. But 67% of retirees today consider those benefits a major source of income, according to the Employee Benefit Research Institute. And 36% of current workers say Social Security will be a major income source once their careers come to a close.
So what's wrong with having Social Security serve as a primary income stream? For one thing, the program just isn't equipped to do that. Additionally, Social Security is facing a future shortfall that, if left unaddressed, could result in major benefit cuts. Therefore, while there's nothing wrong with counting on Social Security to provide some income in retirement, planning on it for the bulk of one's income is hugely problematic. And the sooner current workers realize that, the better positioned they'll be to avoid financial troubles down the line.
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How much should you count on Social Security?
Let's be clear about one thing: Despite the rumors you may have heard, Social Security is by no means in danger of going broke. The reason boils down to the fact that it's funded by payroll taxes, which means that as long as we have a workforce, the program will have money coming in, and therefore will manage to continue paying benefits.
The problem, however, is that we'll soon reach a point when Social Security starts paying more in benefits than it collects in taxes. Once that happens, it will have to dip into its trust funds to make up the difference, but those funds will only last so long. As per the latest estimates, they're set to run dry in 2034, at which point recipients might see as much as a 23% reduction in benefits. In other words, the seniors who are used to collecting a certain amount of money today might have to settle for less down the line. And that could drive those who depend too heavily on those benefits straight into poverty.
But let's be optimistic and assume that Social Security won't face future cuts. Even in that scenario, those benefits still won't be enough to sustain, or even mostly sustain, the average senior. Most retirees need around 80% of their former income to pay the bills once they stop working, and if that percentage sounds high, remember that while certain living costs tend to go down for seniors in retirement, other major ones, like healthcare, tend to go nowhere but up. Now without a future reduction in benefits, Social Security will replace about 40% of the typical worker's pre-retirement earnings. But as you can see, that's still only, in a best-case scenario, about half of what the average senior will need.