3 Painful Social Security Realities Everyone Needs to Know About

A recent AARP survey found that 20% of Americans aged 50 and over have no savings for retirement whatsoever. And a 2020 report by the National Institute on Retirement Security found that 40% of older Americans rely solely on Social Security for income.

If you’re finding it difficult to save for retirement, you may be inclined to rely heavily on Social Security for your senior years. But that approach might backfire on you.

A lot of people are surprised to learn that Social Security has its share of flaws. Here are some issues with the program it’s important to know about.

1. Benefits don’t replace workers’ full paychecks

You might assume that if you don’t manage to save anything for retirement, you’ll be fine falling back on Social Security alone. But you should know that those monthly benefits won’t come close to replacing your paychecks in their entirety.

If you earn an average wage, you can expect the money you get from Social Security to replace 40% of your pre-retirement earnings. But that means taking a 60% pay cut in the absence of having other income at your disposal.

It’s common for retirees to see their living costs decrease. There are expenses associated with having a job, for example, like car payments, parking fees, gas, and tolls. If you’re no longer going to work, you might cut your transportation costs significantly.

But that doesn’t mean you’ll be able to manage on a 60% pay cut. So it’s important to have income outside of Social Security for your senior years.

2. Benefit cuts may be coming

It’s bad enough that Social Security will only replace 40% of your previous paycheck. But that 40% rate doesn’t account for benefit cuts, which are a possibility in about a decade’s time.

Social Security is facing a funding shortfall that lawmakers need to address. If they don’t, benefits could be broadly slashed by roughly 20%, leaving you with an even bigger pay cut on your hands if you don’t have savings to retire on, or another income source to tap.

3. Cost-of-living adjustments don’t keep up

Social Security benefits are eligible for an annual cost-of-living adjustment, or COLA. The purpose of COLAs is to help ensure that Social Security recipients don’t lose buying power over time as inflation drives living costs upward.

The problem, though, is that Social Security COLAs often fail to make it possible for seniors to keep up with their expenses. A big part of the problem is that the pace at which healthcare costs rise tends to outpace inflation broadly. But that factor is not accounted for in the formula used to calculate Social Security COLAs despite healthcare being a chief expense among retirees.

Lawmakers have proposed changes to the Social Security COLA formula. But until something shifts, those benefits will probably continue to lose buying power.

Of course, retirees who have savings and other income can compensate more easily for floundering COLAs. But for those without additional income, insufficient COLAs commonly result in a world of financial stress. So it’s best to do what you can to avoid landing in that situation, whether it means working longer to build up more savings or getting on board with a part-time job in retirement to supplement your benefits.

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