Some statistics are meant to shock. Others do it without even trying. According to a recent population survey, half of all retirees rely on Social Security for more than 50% of their income. And, more shocking still, one in four retirees depend on Social Security for over 90% of their income. These stats are truly mind-blowing!
To see how this can be, let’s begin by imagining Lily, a typical 17-year old just starting her first job. Her early years of work won’t likely be her most lucrative. But, by the time she reaches her full retirement age of 67, she’ll have successfully recorded five decades of work. (Psst, don’t ever frame the future like this to an actual teenager; realizing that a half-century of work is still ahead of you isn’t a great motivator!)
Social Security won’t care about each and every one of Lily’s 50 years of work. They will kindly give her a free pass for some of them. In fact, she’ll get to throw out 15 of her lowest earning years. Social Security will officially only care about her best 35 years.
Once her highest earning years are logged, Social Security will then adjust each one for inflation. It’s only right. After all, even a modest 2% inflation rate will silently eat away about half of the purchasing power of one dollar after 35 years!
Of course, it’s important to note that Social Security will completely ignore any of Lily’s earnings that exceed a set annual maximum income of $132,900. This income level is also where Social Security will stop requiring Lily to contribute into the system. Think of this threshold as the start of the “no contributions/no benefits” zone. This threshold is adjusted for inflation. For example, it was only about $38,000 in 1984.
Let’s now fast forward to Lily as a 67-year old. With her 35 years of work adjusted for inflation, Social Security’s formula figures out her average monthly earnings. This monthly average is the basis for Lily’s Social Security benefit.
To show just how easily explainable those shocking statistics are, let’s say Lily’s lifetime average earnings turned out to be $4,000 per month. What portion of her earnings will Social Security replace?
Using some rounded figures, Lily will get 90% replacement of the first $1,000 per month of her historical work record. On her next $3,000 per month of earnings history, she’ll get 32% replaced. Taken together, Lily’s Social Security benefit will be about $1,800 per month; successfully replacing a bit less than half of her average monthly earnings.
From the looks of it, Lily’s reliance on Social Security is typical and the program’s importance is beyond obvious.
To learn more about Social Security, attend our next Money Series presentation on Wednesday, April 10 at 6:30pm in the McGuire Room of the Traverse Area District Library. To register, please visit MoneySeries.org or simply call (231) 668-6894. Front Street Foundation, through its commercial-free Money Series, is a non-profit committed to providing open-access to financial education, for all.