6 Ugly Truths About Social Security

Social Security is one of the financial cornerstones of retirement for many Americans. Indeed, for some, Social Security represents the bulk or even the entirety of their savings. But while Social Security no doubt serves an important purpose, it doesn’t come close to solving the retirement savings shortfall in the United States.

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In fact, there are some ugly truths about Social Security that many Americans either don’t fully understand or simply don’t want to know. But the best way to prepare for a solid retirement is to have all of the information in front of you so you can devise the most appropriate savings plan. Here are some of the lesser-known or often-overlooked facts about Social Security that may prompt you to ramp up your own personal retirement savings program.

In a dream world, Social Security would completely fund your retirement needs, leaving you worry-free once you reach age 65. But the reality is far from this fantasy. According to the Social Security Administration, retirement beneficiaries only receive about 40% of their income from Social Security. Looking at it another way, the average Social Security retirement benefit is just $1,657. That amounts to just $19,884 on average per year, which is a far cry from the needs of most retirees. In most cases, you’ll need a significant retirement savings plan of your own in order to enjoy a comfortable retirement. 

If you think the average Social Security benefit of $1,657 per month is lacking, just wait until you retire yourself. According to a report from the Social Security Trustees, the Social Security Trust Fund is expected to run out by 2033. While this won’t end all Social Security payouts — which are still primarily funded by taxes on existing workers — it may very well result in reduced benefits by the time you retire. According to that same Social Security Trustees’ Report, if nothing is done to shore up the Trust Fund, payouts will drop to 76% of current expected levels.

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One of the ways that the government has worked to shore up Social Security is by increasing the “full” retirement age. Although you can claim your retirement benefits as early as age 62, your full benefits don’t kick in until age 67. This full retirement age, which has already been raised repeatedly in the past, is likely to be increased again at some point. This means if you’re in your 20s and already looking forward to claiming your benefits at age 67, by the time you get there, full retirement age might not be until 68, 70 or even later. 

For some retirees, Social Security benefits are not taxable. But if you generate even a modest amount of income, you may be liable for tax on up to 85% of your benefits. If you’re an individual earning above $34,000, or a joint filer with earnings of over $44,000, you’ll owe tax on 85% of your Social Security benefits. Earnings between $25,000 and $34,000 for singles and $32,000 to $44,000 for joint filers translates to a tax on 50% of your Social Security benefits. No tax is due if you earn below the lower limits of these filing statuses. So, if your plan was to have a side gig or to generate investment income to supplement your Social Security income, it might push you into a bracket where you’ll end up paying tax on your benefits.

Another way that the government may help prop up Social Security is to generate additional taxes on existing workers. Currently, workers pay a 6.2% tax on earnings of up to $147,000, with additional income remaining untaxed. But this amount, known as the Social Security wage base, consistently rises in line with inflation. If you’re still young, by the time you retire, the wage base might increase to $200,000 or more, meaning if you’re a high earner, more of your income will go toward Social Security taxes. 

The wait for Social Security benefits can seem endless, particularly if you are a worker in your 20s or 30s. Perhaps this is one of the reasons why many retirees opt to claim Social Security at 62, the earliest possible date. But if you file for your benefits early, you won’t get the full amount that you’re due at the current full retirement age of 67. In fact, your monthly benefits will be permanently reduced by a whopping 30%. While it’s true that you’ll receive more payments, the significant reduction could permanently damage your retirement plans. For example, if your anticipated benefit at age 67 is $1,700, if you file instead at age 62, you’ll only receive $1,190 monthly.

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