What does the future have in store for America’s top retirement program?
For most retirees, Social Security is an indispensable source of income. Two decades of surveys from national pollster Gallup show that between 80% and 90% of retired workers lean on their monthly Social Security payout in some capacity to cover their expenses.
But it’s not just a program for retired workers. As of February 2023, close to 8.8 million people were receiving a disability insurance benefit, with another 5.8 million bringing home a monthly survivor benefit. Collectively, Social Security is responsible for pulling more than 22 million people out of poverty each year.
How big of a Social Security check does it take to help secure the financial well-being of more than 22 million people annually? Let’s take a closer look.
How big is the average Social Security check?
Every month, the Social Security Administration provides a detailed, backward-looking report of where its benefit dollars went. The latest report from February 2023 shows a total outlay of $112.21 billion to 66.243 million recipients. When examined as a whole, the average Social Security check is $1,693.88, which works out to a little over $20,300 per year.
However, Social Security isn’t a one-size-fits-all program. Average monthly benefits can vary pretty significantly, depending on what type of beneficiary you are. For example, the nearly 49 million retired workers receiving a monthly Social Security check are getting an average of $1,830.66. Meanwhile, the qualifying spouses and children of these retired workers are collecting just $899.20 and $858.79, respectively, each month.
Monthly payouts for workers with long-term disabilities and survivors of deceased workers are notably lower than retired worker benefits. The average worker with a disability brought home $1,483.17 in February 2023, while the collective 5.8 million survivor beneficiaries, which includes disabled and nondisabled widow(er)s, children, and widowed mothers and fathers, averaged a Social Security payout of $1,448.38.
Keep in mind that these monthly payouts increased by a historically large 8.7% in 2023.
What might the average Social Security payout look like in 10 years?
On a nominal-dollar basis, the average Social Security check isn’t that big, but it’s getting the job done for tens of millions of Americans.
The question is: How big of a payment can current and/or future beneficiaries expect 10 years from now? The answer might be surprising — and not in a good way.
To calculate what the average Social Security check might look like by 2033, we’d need to take into account 10 years of cost-of-living adjustments (COLAs). COLA is the “raise” passed along to beneficiaries most years to account for inflation. It’s effectively a way for Social Security to ensure that beneficiaries can maintain their standard of living as the price for goods and services climbs over time. You’ll note “raise” is in quotation marks, which reflects that this benefit increase is to match inflation, not outpace it, as you might see with a raise from an employer.
Although last year’s COLA of 8.7% was the highest in 41 years, the average annual COLA for more than a decade has been closer to 2%. Coincidentally, the Federal Reserve’s long-term target for the U.S. inflation rate is also 2%.
If cost-of-living adjustments come it at an annualized 2% through 2033, the average Social Security check would increase to $2,064.83. However, there’s a huge asterisk that needs to be placed next to this estimate, and it has nothing to do with my educated guess of COLAs over the next 10 years.
According to the 2023 Social Security Board of Trustees Report, the program is facing a mammoth funding shortfall of $22.4 trillion through 2097. Based on the current payout schedule, and inclusive of estimated COLAs, the Old-Age and Survivors Insurance Trust Fund (OASI) is expected to exhaust its asset reserves (i.e., excess cash built up since inception) by 2033.
If this were to happen, the Trustees Report estimates only 77% of payouts to retired workers and survivors would be made. In other words, retired workers and survivors would be receiving a smaller Social Security check 10 years from now than they’re bringing home today.
Social Security is here to stay, but it has clear shortcomings
But let’s get one thing clear: Social Security isn’t going anywhere. With 90% of its revenue derived from the 12.4% payroll tax on earned income, Social Security will always have cash to disburse as long as Americans keep working. The program can’t go bankrupt or disappear for current or future beneficiaries.
However, Social Security does have some plain-as-day shortcomings that lawmakers are going to have to address at some point. A number of ongoing demographic shifts are wreaking havoc on the program and worsening its funding shortfall. These problems include (in no particular order):
- The ongoing retirement of baby boomers.
- Rising longevity that far exceeds the increase in Social Security’s full retirement age.
- Historically low U.S. birth rates.
- A more than halving in legal net migration into the U.S. since 1998.
- Growing income inequality.
Lawmakers on Capitol Hill are well aware that Social Security reforms are necessary to strengthen the program. Unfortunately, Democrats and Republicans have approached amending Social Security from opposite ends. President Joe Biden and Democrats have proposed increasing payroll tax liability for high earners, while Republicans prefer reducing outlays by gradually raising the full retirement age.
With both parties, thus far, unwilling to explore a common-ground solution with their opposition, Social Security moves ever closer to a possible benefit reduction that’s only an estimated 10 years away.