Social security is, for millions of retirees, an essential financial lifeline that they could not live without. According to statistics from the Social Security Administration, about 61% of retirees currently receiving benefits and 71% of single seniors depend on their Social Security benefits for at least half of their monthly income. Separate data from the Center on Budget and Policy Priorities also estimated that without Social Security income more than 40% of older Americans would live in poverty.
However, this financial foundation for seniors is in rather bad shape. 2016 Social Security Board Report Predicts Major Change in 2020: More Benefits Will Be Paid Than Revenue for the first time since 1981. By 2034, the trustees predict that the Social Security trust will be completely depleted, which could require a widespread cut in benefits of up to 21%. That’s not exactly a rosy forecast considering how much retirees have relied on Social Security.
If there’s a silver lining for seniors, it’s that Social Security can’t go bankrupt, which means it’ll be there for future generations of retirees. The reason? Payroll taxes on American workers’ wages provide the vast majority of the program’s revenue. As long as people continue to work, Social Security will have income it can pay out to eligible recipients.
Say goodbye to your social security check
But just because Social Security can’t go bankrupt doesn’t mean the elderly will be saved from such a fate. New data from HealthView Services’ “Report on health care costs in retirement 2017“presents a bleak long-term outlook for retirees.
According to HealthView Services, healthcare inflation is expected to increase “by an average annual rate of 5.47% for the foreseeable future. [defined as the next decade]”, which happens to be almost three times higher than the headline inflation rate between 2012 and 2016, and more than double what it expects retirees to receive in cost-of-living adjustments (COLAs) in a foreseeable future In clearer terms, health care costs seem to gradually eat up more and more of the social security benefits of older people over time.
HealthView’s Retirement Healthcare Cost Index estimates that a 66-year-old couple retiring in 2017 will need 59% of their Social Security benefits to cover their retirement healthcare costs. By comparison, a 55-year-old couple would need 92% of their benefits to cover their overall healthcare costs, and a 45-year-old couple will need 122%! This forecast essentially suggests that the average American under 55 in 2017 may be saying goodbye to their Social Security benefits due to rising health care costs.
HealthView’s report also suggests that women are particularly at risk because they typically outlive their male counterparts. Women tend to care for children and sick family members more often than men, leaving them with lower earnings throughout their lives and, therefore, a lower benefit at the outset.
Holding harmless offers some protection
If there’s any comfort for those who have retired and started collecting their Social Security benefits, it’s that the “exemption” clause will provide some degree of protection.
The disclaimer guarantees that Medicare Part B premiums (premiums paid to cover outpatient services) will never increase more on an annual basis than Social Security’s COLA. For example, Social Security’s COLA rose a meager 0.3% in 2017, the smallest increase on record. Even though Part B premiums jumped by a much larger amount, those who were already enrolled in Social Security and Part B the previous year only saw a 0.3% increase in their Part B premiums. Of course, this also means that senior citizens see no real “increase” in Social Security since it is simply transferred to the Medicare program.
The biggest problem comes into play for those who are 10 years or more from retirement, as well as for people planning to put their Social Security claims on hold (about 60% of people claim benefits between the ages of 62 and 64 ). If you are not enrolled in Social Security, your Part B premiums are not deducted from your monthly check, and you are directly billed for Part B, or if you will not be eligible for Social Security or On Medicare for a decade or more, you have essentially little protection against rising medical costs. This is where healthcare costs can eat up all of your retirement income.
Social Security was never meant to be “Plan A”
Ultimately, it comes down to the point that the architects of Social Security in the mid-1930s never intended the program to become a primary source of income for the elderly. It was designed to supplement what seniors had already saved for retirement and to protect low-income earners during their golden years. With so many retirees relying very heavily on the program, they have set themselves up for failure, either by a seemingly imminent benefit cut in less than two decades or by rising health care costs.
The HealthView Services report is a great reminder that American workers need to save more, invest for your futureand consider ways to reduce what they will owe now and in the future in tax payments.
For example, a 2013 Gallup poll found that only 32% of US households kept a detailed monthly budget. Without a monthly budget, it’s nearly impossible to adjust your saving and spending habits, or understand your cash flow. The average American today, according to data from the St. Louis Federal Reserve, saves less than half of what they did 50 years ago as a percentage of their annual income. It just won’t work.
Another Gallup poll from April 2016 found that only 52% of adults have money invested in the stock market. While the market is notorious for wild swings at times, it is also arguably the biggest creator of long-term wealth with an average annual return of 7% including reinvestment of dividends. If today’s American workers hope to have any chance of building a retirement nest egg, they will need to be able to trust the stock market for the long term.
Even simple tax planning can make a big difference. A Roth IRA, which has income-based contribution limits that will weed out the wealthiest Americans, might be a smart solution for most workers. Money paid into a Roth is paid after tax, and investments within a Roth can grow tax-free for life. This allows you to withdraw any amount of money after age 59.5 from your Roth account without paying a single penny of tax.
If you’re dreaming of a comfortable retirement, relying heavily on Social Security income probably won’t allow you to achieve your goals.