Here's Why Today's Working Americans Can Kiss Their Social Security Benefits Goodbye

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Social Security is, for millions of retired workers, a critical financial lifeline that they wouldn't be able to do without. According to statistics from the Social Security Administration, some 61% of retired workers currently receiving benefits, and 71% of unmarried elderly individuals, rely 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 elderly Americans would be living in poverty. 

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However, this financial foundation for seniors is in pretty serious trouble. The 2016 Social Security Board of Trustees report forecasts a major switch occurring in 2020: more will be paid out in benefits than is received via revenue for the first time since 1981. By 2034, the Trustees anticipate that Social Security's Trust will be completely exhausted, which could necessitate an across-the-board cut in benefits of up to 21%. Not exactly a rosy forecast considering how heavily retirees have been leaning on Social Security.

If there is a silver lining for seniors, it's that Social Security can't go bankrupt, meaning it will be there for future generations of retirees. The reason? Payroll taxes on the wages of working Americans supplies the vast majority of revenue for the program. As long as people keep working, Social Security will have revenue that it can disburse out to eligible beneficiaries.

Kiss your Social Security check goodbye

But just because Social Security can't go bankrupt, it doesn't mean the elderly will be saved from such a fate. New data from HealthView Services' "2017 Retirement Health Care Costs Data Report" presents a grim long-term outlook for retirees.

According to HealthView Services, healthcare inflation is expected to rise by "an average annual rate of 5.47% for the foreseeable future [defined as the next decade]," which happens to be nearly three times as high as the nominal rate of inflation between 2012 and 2016, and more than double what it forecast retirees will receive in cost-of-living adjustments (COLA) in the foreseeable future. In plainer terms, healthcare costs are looking as if they'll progressively gobble up more and more of seniors' Social Security benefits over time.

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HealthView's Retirement Health Care Cost Index estimates that a 66-year-old couple retiring in 2017 will require 59% of their Social Security benefits to cover their total retirement healthcare costs. Comparatively, a 55-year-old couple is projected to need 92% of their benefits to cover their aggregate healthcare costs, and a 45-year-old couple will need 122%! This forecast essentially suggests that the average American under age 55 as of 2017 can kiss their Social Security benefits goodbye because of rising healthcare costs.

HealthView's report also suggests that women are in particular danger since they typically outlive their male counterparts. Women are more commonly the caretakers of children and sick family members than men, leaving them with lower lifetime earnings, and thusly a lower benefit to begin with.

Hold harmless provides some protection

If there is some solace for those who've retired and have begun to take their Social Security benefits, it's that the "hold harmless" clause will provide some degree of protection.

The hold harmless clause ensures that Medicare Part B premiums (premiums paid to cover outpatient services) never rise by more on an annual basis than Social Security's COLA. For example, Social Security's COLA rose by a meager 0.3% in 2017, the lowest 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 in the previous year saw just a 0.3% hike in their Part B premiums. Of course, this also means that senior are seeing no real "raise" from Social Security since it's simply being transferred to the Medicare program.

The bigger issue comes into play for those are who 10 or more years away from retirement, as well as those persons who plan to hold off on claiming Social Security benefits (about 60% of people claim benefits between ages 62 and 64). If you aren't enrolled in Social Security, aren't having your Part B premiums deducted from your monthly check and are being billed for Part B directly, or won't be eligible for Social Security or Medicare for a decade or longer, you essentially have few protections against rising medical costs. This is where healthcare costs can eat up the entirety of your retirement income.

Social Security was never meant to be "Plan A"

Ultimately, this comes down to the point that Social Security's architects in the mid-1930s never intended the program to become a primary source of income for seniors. It was designed to supplement what seniors already had saved for retirement, and to protect lower-income folks during their golden years. With so many retirees leaning very heavily on the program, they've set themselves up for failure, either through a seemingly imminent benefits cut in less than two decades, or through rising healthcare costs.

HealthView Services report serves as a very good reminder that working Americans need to be saving more, investing for their future, and examining ways they can reduce what they'll owe now and in the future in tax payments.

For instance, a 2013 Gallup poll found that only 32% of U.S. household kept a detailed monthly budget. Without a monthly budget it's practically impossible to adjust your saving and spending habits, or understand your cash flow. The average American today, based on data from the St. Louis Federal Reserve, is saving less than half of what he or she did 50 years ago as a percentage of annual income. That 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 has been known to have wild fluctuations at times, it's also, arguably, the greatest long-term wealth creator with an average annual return of 7%, inclusive of dividend reinvestment. If today's working Americans hope to have any chance of building their nest egg for retirement, they'll need to be able to trust in the stock market over the long run.

Even simple tax-planning can make a big difference. A Roth IRA, which does have income-based contribution limits that'll eliminate wealthier Americans, could be a smart solution for most workers. Money contributed to a Roth is done on an after-tax basis, and investments within a Roth can grow tax-free for life. This allows you to take out any amount of money you want after age 59-1/2 from your Roth account without paying a single cent in taxes.

If you have a dream of retiring comfortably, relying heavily on Social Security income probably isn't going to get you to your goals.

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